As Filed With The Securities And Exchange Commission on December 17, 1997
Securities Act File No. 333-26791
Investment Company Act File No. 811-7861
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
Registration Statement Under the Securities Act of 1933 /X/
Pre-Effective Amendment No. 1 /X/
Post-Effective Amendment No. / /
and
Registration Statement Under the Investment Company Act of 1940 /X/
Amendment No. 1 /X/
(Check appropriate box or boxes)
----------------------
THE MALLARD FUND, INC.
(Exact name of Registrant as specified in charter)
Rodney Square North
1100 N. Market Street
Wilmington, DE 19890
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (302) 651-1656
----------------------
RICHARD F. BERDIK
Secretary and Treasurer
THE MALLARD FUND, INC.
Rodney Square North
1100 N. Market Street
Wilmington, DE 19890
(Name and Address of agent for service)
COPIES TO:
ARTHUR J. BROWN, ESQ.
MARC R. DUFFY, ESQ.
KIRKPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
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Approximate date of proposed public offering: As soon as possible after
this Registration Statement becomes effective.
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Title of Securities Amount Proposed Maximum Aggregate Amount of
Being Registered Being Registered Offering Price Registration Fee
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<S> <C> <C> <C>
Common Stock, $.001 Par Value 1,825,000(1) $39,639,000(2) $11,693.52(2)
- ------------------------------ ---------------------- -------------------------- ----------------
</TABLE>
(1) Estimated based on the Registrant's net asset value per share of
$21.72 on September 30, 1997. The actual number of shares offered will be based
on the net asset value of the Registrant at the close of the offering period.
(2) On May 9, 1997, Registrant paid a registration fee of $100 to
register $330,033 worth of shares.
Registrant hereby amends this Registration Statement under the
Securities Act of 1933 on such date or dates as may be necessary to delay its
effective date until Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become
effective in accordance with the provisions of 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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<PAGE>
<TABLE>
<CAPTION>
THE MALLARD FUND, INC.
FORM N-2 CROSS REFERENCE SHEET
Items in Part A And Part B of Form N-2* Prospectus Caption
--------------------------------------- ------------------
<S> <C> <C>
1 Outside Front Cover............................. Outside Front Cover of Prospectus
2 Inside Front and Outside Back Cover Page........ Inside Front and Outside Back Cover Page of
Prospectus
3 Fee Table and Synopsis.......................... Prospectus Summary; Fund Expenses
4 Financial Highlights............................ Not Applicable
5 Plan of Distribution............................ Outside Front Cover; Prospectus Summary;
Purchase of Shares
6 Selling Shareholders............................ Not Applicable
7 Use of Proceeds................................. Use of Proceeds
8 General Description of Registrant............... The Fund; Investment Objective and Policies;
Investment Restrictions; Special
Considerations and Risk Factors; Description
of Capital Stock
9 Management...................................... Control Persons; Management; Administrator,
Transfer and Dividend Disbursing Agent,
Custodian
10 Capital Stock, Long-Term Debt and Other
Securities...................................... Risk Factors and Other Investment Practices;
Purchase of Shares; Liquidation; Dividends and
Other Distributions; Description of Capital
Stock; Taxes
11 Defaults and Arrears on Senior Securities....... Not Applicable
12 Legal Proceedings............................... Not Applicable
13 Table of Contents of the Statement of
Additional Information.......................... Not Applicable
14 Cover Page...................................... Not Applicable
15 Table of Contents............................... Not Applicable
16 General Information and History................. Not Applicable
17 Investment Objectives and Policies.............. Investment Objective and Policies; Investment
Restrictions; Special Considerations and Risk
Factors; Portfolio Transactions
18 Management...................................... Management
19 Control Persons and Principal Holders of
Securities...................................... Control Persons; Management
20 Investment Advisory and Other Services.......... Management; Administrator, Transfer and
Dividend Disbursing Agent, Custodian;
Additional Information
21 Brokerage Allocation and Other Practices........ Portfolio Transactions
22 Tax Status...................................... Taxes
23 Financial Statements............................ Financial Statements
</TABLE>
* All information required to be set forth in Part B: Statement of
Additional Information has been included in Part A: Prospectus
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 17, 1997
The Mallard Fund, Inc.
Common Stock
----------------
The Mallard Fund, Inc. (the "Fund") is a recently organized,
non-diversified, closed-end investment company. The Fund's investment objective
is to provide high total return (primarily from capital appreciation and
secondarily from current income). The Fund invests primarily in other pooled
investment vehicles. These vehicles include open-end and closed-end investment
companies, private investment companies, and other collective investment funds.
The Fund also may invest in securities directly and holds cash and/or U.S.
Government securities and other short-term money market instruments. The Fund
may borrow money for investment purposes. There can be no assurance that the
Fund will achieve its investment objective.
The Fund is managed by its officers under the supervision of its board of
directors. The Fund receives investment consulting services from Cambridge
Associates, Inc. and its affiliate, Cambridge Capital Advisors, Inc. (together,
"Cambridge").
Shares of the Fund will be offered at a price equal to the net asset value
of a share of the Fund on the close of the subscription offering period, which
is expected to end on February 27, 1998, unless extended. The subscriptions will
be payable and the stock will be issued immediately after the Fund determines
its net asset value. The minimum initial purchase during the subscription
offering period is $1,000,000. The offering of shares of the Fund will be made
on a "best efforts" basis under which the underwriter is required to take and
pay for only such shares as it may sell to the public. Monies for subscriptions
will not be accepted prior to the closing of the offering period.
Shares of the Fund are available exclusively to organizations that are
exempt from federal income taxation under Section 501(c)(3) of the Internal
Revenue Code, as amended (the "Code") and to charitable remainder trusts
described in Section 664 of the Code. (See "Eligible Investors").
The transferability of shares of the Fund is severely restricted; all
transfers must be approved by the Fund prior to transfer. No market currently
exists for the Fund's stock and it is not expected that a secondary market will
develop. To the extent a secondary market does develop, shares of closed-end
funds frequently trade in the secondary market at a discount from their net
asset values.
(continued on following page)
----------------
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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Price To Sales Proceeds To
Public (1) Load Fund(2)
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Per Share............................ $ 21.72 None $21.72
Total................................ $39,639,999 None $39,639,000
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(footnotes on following page)
This Prospectus sets forth information about the Fund that an investor
should know before investing. It should be read and retained for future
reference. Additional information concerning the Fund may be obtained by writing
to the Fund or its underwriter at Rodney Square North, 1100 N. Market Street,
Wilmington, DE 19890 or by calling (302) 651-1656.
<PAGE>
Since the Fund's stock will not be readily marketable and may be
considered illiquid, the Board of Directors will consider, on an annual basis,
the possibility of making tender offers to repurchase all of the stock of the
Fund from stockholders at the net asset value per share. There can be no
assurance, however, that the Board of Directors will decide to make any tender
offers. See "Tender Offers." If the Board of Directors does not make a tender
offer to repurchase all of the stock of the Fund by December 31, 2000, the Fund
will be liquidated as soon as practical thereafter unless the Fund obtains
unanimous approval from all stockholders not to liquidate the Fund. See
"Liquidation."
Shares of the Fund involve investment risks, including fluctuations in
value and the possible loss of some or all of the principal investment. The
leverage created by borrowings to finance additional investments by the Fund
creates special risks, including the risk of higher volatility of the net asset
value of the shares. See "Special Considerations and Risk Factors --
Leveraging."
The Fund's stock does not represent a deposit or obligation of, and is not
guaranteed or endorsed by, any bank or other insured depository institution, and
is not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
- -----------
(footnotes from previous page)
(1)Estimated based on the net asset value of a share of the Fund on September
30, 1997. The stock is offered on a best efforts basis at a price equal to the
net asset value of a share of the Fund at the close of the offering period.
(2)Assuming all shares being offered are sold and before deducting offering
expenses incurred by the Fund (estimated at $190,927). Organizational expenses
will be amortized over a period not to exceed 60 months from the date the Fund
commenced investment operations.
----------------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or an offer to
buy nor shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
2
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...........................................................4
Fund Expenses................................................................8
The Fund.....................................................................9
Use Of Proceeds..............................................................9
Investment Objective And Policies............................................9
Investment Restrictions.....................................................11
Special Considerations And Risk Factors.....................................12
Purchase Of Shares..........................................................16
Restrictions On Transferability.............................................16
Control Persons.............................................................17
Tender Offers...............................................................17
Liquidation.................................................................18
Management..................................................................18
Portfolio Transactions......................................................20
Dividends And Other Distributions...........................................21
Taxes ......................................................................22
Net Asset Value.............................................................24
Description Of Capital Stock................................................25
Performance Information.....................................................25
Administrator, Transfer And Dividend Disbursing Agent, Custodian............26
Additional Information......................................................26
Financial Statements........................................................27
Appendix...................................................................A-1
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD
CAREFULLY CONSIDER INFORMATION SET FORTH UNDER THE HEADING "SPECIAL
CONSIDERATIONS AND RISK FACTORS."
The Fund................. The Fund is a recently organized, non-diversified,
closed-end management investment company. See "The
Fund".
The Offering............. Rodney Square Distributors, Inc. (the
"Underwriter") and other securities dealers that
may enter into dealer agreements with the
Underwriter will solicit subscriptions for shares
of the Fund during a period expected to end on
February 27, 1998, unless extended. Immediately
after the Fund determines its net asset value, the
subscriptions will be payable and the shares will
be issued. Shares of the Fund will be offered at a
price equal to the net asset value of a share of
the Fund at the close of the offering period. The
offering will be made on a "best efforts" basis.
The minimum purchase during the subscription
period is $1,000,000. The Fund reserves the right
to waive or modify the minimum investment
requirement at any time. The estimated number of
shares of stock offered hereby is 1,825,000. The
actual number of shares offered will be based on
the net asset value of the Fund at the close of
the offering period.
Eligible Investors....... The Fund is available exclusively to organizations
that qualify for exemption from federal income
taxation under Section 501(c)(3) of the Internal
Revenue Code, as amended (the "Code") and to
charitable remainder trusts described in Section
664 of the Code. Shares of the Fund cannot be
transferred without the approval of the Fund. See
"Restrictions on Transferability."
Investment Objective
and Policies........... The investment objective of the Fund is to provide
high total return (primarily from capital
appreciation and secondarily from current income).
The Fund seeks to achieve its investment objective
by investing primarily in other pooled investment
vehicles. These vehicles include open-end and
closed-end investment companies, private
investment companies and other collective
investment funds. The Fund also may invest in
securities directly and may hold cash and/or U.S.
Government securities and other short-term money
market instruments. There can be no assurance that
the Fund will achieve its investment objective.
Leverage................. The Fund may borrow money in amounts up to 33-1/3%
of the value of its total assets to finance
additional investments as well as to make
distributions and finance tender offers and for
temporary, extraordinary or emergency purposes.
See "Tender Offers." The Fund intends, from time
to time, to borrow money to finance additional
investments, but only when it believes that the
return that may be earned on investments purchased
with the proceeds of such borrowings will exceed
the costs, including interest, associated
therewith. However, to the extent such costs
exceed the return on the additional investments,
the return realized by the Fund's common
stockholders will be adversely affected. Moreover,
if the return is negative during a period, not
only will the Fund's common stockholders be
adversely affected thereby but the Fund also will
pay the costs associated with the borrowing.
4
<PAGE>
Leverage creates certain risks for holders of
shares, including the risk of higher volatility of
the net asset value of the shares, and the risk
that interest rates on the indebtedness will
affect the yield and return to holders of shares.
Under adverse conditions, the Fund's leveraged
capital structure would result in a lower rate of
return to stockholders than if the Fund were not
leveraged. See "Special Considerations and Risk
Factors - Leveraging."
Management and
Investment Consultant.. The business and affairs of the Fund are managed
under the direction of the Board of Directors. The
President of the Fund is its Chief Investment
Officer. As Chief Investment Officer, the
President is responsible for making decisions to
buy, sell, or hold a particular security subject
to the oversight of the Board of Directors. The
Fund has contracted with Cambridge for investment
consulting services. Cambridge provides
non-discretionary advice with regard to all of the
Fund's assets. The Fund invests in various pooled
investment vehicles all, or almost all, of which
have investment advisers which provide portfolio
management for those vehicles.
Administrator and
Custodian ............. Rodney Square Management Corporation provides
administrative services to the Fund necessary for
the Fund's operations, and its affiliate acts as
the Fund's underwriter. Mellon Bank, N.A. serves
as custodian of the Fund's assets.
Dividends and Other
Distributions.......... The policy of the Fund is to distribute quarterly,
commencing after April 1, 1998, an amount that on
an annual basis is equal to approximately 20% of
the Fund's average net asset value. This fixed
distribution rate will not be related to the
amount of the Fund's net investment income or net
realized capital gains or losses. The Board of
Directors may adjust the year-end quarterly
distribution to ensure that the Fund makes all
required capital gains distributions. If, for any
calendar year, the total distributions required by
the 20% pay-out policy exceed the Fund's net
investment income and net realized capital gains,
which normally is expected to be the case, the
excess generally will be treated as a tax-free
return of capital, reducing a shareholder's
adjusted basis in its shares. See "Taxes."
Tender Offers and
Liquidation............ The Board of Directors will consider, on an annual
basis, the possibility of making tender offers
(each a "Tender Offer") to repurchase all of the
shares of the Fund at a price equal to the net
asset value per share. Any Tender Offer will be on
an "all or none" basis. The Board of Directors,
however, is under no obligation to authorize the
making of a Tender Offer and no assurance can be
given that in any particular year a Tender Offer
will be made. See "Tender Offers." If the Board of
Directors does not commence a Tender Offer by
December 31, 2000, the Fund will be liquidated as
soon as practical thereafter unless the Fund
obtains unanimous approval from all stockholders
not to liquidate the Fund. See "Liquidation."
Special Considerations
and Risk Factors....... As a recently organized entity, the Fund only has
a limited operating history. In addition, the
officers of the Fund and Cambridge have no
5
<PAGE>
previous experience managing an investment
company, registered with the Securities and
Exchange Commission, although Cambridge has over
20 years of experience as an adviser and currently
provides similar advisory services with respect to
more than $15 billion.
LIQUIDITY OF FUND. The Fund's stock will not be
listed on any exchange and it is not currently
anticipated that a secondary market will develop.
Moreover, shares of the Fund cannot be transferred
without the approval of the Fund, which approval
ordinarily will not be given unless transferees
would qualify as Eligible Investors. Because of
the anticipated lack of a secondary market for
shares of its stock, the Fund should not be
considered a vehicle for trading purposes or for
investors who need more liquidity than is provided
under the arrangements described herein.
INVESTMENT RISK. The Fund will concentrate its
investments in shares of open-end and closed-end
investment companies and other pooled investment
vehicles. Pooled investment vehicles generally
pool the investments of different investors and
use professional management to select and purchase
securities for their portfolios. Any investment in
pooled investment vehicles involves risk. The
ability of the Fund to achieve its investment
objective will depend on its ability to allocate
successfully its assets among different asset
categories and to select and monitor portfolio
investments vehicles within each specified
category. Specifically, the Fund will select from
a broad range of asset categories, including
speculative equity securities vehicles, such as
emerging markets funds, aggressive growth funds
and leveraged buyout funds, and conservative debt
securities vehicles, such as short-term U.S.
government securities funds. Thus, the Fund may
choose among asset categories that range from the
most aggressive to the most conservative. The
Fund's decisions to invest more heavily in
aggressive or conservative vehicles, equity or
debt-oriented vehicles, or U.S. or
foreign-oriented vehicles will impact
significantly the results of the Fund. This asset
allocation risk is separate from the risk of
selecting particular investments.
The ability of the Fund to achieve its investment
objective also will depend on the ability of the
advisers and managers of the pooled investment
vehicles to achieve their objective. There can be
no assurance that the investment objective of the
Fund, or of any of the pooled investment vehicles
in which it invests, will be achieved.
INVESTMENT LIMITATIONS. The Fund may invest up to
100% of its total assets in open-end and
closed-end investment companies and may invest up
to 25% of its total assets in any one open-end or
closed-end investment company. The Fund may
purchase only up to 3% of the total outstanding
voting securities of a registered investment
company. The Fund also may invest up to 50% of its
total assets in private investment companies and
will not invest more than 10% of its total assets
in any one private investment company. Within that
limitation, the Fund will neither invest more than
25% of its total assets in private investment
companies that invest primarily in publicly traded
securities, nor more than 25% of its total assets
in all other private investment companies,
including so-called venture capital companies that
invest primarily in securities that are not
publicly traded when originally purchased. In
addition, the Fund may invest up to 10% of its
total assets in other collective investment funds.
See "Investment Objective and Policies."
6
<PAGE>
LIQUIDITY OF POOLED INVESTMENT VEHICLES. Open-end
investment companies stand ready to redeem their
shares at net asset value, but an open-end
investment company is obliged to redeem shares
held by the Fund only in an amount up to 1% of
such company's outstanding securities during any
period of 30 days. Shares of closed-end funds are
not redeemable, but generally trade on exchanges
at prices that typically are lower than their net
asset value.
Other pooled investment vehicles, such as private
investment companies generally are considered to
be illiquid, which may impair the Fund's ability
to realize the full value of its interest. The
Board of Directors will consider the liquidity of
the Fund's securities in determining whether a
tender offer should be made by the Fund. See
"Investment Objective and Policies" and
"Investment Restrictions."
NON-DIVERSIFIED. The Fund has registered as a
"non-diversified" investment company so that it
will be able to invest more than 5% of its assets
in the obligations of any single issuer, subject
to the diversification requirements of Subchapter
M of the Code applicable to the Fund. Since the
Fund may invest a relatively high percentage of
its assets in the obligations of a limited number
of issuers, the Fund may be more susceptible than
a more widely diversified fund to any single
economic, political or regulatory occurrence.
Control Persons.......... The William S. Dietrich II Charitable Remainder
Annuity Trust (the "Dietrich CRAT") and the
William S. Dietrich II Charitable Remainder Unit
Trust (the "Dietrich CRUT") own approximately 85%
and 15% of the shares of the Fund, respectively.
If all shares offered pursuant to the public
offering are sold and issued, it is anticipated
that the Dietrich CRAT individually still will own
more than 50% of the shares of the Fund. As a
result of this stock ownership, the Dietrich CRAT
would be deemed to control the Fund within the
meaning of Section 2(a)(9) of the Investment
Company Act of 1940 ("1940 Act"). Because of its
ownership, the Dietrich CRAT will be able to vote
on and control all matters relating to the
management and policies of the Fund, such as the
election of directors and any changes in the
Fund's fundamental investment restrictions. See
"Control Persons."
7
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
STOCKHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price)(1)....................None
Dividend reinvestment fees ..........................................None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS)
Investment consulting fee(2).........................................0.17%
Other expenses(3)....................................................0.17%
Total annual operating expenses......................................0.34%
====
(1) No sales load or commission will be payable in connection with this offer.
(2) Estimated based on the Fund's portfolio assets as of September 30, 1997.
See "Management" for additional information.
(3) "Other expenses" include director compensation, administrative, custodial,
transfer agency, legal, audit, and other miscellaneous Fund expenses.
Because the Fund has a limited operating history, "Other expenses" have
been estimated for the current fiscal year.
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expense that would be incurred over various periods with
respect to a hypothetical investment in the Fund. These amounts are based
upon payment by the Fund of operating expenses at the levels set forth in
the above table.
An investor would directly or indirectly pay the following expenses of a
$1,000 investment in the Fund, assuming i) a 5% annual return and ii)
reinvestment of all dividends and other distributions at net asset value:
One Year Three Years Five Years
-------- ----------- ----------
$3 $11 $19
This example assumes that the percentage amounts listed under total annual
operating expenses remain the same in the years shown. The above tables
and the assumption in the example of a 5% annual return and reinvestment
at net asset value are required by regulation of the Securities and
Exchange Commission applicable to all closed-end investment companies; the
assumed 5% annual return is not a prediction of, and does not represent,
the projected or actual performance of the stock. Actual expenses and
annual rates of return may be more or less than those assumed for purposes
of the example.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
8
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THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company. The Fund was incorporated under the laws of the State of
Maryland on October 15, 1996 and is registered under the 1940 Act. Its
investment operations commenced on May 30, 1997 and this offering represents its
initial public offering of shares of common stock. The Fund's principal office
is located at Rodney Square North, 1100 N. Market Street, Wilmington, DE 19890,
and its telephone number is (302) 651-1656.
USE OF PROCEEDS
The net proceeds of the offering, assuming all shares offered hereby are
sold are expected to be $39,448,073 after deducting offering expenses payable by
the Fund of approximately $190,927. The Fund will invest the net proceeds in
accordance with the Fund's investment objective and policies within
approximately three months after completion of the offering of stock, depending
on the availability of securities and other relevant conditions. Pending such
investment, it is anticipated that the proceeds will be held in U.S. Government
securities (which term includes obligations of the United States Government, its
agencies or instrumentalities) and other short-term money market instruments.
See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective, (which is established by the Board of
Directors and is subject to change only with shareholder approval) is to seek
high total return (primarily from capital appreciation and secondarily from
current income). In furtherance of this objective, the Fund will invest
primarily in other pooled investment vehicles. These vehicles will include
open-end and closed-end investment companies ("Underlying Funds"), private
investment companies ("Underlying Private Funds") and other collective
investment funds ("Underlying Collective Funds") (together, "Underlying
Investment Vehicles"). Underlying Funds are public investment companies that are
registered with the Securities and Exchange Commission and invest predominately
in securities. Underlying Private Funds are private investment companies that
may be organized in either the United States or a foreign jurisdiction.
Underlying Private Funds invest predominately in securities (whether public or
private), may make private or venture capital investments and may sell
securities short as well as use borrowed funds to make investments in
securities. Underlying Private Funds that invest primarily in publicly traded
securities are often referred to as "hedge funds." Underlying Private Funds that
invest in private equity transactions (whether domestic or international),
including leveraged buyouts, mezzanine and restructuring funds, are often
referred to as "venture capital funds." Underlying Private Funds themselves may
be organized as "funds of funds" whereby an Underlying Private Fund invests in a
diversified pool managed by multiple investment managers. Underlying Collective
Funds are separate accounts managed by investment advisers, who invest the
assets on a discretionary basis. The Fund also may invest in securities directly
and may hold cash and/or U.S. Government securities and other short-term money
market instruments. There can be no assurance that the Fund will achieve its
investment objective.
The business and affairs of the Fund are managed under the direction of
the Board of Directors. The President of the Fund is the Chief Investment
Officer. As Chief Investment Officer, the President is responsible for making
decisions to buy, sell or hold a particular security, subject to the oversight
of the Directors. The Chief Investment Officer may be assisted by other officers
of the Fund in the investment selection process. Cambridge provides investment
consulting services to the Fund. Cambridge assists the Fund in determining asset
allocation ranges, choosing management structures for the Fund's assets and
making recommendations to the Fund regarding purchasing, selling and holding of
Underlying Investment Vehicles.
The Fund uses a "top down" approach to buying and selling securities,
although it is not limited to this approach. Under a "top down" approach,
categories of investments are identified that offer the best risk/reward
opportunities. These categories may include, but are not limited to, investments
9
<PAGE>
in corporate debt, high-yield or junk bonds, small-capitalization stocks,
large-capitalization stocks, and foreign securities of developed markets and of
emerging markets. The Fund allocates its assets within these categories by
selecting specific Underlying Investment Vehicles. The allocation among asset
categories reflects the Fund's long range view of the markets. Generally,
Underlying Investment Vehicles within a particular asset category are compared
against similar vehicles in the same category. Selection of particular
Underlying Investment Vehicles will be based on a variety of factors, including,
but not limited to, the investment objectives and policies of the vehicle, the
past performance of the vehicle, the investment style of the managers of the
vehicle, and the cost structure of the vehicle. The Fund currently anticipates
that it will overweight the asset categories of foreign securities in developed
markets and emerging markets, including debt and equity securities. The Fund's
relative weighting among asset categories is not subject to any limitations and
there can be no assurance that any weighting will be maintained in the future.
In pursuit of its investment objective, the policy of the Fund is not to
restrict itself as to the type of Underlying Investment Vehicle in which it can
invest or as to the proportion of the value of its assets that may be invested
in any type of Underlying Investment Vehicle. However, the Fund will follow
certain guidelines regarding its investments. The Fund may invest up to 100% of
its total assets in Underlying Funds and may invest up to 25% of its total
assets in any one Underlying Fund. In addition, the Fund together with any
affiliated persons of the Fund (as that term is defined in the 1940 Act) may
purchase only 3% of the total outstanding voting securities of a registered
investment company. See "Special Considerations and Risk Factors."
The Fund may invest up to 50% of its total assets in Underlying Private
Funds and may invest up to 10% of its total assets in any one Underlying Private
Fund. The Fund will not invest more than 25% of its total assets in Underlying
Private Funds that are organized as hedge funds ("Underlying Hedge Funds") and
will not invest more than 25% of its total assets in Underlying Private Funds
that are organized as private equity or venture capital funds ("Underlying
Private Equity Funds"). In addition, to the extent that the Fund is committed to
make, or has entered into commitments to make, future investments in Underlying
Private Equity Funds, the Fund may continue to make investments and enter into
such commitments only so long as these commitments, together with the actual
investments of the Fund in Underlying Private Equity Funds, do not exceed 35% of
the total assets of the Fund. Thus, the Fund could have more than 25% of its
total assets invested in Underlying Private Equity Funds (and more than 50% of
its total assets invested in Underlying Private Funds) if the Fund made a
capital contribution required under a previous commitment to an Underlying
Private Equity Fund at a point in time when the Fund already had 25% of its
total assets invested in Underlying Private Equity Funds. The Fund also may
invest up to 10% of its total assets in Underlying Collective Funds. These
percentage limitations are applied at the time a transaction is effected and are
subject to change by the Board of Directors.
Pending investment, for temporary defensive purposes, or for other
purposes such as to pay distributions, the Fund may hold up to 100% of its
assets in cash and/or U.S. Government securities and other money market
instruments, including money market funds. To the extent the Fund employs a
temporary defensive strategy, it will not be invested so as to achieve directly
its investment objective. The Fund may invest up to 15% of its total assets
directly in equity and debt securities other than cash and money market
instruments.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
LEVERAGE. The Fund is authorized to borrow money in amounts of up to
33-1/3% of the value of its total assets at the time of such borrowings.
Borrowings by the Fund (commonly known as "leveraging") create an opportunity
for greater total return but, at the same time, increase exposure to capital
risk. In addition, borrowed funds are subject to interest costs that may offset
or exceed the return earned on the borrowed funds. The Fund has obtained an
uncommitted line of credit for up to $50 million from Boston Safe Deposit &
Trust Company. The borrowing is structured as a secured revolving demand loan
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and is evidenced by a promissory note of the Fund. Interest is payable on such
borrowing generally at a rate equal to the interest rate announced by the
Federal Reserve Bank of New York as the average rate on overnight Federal funds
transactions plus 1/2 of 1%. Borrowings will be collateralized by varying
percentages of the Fund's assets held by the Fund's custodian depending on the
amount of borrowings outstanding. As of September 30, 1997, the Fund had
outstanding borrowings of $12,325,000 from the line of credit at an annualized
average interest rate of 6.18%. See "Special Considerations and Risk Factors --
Leverage."
SECURITIES LENDING. The Fund may from time to time lend securities from
its portfolio with a value not exceeding 33-1/3% of its total assets to banks,
brokers and other financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States Government. Such collateral
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. This limitation is a fundamental
policy, and may not be changed without the approval of the holders of a majority
of the Fund's outstanding voting securities, as defined in the 1940 Act. The
purpose of such loans is to permit the borrower to use such securities for
delivery to purchasers when such borrower has sold short. If cash collateral is
received by the Fund, it is invested in short-term money market securities, and
a portion of the yield received in respect of such investment is retained by the
Fund. Alternatively, if securities are delivered to the Fund as collateral, the
Fund and the borrower negotiate a rate for the loaned premium to be received by
the Fund for lending its portfolio securities. In either event, the total yield
on the Fund is increased by loans of its securities. The Fund will have the
right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. Such loans are terminable at any time. The Fund
may pay reasonable finder's, administrative and custodial fees in connection
with such loans. In the event that the borrower defaults on its obligation to
return borrowed securities, because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could suffer
a loss to the extent that the value of the collateral falls below the market
value of the borrowed securities. The Fund has no present intention of lending
its portfolio securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
respect to its permitted investments but currently intends to do so only with
member banks of the Federal Reserve System or with primary dealers in U.S.
Government securities. Under a repurchase agreement, the Fund buys a security at
one price and simultaneously promises to sell the same security back to the
seller at a higher price. The Fund's repurchase agreements will provide that the
value of the collateral underlying the repurchase agreement will always be at
least equal to the repurchase price, including any accrued interest earned on
the repurchase agreement, and will be marked to market daily. The repurchase
date usually is within seven days of the original purchase date. Repurchase
agreements are deemed to be loans under the 1940 Act. In all cases, the Board of
Directors must be satisfied with the creditworthiness of the other party to the
agreement before entering into a repurchase agreement. In the event of the
bankruptcy (or other insolvency proceeding) of the other party to a repurchase
agreement, the Fund might experience delays in recovering its cash. To the
extent that, in the meantime, the value of the securities the Fund purchases may
have declined, the Fund could experience a loss. The Fund has no present
intention of entering into repurchase agreements.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares (which for this purpose and under the 1940 Act means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). The Fund may not:
(1) Borrow money in excess of 33 1/3% of the value of its total assets
(including amounts borrowed) at the time of such borrowing, (except that the
Fund may borrow from a bank in an amount not in excess of 5% of the Fund's total
assets as a temporary measure for extraordinary or emergency purposes).
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(2) Purchase or sell real estate, physical commodities, or commodities
contracts, except that the Fund may purchase commodities contracts relating to
financial instruments, such as financial futures or index contracts and options
on such contracts.
(3) Invest in oil, gas or other mineral exploration or development
programs and oil, gas or mineral leases.
(4) Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(5) Make loans, except that the Fund may purchase debt securities,
entering into repurchase agreements and lend its portfolio securities.
Because of its investment objective and policies, the Fund will
concentrate more than 25% of its assets in the investment company industry. In
accordance with the Fund's investment program, the Fund will invest more than
25% of its assets in Underlying Investment Vehicles.
The Fund may issue senior securities representing debt, provided the Fund
has an asset coverage of 300% after such issuance. In addition, although it has
no present intention to do so, the Fund may issue senior securities representing
stock, provided the Fund has an asset coverage of 200% after such issuance.
The Fund's investment objective is fundamental. All other policies
described herein are treated as non-fundamental investment limitations that may
be changed by the Board of Directors without a vote of shareholders.
If a percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a transaction is
effected, later changes in the percentage resulting from changing values will
not be considered a violation.
SPECIAL CONSIDERATIONS AND RISK FACTORS
Investment in shares of stock of the Fund offers several benefits. The
Fund offers investors the opportunity to benefit from economies of scale
inherent in many aspects of investing. These potential economies of scale
include enhanced diversification of assets across numerous Underlying Investment
Vehicles. The Fund is expected to be a lower cost investment vehicle than other
registered investment companies that operate in a "fund of funds" manner. The
Fund also relieves the investor of the burdensome administrative details
involved in managing a portfolio of such investments. These benefits are at
least partially offset by the expenses involved in operating an investment
company. Such expenses primarily consist of the investment consulting fees and
the administrative fees and operational costs of the Fund.
RISKS AND OTHER CONSIDERATIONS. The Fund will concentrate its investments
in the shares of open-end and closed-end investment companies and in interests
in private investment companies. Investment companies pool the investments of
many investors and use professional management to select and purchase securities
of different issuers for their portfolios. Some investment companies invest in
particular types of securities (i.e. equity or debt), some concentrate in
certain industries, and others may invest in a variety of securities to achieve
a particular type of return or tax result. Any investment in an investment
company involves risk. Even though the Fund may invest in a number of investment
companies, this investment strategy cannot eliminate investment risk. Investing
in investment companies through the Fund may involve additional and duplicative
expenses and certain tax results that would not be present if an investor were
to make a direct investment in the Underlying Funds or Underlying Private Funds.
The Fund has no present intention of investing in open-end funds that impose a
sales load, contingent deferred sales load or redemption fee. The Underlying
Funds may incur distribution expenses in the form of "Rule 12b-1 fees."
The Underlying Funds that are "open-end" funds stand ready to redeem their
shares. The 1940 Act provides that an open-end fund whose shares are purchased
by the Fund is obliged to redeem shares held by the Fund only in an amount up to
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1% of the open-end fund's outstanding securities during any period of 30 days.
Under certain circumstances, an open-end fund may determine to make payment of a
redemption by the Fund (wholly or in part) by a distribution-in-kind of
securities from its portfolio, instead of in cash. As a result, the Fund may
hold securities distributed by an open-end fund until such time as the Board of
Directors determines it is appropriate to dispose of such securities. The Fund
could incur brokerage, tax or other charges in converting such portfolio
securities to cash.
The Fund generally will purchase shares of closed-end funds only in the
secondary market. The Fund will incur normal brokerage costs on such purchases
similar to the expenses the Fund would incur for the purchase of equity
securities in the secondary market. The Fund, however, also may purchase
securities of a closed-end fund in an initial public offering when, in the
opinion of the Chief Investment Officer based on a consideration of the nature
of the closed-end fund's proposed investments, the prevailing market conditions
and the level of demand for such securities, securities of closed-end funds
represent an attractive opportunity for growth of capital. The initial offering
price typically will include a dealer spread, which may be higher than the
applicable brokerage cost if the Fund purchased such securities in the secondary
market.
The shares of many closed-end funds, after their initial public offering,
frequently trade at a price per share that is less than the net asset value per
share, the difference representing the "market discount" of such shares. This
market discount may be due in part to the investment objective of long-term
appreciation, which is sought by many closed-end funds, as well as to the fact
that the shares of closed-end funds are not redeemable by the holder upon demand
in the secondary market. A relative lack of secondary market purchases of
closed-end fund shares also may contribute to such shares trading at a discount
to their net asset value.
The Fund may invest in shares of closed-end funds that are trading at a
discount to net asset value or at a premium to net asset value. There can be no
assurance that the market discount on shares of any closed-end fund purchased by
the Fund will ever decrease. In fact, it is possible that this market discount
may increase and the Fund may suffer realized or unrealized capital losses due
to further decline in the market price of the securities of such closed-end
funds, thereby adversely affecting the net asset value of the Fund's shares.
Similarly, there can be no assurance that any shares of a closed-end fund
purchased by the Fund at a premium will continue to trade at a premium or that
the premium will not decrease subsequent to a purchase of such shares by the
Fund.
While closed-end funds may have a wide variety of investment objectives,
which may be similar to open-end funds, many closed-end funds invest in less
liquid securities than open-end funds and may invest in securities that are
subject to greater price volatility such as small capitalization equity stocks
and securities that trade in foreign emerging markets.
Closed-end funds may issue senior securities (including preferred stock
and debt obligations) or borrow money for the purpose, and with the effect of,
leveraging the closed-end fund's common shares in an attempt to enhance the
current return to such closed-end funds common shareholders. The Fund's
investment in the common shares of closed-end funds that are financially
leveraged may create an opportunity for greater total return on its investment,
but at the same time may be expected to exhibit more volatility in market price
and net asset value than an investment in shares of investment companies without
a leveraged capital structure. The Fund has no present intention to invest in
senior securities issued by closed-end funds.
An investor could invest directly in the Underlying Funds. By investing in
investment companies indirectly through the Fund, the investor bears not only
his proportionate share of the expenses of the Fund (including operating costs
and administrative fees) but also, indirectly, similar expenses of the
Underlying Funds. An investor may indirectly bear expenses paid by Underlying
Funds related to the distribution of their shares.
RISK OF UNDERLYING INVESTMENT VEHICLES. Investment decisions of the
Underlying Investment Vehicles are made by general partners and/or investment
advisers entirely independently of the Fund. Indeed, at any particular time, one
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Underlying Investment Vehicle may be purchasing shares of an issuer whose shares
are being sold by another Underlying Investment Vehicle. As a result, the Fund
would incur indirectly certain transactions costs without accomplishing any
investment purpose.
Some of the Underlying Investment Vehicles also incur more risks than
others. For example, they may trade their portfolios more actively (which
results in higher brokerage costs), may engage in investment practices that
entail greater risk, or invest in companies whose securities and other
investments are more volatile. In addition, the Underlying Investment Vehicles
in which the Fund invests may or may not have the same investment limitations as
those of the Fund itself. In the case of an Underlying Investment Vehicle that
concentrates in a particular industry or industry group, events may occur that
impact that industry or industry group more significantly than the stock market
as a whole. In the case of a Underlying Investment Vehicle that employs
leverage, i.e., borrows money to invest, there may be increased risk of
volatility and other risks of "leveraged transactions." If an Underlying
Investment Vehicle sells securities short, there may be an increased risk of
loss if the value of the securities sold short increase in value because the
Underlying Investment Vehicle may have posted only a small percentage of the
value of the securities as collateral but would be liable for the entire value
of the securities sold short. In addition, investing in Underlying Investment
Vehicles that invest in foreign securities and emerging markets involves risks
related to political and economic developments and changes in foreign currency
exchange rates. Investments in Underlying Investment Vehicles that invest in
lower quality debt securities commonly known as "junk bonds" involves a high
degree of risk and could be considered speculative investments. The risks
associated with investments in foreign securities and junk bonds are further
described in the Appendix to this Registration Statement.
Underlying Private Equity Funds also involve special risks. Private equity
investments tend to be in start-up or newly-organized entities that have little
or no operating history or in entities that are being reorganized or have had
financial difficulties. As a result, these investments tend to be riskier with
less predictable earnings and returns. Interests acquired by Underlying Private
Equity Funds generally are privately placed securities or public securities with
restrictions on resale. These securities generally are considered illiquid with
little or no ability to resell the securities in the immediate future. Moreover,
interests in Underlying Private Equity Funds tend to be illiquid with a limited
market for resale. In addition, Underlying Private Equity Funds often require
subsequent capital contributions, the timing of which are determined by the
general partners of the funds. Underlying Private Equity Funds also tend to make
long-term investments in securities that are acquired with the expectation of
long-term capital appreciation. Thus, securities may be held by Underlying
Private Equity Funds for long periods before any gain on the investment is
realized. Also, the financial information provided by Underlying Private Equity
Funds can be limited.
LEVERAGE. The Fund may borrow money in amounts up to 33-1/3% of the value
of its total assets to finance additional investments and make distributions as
well as to finance tender offers or for temporary, extraordinary or emergency
purposes. See "Tender Offers." The Fund has received a private letter ruling
from the Internal Revenue Service premised on the Fund having no more than one
class of shares outstanding. See "Taxes." As a result, although the Fund is
permitted by its articles of incorporation and the 1940 Act to issue one or more
series of preferred shares, it has no present intention to do so. The Fund has
obtained an uncommitted line of credit from Boston Safe Deposit & Trust Company.
The Fund may borrow to finance additional investments only when it believes that
the return that may be earned on investments purchased with the proceeds of such
borrowings or offerings will exceed the costs, including debt service,
associated therewith. However, to the extent such costs exceed the return on the
additional investments, the return realized by the Fund's stockholders will be
adversely affected. Moreover, if the return is negative during a period, not
only will the Fund's stockholders be adversely affected, but the Fund also will
pay the costs associated with the borrowing.
Capital raised through leverage will be subject to interest costs or
dividend payments which may or may not exceed the interest on the assets
purchased. The Fund also may be required to maintain minimum average balances in
connection with borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements will increase the cost of borrowing
over the stated interest rate. The issuance of additional classes of preferred
shares involves offering expenses and other costs and may limit the Fund's
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freedom to pay dividends on shares of stock or to engage in other activities.
Borrowings and the issuance of a class of preferred stock having priority over
the Fund's stock create an opportunity for greater income per share of stock,
but at the same time such borrowing or issuance is a speculative technique in
that it will increase the Fund's exposure to capital risk. Unless the income and
appreciation, if any, on assets acquired with borrowed funds or offering
proceeds exceeds the costs of borrowing or issuing additional classes of
securities, the use of leverage will diminish the investment performance of the
Fund compared with what it would have been without leverage.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act the Fund may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase, an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be.
The Fund's willingness to borrow money for investment purposes, and the
amount it will borrow, will depend on many factors, the most important of which
are investment outlook, market conditions and interest rates. Successful use of
a leveraging strategy depends on the ability of the Chief Investment Officer to
predict correctly interest rates and market movements, and there is no assurance
that a leveraging strategy will be successful during any period in which it is
employed.
FUND INVESTMENT STRUCTURE. An investor should be aware that the Fund,
unlike other investment companies that directly acquire and manage their own
portfolios of securities, seeks to achieve its investment objective primarily by
investing all of its investable assets in the Underlying Investment Vehicles
(although the Fund may temporarily hold a DE MINIMIS amount of cash). Therefore,
the Fund's interest in the securities owned by the Underlying Investment
Vehicles is indirect. Funds that invest all their assets in interests in
separate unaffiliated investment companies are a relatively new development in
the investment company industry and, therefore, the Fund may be subject to
additional regulations than historically structured funds. The Underlying
Investment Vehicles also may sell interests to other affiliated and
non-affiliated investment companies or institutional investors.
If the Fund withdraws all of its assets from an Underlying Investment
Vehicle, or the Board of Directors determines that the investment objective of
an Underlying Investment Vehicle is no longer consistent with the investment
objective of the Fund, the Board of Directors would consider what action might
be taken, including investing the assets of the Fund in another pooled
investment vehicle or retaining an investment adviser to manage the Fund's
assets in accordance with its investment objective. The Fund's investment
performance may be affected by a withdrawal of all or some of the Fund's assets
from an Underlying Investment Vehicle.
Whenever the Fund, as an investor in an Underlying Fund is requested to
vote on matters pertaining to the Underlying Fund, the Fund will seek
instructions from its stockholders with regard to the voting of all proxies of
the Underlying Fund and will vote such proxies for or against such matters
proportionately to the instructions to vote for or against such matters received
from the Fund's stockholders. The Fund shall vote shares for which it receives
no voting instructions in the same proportion as the shares for which it
receives voting instructions. Alternatively, if the Fund does not seek
instructions from its stockholders, the Fund will vote shares of an Underlying
Fund held by it in the same proportion as the vote of all other holders of such
security.
ILLIQUID SECURITIES. The Fund has no limitation on the amount of its
assets that may be invested in investments which are not readily marketable or
are subject to restrictions on resale. Such investments, which may be considered
illiquid, may affect the Fund's ability to realize the net asset value in the
event of a voluntary or involuntary liquidation of its assets. To the extent
that such investments are illiquid, the Fund may have difficulty disposing of
securities in order to enable the Fund to repurchase shares of its stock
pursuant to tender offers, if any. Interests in Underlying Private Funds and
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Underlying Collective Funds generally are not readily marketable and may be
subject to restrictions on resale. The Board of Directors will consider the
liquidity of the Fund's investments in determining whether a tender offer should
be made by the Fund. See "Net Asset Value."
LACK OF OPERATING HISTORY AND SECONDARY MARKET. As a relatively newly
organized entity, the Fund has a limited operating history. In addition, the
members of the Board of Directors and the Fund's officers have no previous
experience in managing an investment company. Furthermore, Cambridge does not
provide investment consulting services or investment advice to any other
registered investment company, although Cambridge does provide investment advice
to numerous institutional clients. Moreover, the Fund's shares of stock are
restricted and cannot be transferred without the approval of the Fund. It is not
anticipated that there will be a public trading market for the Fund's stock. To
the extent that a secondary market exists and a transfer is permitted, however,
investors should be aware that the shares of closed-end funds frequently trade
in the secondary market at a discount from their net asset value. Should there
be a secondary market for the Fund's shares of stock, the market price of the
shares may vary from net asset value. The Fund should not be considered a
vehicle for trading purposes.
NON-DIVERSIFICATION. The Fund is classified under the 1940 Act as a
"non-diversified" fund; therefore, the Fund will be able, with respect to 50% of
its total assets, to invest more than 5% of its total assets in obligations of
one issuer. To the extent that the Fund invests in a smaller number of issuers,
the value of the Fund's shares may fluctuate more widely and the Fund may be
subject to greater investment and credit risk with respect to its portfolio.
PURCHASE OF SHARES
SUBSCRIPTION OFFERING. Shares of the Fund will be offered at a price equal
to the net asset value of a share of the Fund on the close of the subscription
offering period, expected to end on February 27, 1998, unless extended. The
subscriptions will be payable and the stock will be issued immediately after the
Fund determines its net asset value. The minimum initial purchase during the
subscription offering period is $1,000,000. The Fund will not accept monies for
subscriptions prior to the close of the offering period.
BEST EFFORTS UNDERWRITING. Rodney Square Distributors, Inc. (the
"Underwriter") acts as the underwriter of shares of the Fund. The Underwriter,
and other selected securities dealers that may enter into dealer agreements with
the Underwriter, will solicit subscriptions for shares of the Fund for a period
of up to 60 days expected to end on February 27, 1998. The subscription period
may be extended for up to an additional 30 days upon agreement between the Fund
and the Underwriter. The subscription offering may be terminated by the Fund or
the Underwriter at any time, in which event no shares will be issued (and,
therefore, the Fund will not commence a public offering, no amounts will be
payable by subscribers, any payments by subscribers will be refunded in full
without interest) or a limited number of shares will be issued. Under the terms
and conditions of an underwriting agreement dated August 4, 1997 ("Underwriting
Agreement") between the Fund and the Underwriter, the offering will be made on a
"best efforts" basis under which the Underwriter is required to take and pay for
only such securities as it may sell to the public. In the Underwriting
Agreement, the Fund and the Underwriter each have agreed to indemnify the other
against certain liabilities, including liabilities under federal and state
securities laws, and to contribute to payments they may be required to make in
respect thereof.
RESTRICTIONS ON TRANSFERABILITY
Shares of stock of the Fund cannot be transferred without the written
approval of the Fund. The Secretary of the Fund must approve all transfers. The
Secretary will not approve transfers unless the transferee qualifies for
exemption from federal income taxation under Section 501(c)(3) of the Code or is
a charitable remainder trust described in Section 664 of the Code (defined
herein as an Eligible Investor) and the transfer is for at least $1,000,000
worth of stock. The Board of Directors may from time to time by resolution
modify qualifications for transferees.
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CONTROL PERSONS
CONTROL OF FUND. The Fund raised its initial capital through a private
placement and commenced investment operations on May 30, 1997. As a result of
the private placement, the William S. Dietrich II Charitable Remainder Annuity
Trust (the "Dietrich CRAT") and the William S. Dietrich II Charitable Remainder
Unit Trust (the "Dietrich CRUT") own approximately 85% and 15% of the shares of
the Fund, respectively. If all shares offered pursuant to the public offering
are sold and issued, it is anticipated that the Dietrich CRAT individually still
will own more than 50% of the shares of the Fund. As a result of this stock
ownership, the Dietrich CRAT would be deemed to control the Fund within the
meaning of Section 2(a)(9) of the 1940 Act. Because of its ownership, the
Dietrich CRAT will be able to vote on and control all matters relating to the
management and policies of the Fund, such as the election of directors and any
change in the Fund's fundamental investment restrictions. The trustee of the
Dietrich CRAT and the Dietrich CRUT is Thomas Marshall. The address of the
Dietrich CRAT and the Dietrich CRUT is 500 Grant Street, Suite 2226, Pittsburgh,
PA 15219-2502.
TENDER OFFERS
No market presently exists for the Fund's shares and it is not currently
expected that a secondary market will develop. In recognition of the possibility
that a secondary market for the Fund's shares will not exist, the Fund may take
actions that will provide liquidity to stockholders. Commencing with the second
year of Fund operations, the Board of Directors will consider each year the
making of Tender Offers, I.E., offers to repurchase all of its shares from
stockholders of the Fund's stock at a price per share equal to the net asset
value per share of the stock. There can be no assurance that the Board of
Directors will decide to undertake the making of a Tender Offer in any
particular year. If the Board of Directors determine to make a Tender Offer,
such offer will be on an "all or none" basis. Thus, shareholders who accept the
offer would have all their shares repurchased by the Fund, thereby reducing each
such shareholder's interest in the Fund to zero. Subject to the Fund's
investment restriction with respect to borrowings, the Fund may borrow money to
finance the repurchase of shares pursuant to any Tender Offers. See "Special
Considerations and Risk Factors -- Leverage" and "Investment Restrictions."
The Fund's assets will consist primarily of its interests in the
Underlying Investment Vehicles. Therefore, in order to finance the repurchase of
Fund shares pursuant to Tender Offers, the Fund may find it necessary to
liquidate all or a portion of these interests.
The Fund expects that ordinarily there will be no secondary market for the
Fund's stock. Nevertheless, if a secondary market develops for the stock of the
Fund, the market price of the shares may vary from net asset value from time to
time. Such variance may be affected by, among other factors, relative demand and
supply of shares and the performance of the Fund. A Tender Offer for shares of
stock of the Fund at net asset value could reduce any spread between net asset
value and market price that may otherwise develop. However, there can be no
assurance that such action would result in the Fund's stock trading at a price
that equals or approximates net asset value.
Although the Board of Directors believes that the Tender Offers generally
would be beneficial to holders of the Fund's stock, the acquisition of shares by
the Fund will decrease the total assets of the Fund and therefore have the
likely effect of increasing the Fund's expense ratio (assuming such acquisition
is not offset by the issuance of additional shares). Furthermore, to the extent
the Fund borrows to finance the making of Tender Offers, interest on such
borrowings reduce the Fund's net investment income.
It is the Board of Director's announced policy, which may be changed by
the Board of Directors, not to repurchase shares pursuant to a Tender Offer if
(1) such repurchases would terminate the Fund's status as a regulated investment
company ("RIC") under the Code (which would make the Fund a taxable entity,
causing its income to be taxed at the corporate level in addition to the
taxation of non-exempt stockholders who receive dividends from the Fund); (2)
the Fund would not be able to liquidate portfolio securities in a manner that is
orderly and consistent with the Fund's investment objective and policies in
order to repurchase stock tendered pursuant to the Tender Offer; or (3) there
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is, in the Board of Director's judgment, any (a) legal action or proceeding
instituted or threatened challenging the Tender Offer or otherwise materially
adversely affecting the Fund, (b) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States which is material to the Fund, or (c) other event or condition
which would have a material adverse effect on the Fund or its stockholders if
shares of stock tendered pursuant to the Tender Offer were purchased. Thus,
there can be no assurance that the Board of Directors will proceed with any
Tender Offer. The Board of Directors may modify these conditions in light of
circumstances existing at the time. If the Board of Directors determines to
repurchase the Fund's shares of stock pursuant to a Tender Offer, such purchases
could significantly reduce the asset coverage of any borrowing or outstanding
senior securities. The Fund may not purchase shares of stock to the extent such
purchases would result in the asset coverage with respect to such borrowing
being reduced below the asset coverage requirement set forth in the 1940 Act.
Accordingly, in order to repurchase all shares of stock tendered, the Fund may
have to repay all or part of any then outstanding borrowing to maintain the
required asset coverage. See "Special Considerations and Risk Factors --
Leverage."
Each Tender Offer will be made and stockholders notified in accordance
with the requirements of the Securities Exchange Act of 1934 and the 1940 Act,
either by publication or mailing or both. The offering documents will contain
such information as is prescribed by such laws and the rules and regulations
promulgated thereunder. The repurchase of tendered shares by the Fund will be a
taxable event to a non-exempt shareholder. See "Taxes." The Fund will pay all
costs and expenses associated with the making of any Tender Offer.
LIQUIDATION
If the Board of Directors does not commence a Tender Offer by December 31,
2000, the Fund will be liquidated as soon as practical thereafter unless the
Fund obtains unanimous approval from all shareholders of the Fund not to
liquidate the Fund. If unanimous shareholder approval is obtained, the Fund will
continue in existence for another three-year period. If no tender offer is made
within that three year period or in each of the two following three-year
periods, the Fund will be liquidated as soon as practical thereafter, unless
during any three-year period, the Fund obtains unanimous approval from all
shareholders not to liquidate the Fund. In all cases, the Fund shall cease to
exist at the close of business on December 31, 2009.
The Fund's organizational expenses are being amortized over a 60-month
period. If the Fund is liquidated prior to the completion of this 60-month
period, the initial investors in the Fund (I.E., the Dietrich CRAT and the
Dietrich CRUT) will bear any remaining unamortized organizational expenses.
MANAGEMENT
The Fund's Board of Directors has overall supervision over the affairs of
the Fund. Pursuant to this responsibility, the Board of Directors has appointed
officers and engaged other companies to provide certain advisory and
administrative services required by the Fund.
The Chief Investment Officer is responsible for the actual management of
the Fund. As part of his responsibilities, the Chief Investment Officer, with
the assistance of the Fund's officers and subject to the oversight of the Board
of Directors, is responsible for making decisions to buy, sell, or hold a
particular security. The Board of Directors has served as such since the Fund's
organizational board meeting on April 21, 1997.
William S. Dietrich II is the President and Chief Investment Officer of
the Fund. In this capacity, he is responsible for making investment decisions
for the Fund, subject to the oversight of the Board of Directors. In the event
that Mr. Dietrich is unable to perform in this capacity, the Board of Directors,
in its discretion, may appoint another officer of the Fund as Chief Investment
Officer. Mr. Dietrich also is President and a Director of Dietrich Industries,
Inc. As President, Mr. Dietrich is responsible for managing all aspects of
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<PAGE>
Dietrich Industries, Inc.'s business, a company in the steel fabrication
business. Until December 1995, Mr. Dietrich was sole shareholder of Dietrich
Industries, Inc. Mr. Dietrich donated all of the stock of Dietrich Industries,
Inc. to the Dietrich CRAT. In 1996, the Dietrich CRAT sold Dietrich Industries,
Inc., to Worthington Industries Inc.
DIRECTORS AND OFFICERS. Set forth in the table below is a listing of the
Directors and officers of the Fund, their ages and their business experience the
last five years. Unless otherwise noted, the address of each Director and
officer is Rodney Square North, 1106 N. Market Street, Wilmington, DE 19890.
Position(s) with Principal Occupation(s)
Name, Address, And Age Registrant During Past 5 Years
- ---------------------- ---------------- -----------------------
William S. Dietrich II*, 59 Director and Director and President,
President Dietrich Industries, Inc.;
Director, Worthington
Industries Inc.; Director,
Carpenter Technologies
Corp.
Jennings R. Lambeth#, 77 Director Business Consultant -
2 Gateway Center, Suite 680 Self-employed; Director,
Pittsburgh, Pennsylvania 15222 J&L Specialty Steel, Inc.
Evans Rose, Jr.#, 65 Director Lawyer, Cohen & Grigsby,
2900 CNG Tower P.C.
Pittsburgh, Pennsylvania 15222
Richard F. Berdik, 53 Secretary and Treasurer, Dietrich
Treasurer Industries, Inc. since
1996; until December 1995,
Mr. Berdik was Chief
Financial Officer of
Dietrich Industries, Inc.
* Mr. Dietrich is an "interested person" of the Fund as defined in
Section 2(a)(19) of the 1940 Act.
# Prior to February, 1996, both Mr. Lambeth and Mr. Rose served as
directors of Dietrich Industries, Inc. The law firm of Cohen &
Grigsby, P.C. performed legal services for Dietrich Industries, Inc.
REMUNERATION OF DIRECTORS AND OFFICERS. The following table sets forth for each
of the persons named below the aggregate current remuneration paid by the Fund
for its first year of operation for services in all capacities:
Capacity in Which Aggregate
Compensation Compensation Total Compensation
Name Of Person Was Received From Fund From Fund(1)
-------------- ------------ --------- ------------
William S. Dietrich II Director -0- -0-
Jennings R. Lambeth Director $5,000 $5,000
Evans Rose, Jr. Director $5,000 $5,000
The Fund pays each Director who is not affiliated with the Fund $5,000 per annum
and reimburses travel and other expenses incurred in connection with attendance
at board meetings.
(1) For its fiscal year that will end March 31, 1998, Mr. Lambeth and Mr. Rose
each are expected to receive $5,000 from the Fund. The Directors and officers
own none of the stock of the Fund.
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<PAGE>
(2) Compensation paid by the Fund contains no accrued or payable pension or
retirement benefits.
INVESTMENT ADVISORY AND OTHER SERVICES. The Fund receives investment
consulting services from Cambridge Associates, Inc. and its affiliate, Cambridge
Capital Advisors, Inc. ("Cambridge") pursuant to an investment consulting
agreement date July 1, 1997 ("Agreement"). Cambridge is in the business of
providing, on a non-discretionary basis, investment consulting services,
including (a) establishing investment objectives, asset allocation ranges and
long-term goals, (b) choosing management structures for the investment of assets
and (c) selecting control systems, and evaluating custody, cash management,
brokerage, and securities lending arrangements. Cambridge's principal business
address is One Winthrop Square, Boston, MA 02110. Cambridge, a private company
controlled by James N. Bailey, Hunter Lewis and Ezra K. Zilkha, has over 20
years of experience as an adviser and currently provides similar advisory
services with respect to more than $15 billion.
Cambridge provides the Fund, on a non-discretionary basis, investment
consulting services regarding the Fund's purchase, sale and holding of
investment securities. Cambridge also provides advice regarding the Fund's
investment policies and cash management structure. In addition, Cambridge
provides quarterly and annual reports regarding the Fund's investment
performance as well as evaluations of the Fund's assets. Cambridge is
compensated for its services on the following basis: 55 basis points on assets
invested in Underlying Private Funds (other than general partnerships or other
types of entities formed to invest in a diversified pool of marketable or
non-marketable alternative asset investment managers ("Fund of Funds")); 30
basis points on assets invested in Fund of Funds; and 10 basis points on assets
invested in Underlying Funds, cash, securities and other assets. These fees also
will be applied on any firm commitment made by the Fund to make investments in
Underlying Private Funds and Funds of Funds. As a result of this fee structure,
Cambridge will receive higher fees to the extent that the Fund invests in, and
makes future commitments to invest in, Underlying Private Funds.
Under the Agreement, Cambridge is permitted to provide investment
consulting services to others so long as the services provided under the
Agreement are not impaired thereby. In performing its obligations under the
Agreement, Cambridge will discharge its duties and exercise its powers with the
skill, prudence and diligence that, under the circumstances then prevailing, a
person acting in a like capacity would use. Moreover, the Agreement provides
that nothing in the Agreement shall be construed to limit any liability to the
Fund or its shareholders to which Cambridge would otherwise be subject by reason
of willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations under the
Agreement.
The Agreement by its terms continues in effect until June 30, 1998. Unless
sooner terminated, the Agreement automatically will continue for successive
periods of twelve month each, provided that such continuance is specifically
approved at least annually (i) by vote of a majority of the directors of the
Fund who are not parties to the Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval and (ii) by the Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund. Notwithstanding the foregoing, this
Agreement may be terminated by the Fund at any time, without the payment of any
penalty, by vote of the Board of Directors or by a vote of a majority of the
outstanding voting securities of the Fund on sixty days' written notice to
Cambridge or by Cambridge at any time on sixty days' written notice to the Fund.
The Fund may hire other consultants who will provide research services
similar to the services described below under soft dollar arrangements. The
Fund, however, will pay cash for consultant services. Information provided by
consultants will assist the Chief Investment Officer in making investment
decisions.
PORTFOLIO TRANSACTIONS
The Chief Investment Officer is responsible for the selection of brokers
and dealers who execute portfolio transactions on behalf of the Fund. The Chief
Investment Officer directs portfolio transactions to brokers-dealers for
execution on terms and at rates which he believes, in good faith, to be
reasonable in view of the overall nature and quality of services provided by a
20
<PAGE>
particular broker-dealer, including brokerage and research services. The Chief
Investment Officer seeks the best net results for the Fund, taking into account
such factors as the price (including the applicable brokerage commission or
dealer spread), size of the order, difficulty of execution and operational
facilities of the firm involved. While the Chief Investment Officer generally
seeks reasonable competitive commission rates and spreads, payment of the lowest
commission or spread is not necessarily consistent with the best net results.
Accordingly, the Fund will not necessarily be paying the lowest spread or
commission available.
Under "soft dollar" arrangements, the Chief Investment Officer may select
brokers to execute the Fund's portfolio transactions on the basis of the
research and brokerage services provided to the Fund. Such services may include
furnishing analyses, reports and information concerning issuers, industries,
securities, economic factors and trends and portfolio strategy. The Fund has no
obligation to deal with any broker-dealer in the execution of portfolio
transactions. Any soft dollar arrangements will satisfy the criteria of Section
28(e) of the Securities Exchange Act of 1934 or other applicable laws. Section
28(e) specifies that a person with investment discretion shall not be "deemed to
have acted unlawfully or to have breached a fiduciary duty" solely because the
person has caused the account to pay a higher commission than the lowest
available under certain circumstances. To obtain the benefits of Section 28(e),
the person so exercising investment discretion must make a good faith
determination that the commissions paid are "reasonable in relation to the value
of the brokerage and research services provided viewed in terms of either the
particular transaction or his overall responsibilities with respect to the
accounts as to which he exercises investment discretion." Thus, although the
Chief Investment Officer may direct portfolio transactions without necessarily
obtaining the lowest price at which such broker-dealer, or another, may be
willing to do business, the Chief Investment Officer seeks best value to the
Fund on each trade that circumstances in the marketplace permit, including the
value inherent in on-going relationships with quality brokers.
The policy of the Fund with respect to portfolio turnover is to make such
changes in its portfolio as its Board of Directors and officers shall from time
approve, provided that the bulk of the Fund's investments shall consist of
long-term investments. The Fund's portfolio turnover rate is not expected to
exceed 100%, but may vary greatly from year to year and will not be a limiting
factor when the Fund deems portfolio changes appropriate. A 100% portfolio
turnover rate would occur if the lesser of the value of purchases or sales of
the Fund's securities for a year (excluding purchases of U.S. Treasury and other
securities with a maturity at the date of purchase of one year or less) were
equal to 100% of the average monthly value of the securities, excluding
short-term investments, held by the Fund during such year. Higher portfolio
turnover involves correspondingly greater brokerage commissions and other
transaction costs that the Fund will bear directly.
DIVIDENDS AND OTHER DISTRIBUTIONS
DISTRIBUTION POLICY. The policy of the Fund is to pay distributions,
commencing after April 1, 1998, on shares of its common stock equal to
approximately 20% of its average net asset value per year, payable in quarterly
installments equal to approximately 5% of the Fund's net asset value on the
Friday prior to each quarterly declaration date. The fixed distributions will
not be related to the amount of the Fund's net investment income or net realized
capital gains or losses. If, for any calendar year, the total distributions
required by the 20% pay-out policy exceed the Fund's net investment income and
net realized capital gains, which normally is expected to be the case, the
excess generally will be treated as a tax-free return of capital, reducing the
shareholder's adjusted basis in its shares. Such excess, however, will be
treated first as ordinary dividend income up to the amount of the Fund's current
and accumulated earnings and profits, and then as return of capital and capital
gains as set forth above. To ensure that the Fund makes all required capital
gains distributions, the Board of Directors may adjust the year-end quarterly
distribution.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence it has an asset coverage of at least 300% of
the aggregate outstanding principal balance of the indebtedness. Additionally,
under the 1940 Act, the Fund may not declare any dividend or other distribution
21
<PAGE>
on any class of its capital stock or purchase any such capital stock unless it
has, at the time of the declaration of any such distribution or at the time of
any such purchase, asset coverage of at least 300% of the aggregate indebtedness
after deducting the amount of such distribution, or purchase price, as the case
may be. This latter limitation -- and a limitation on the Fund's ability to
declare any cash dividends or other distributions on the stock while any shares
of preferred stock are outstanding -- could under certain circumstances impair
its ability to maintain its qualification for taxation as a RIC. See "Special
Considerations and Risk Factors -- Leverage" and "Taxes."
DIVIDEND PAYMENTS. Each holder of stock of the Fund will be deemed to have
elected to have all dividends and other distributions, net of any applicable
withholding taxes, automatically reinvested in additional shares of stock,
unless American Stock Transfer & Trust Company, the Fund's transfer agent (the
"Transfer Agent"), is otherwise instructed by the stockholder in writing.
Stockholders who do not elect to have dividends and other distributions
reinvested in additional shares will receive all dividends and other
distributions in cash, net of any applicable withholding taxes, paid in U.S.
dollars by check mailed directly to the stockholder by American Stock Transfer &
Trust Company as dividend-paying agent. Dividends and other distributions will
be treated as income to stockholders whether they are so reinvested in shares of
the Fund or received in cash. To the extent the Fund is required to make
dividend and other distribution payments in cash, the Fund may liquidate its
portfolio holdings if it does not have adequate cash reserves. Alternatively,
the Fund may borrow money to make required cash distributions. To the extent the
Fund borrows to make distributions, interest on such borrowings will increase
the Fund's expenses. To the extent the Fund liquidates its portfolio holdings to
make distributions, the Fund will decrease its total assets and therefore, will
likely increase its expense ratio. See "Special Considerations and Risk Factors
- - Leverage" and "Taxes."
TAXES
TAXATION OF THE FUND
The Fund intends to qualify for the special tax treatment afforded RICs
under the Code. To qualify for that treatment, the Fund must distribute to its
stockholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gains, and net gains from certain foreign currency transactions) and
must meet several additional requirements. Among these requirements are the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities or foreign
currencies, or other income derived with respect to its business of investing in
securities or those currencies; (2) for its taxable year ending March 31, 1998,
the Fund must derive less than 30% of its gross income only, from the sale or
other disposition of securities, or foreign currencies that are not directly
related to its principal business of investing in securities, held for less than
three months; and (3) at the close of each quarter of the Fund's taxable year,
(i) at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. Government securities, and other securities limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
issuer's voting securities, and (ii) not more than 25% of the value of its total
assets may be invested in securities (other than U.S. Government securities) of
any one issuer. After March 31, 1998, the Fund will not be subject to
requirement (2) above.
The Fund, as an investor in the Underlying Private Funds, will be deemed
to own a proportionate share of the Underlying Private Funds' assets, and to
earn a proportionate share of the Underlying Private Funds' income, for purposes
of determining whether the Fund satisfies all the requirements described above
to qualify as a RIC. In each taxable year that it so qualifies, the Fund (but
not its stockholders) will not be subject to federal income tax on that part of
its investment company taxable income and net capital gain (the excess of net
long-term capital gain over net short-term capital loss derived from the sale of
securities) that it distributes to its stockholders.
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<PAGE>
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts. The Fund
intends to plan its distributions in order to minimize this excise tax
liability.
TAXATION OF THE STOCKHOLDERS
Dividends paid by the Fund from its investment company taxable income,
whether received in cash or reinvested in Fund shares pursuant to the Plan, are
ordinary income to the Fund's stockholders to the extent of the Fund's earnings
and profits. (Any distributions in excess of the Fund's earnings and profits
first will reduce the adjusted tax basis of a holder's stock and, after that
basis is reduced to zero, will constitute capital gain to the stockholder,
assuming the stock is held as a capital asset). Distributions, if any, from the
Fund's net capital gain, when designated as such, will be long-term capital
gains to the Fund's stockholders, regardless of the length of time they have
owned their Fund shares and whether received by them in cash or reinvested in
Fund shares pursuant to the Plan. The Fund annually will provide its
stockholders with a written notice designating the amounts of any capital gain
distributions.
Dividends and other distributions declared by the Fund in, and payable to
stockholders of record as of a date in, October, November, or December of any
year will be deemed to have been paid by the Fund and received by the
stockholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to any stockholders that are subject to income taxes for the year in which
that December 31 falls.
The Fund must withhold 31% from dividends, capital gain distributions, and
proceeds from sales of stock pursuant to a Tender Offer, if any, payable to any
taxable organization or trust that has not furnished to the Fund a correct
taxpayer identification number ("TIN") or a properly completed claim for
exemption on Form W-8 or W-9 ("backup withholding"). Withholding at that rate
also is required from dividends and capital gain distributions payable to such
stockholders who otherwise are subject to backup withholding.
IRS LETTER RULING
Organizations that qualify as Eligible Investors (SEE "Eligible
Investors"), although they are not generally subject to federal taxes on income
or capital gains, may be subject to federal tax on certain unrelated business
income, which includes income from property with respect to which an Eligible
Investor, or any partnership in which the Eligible Investor has a direct
investment, has any acquisition indebtedness, and an Eligible Investor's share
of any income of a partnership in which it has an interest that is neither
purely passive nor related to the organization's exempt purpose. Unrelated
business income, for this purpose, excludes dividends from corporations and gain
from the sale or exchange of capital assets, unless the Eligible Investor has
incurred indebtedness to acquire or maintain its interest in the corporation
paying the dividend or the capital asset, as the case may be. The Fund has
obtained a private letter ruling from the Internal Revenue Service to the effect
that (i) the Fund will be recognized as a separate taxpayer from its
stockholders, who will be considered stockholders in the Fund; (ii) the Fund,
and not its stockholders, will be considered the holder of interests in
Underlying Investment Vehicles organized as partnerships and as the borrower,
should the Fund incur indebtedness; and (iii) distributions from the Fund to its
stockholders (including funds deemed to be distributed and reinvested pursuant
to the Plan) will be treated either as dividends, as proceeds from the sale or
exchange of capital assets, or as a return of capital. Thus, provided an
Eligible Investor has not borrowed to acquire its interest in the Fund, income
of the Eligible Investors from the Fund will not be taxable unrelated business
income. Eligible Investors should consult their tax advisers regarding whether
any borrowing by an Eligible Investor could give rise to acquisition
indebtedness with respect to the Eligible Investor's interests in the Fund.
Certain Eligible Investors that are "Private Foundations" for purposes of
the Code, are subject to the requirement that they make no jeopardizing
investments. According to applicable Treasury regulations, a jeopardizing
investment occurs when foundation managers have failed to exercise ordinary
23
<PAGE>
business care and prudence in providing for the long- and short-term financial
needs of the foundation to carry out its exempt purpose. Such foundations also
are required to make annual distributions equal to five percent of the average
value of the foundation's assets. A private foundation that is considering an
investment in the Fund should consult its tax advisers concerning the potential
application of these provisions to its investment in the Fund.
TENDER OFFERS
A taxable holder of stock who, pursuant to any Tender Offer, tenders all
shares of stock owned by such stockholder, and any shares considered owned
thereby under attribution rules contained in the Code, will realize a gain or
loss depending upon such stockholder's basis for the shares. Such gain or loss
will be treated as capital gain or loss if the shares are held as capital assets
and will be long-term or short-term depending on the stockholder's holding
period for the shares.
* * * *
The foregoing is a general and abbreviated summary of certain federal tax
considerations affecting the Fund and its stockholders. For further information,
reference should be made to the pertinent Code sections and the regulations
promulgated thereunder, which are subject to change by legislative, judicial, or
administrative action either prospectively or retroactively. Investors are urged
to consult their tax advisers regarding specific questions as to federal, state
or local taxes.
NET ASSET VALUE
The net asset value of the Fund's shares of stock is determined quarterly
(or at such other times as the Board of Directors may determine) as of the close
of regular trading on the NYSE (generally, 4:00 p.m., New York time), on the
last day of the quarter on which the NYSE is open for trading. For purposes of
determining the net asset value of a share of stock of the Fund, the value of
the securities of the Underlying Investment Vehicles plus any cash or other
assets (including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) of the Fund is divided by the total
number of shares of stock outstanding.
The Fund's assets consist primarily of shares of open-end and closed-end
funds. Shares of open-end funds are valued at their respective net asset values
under the 1940 Act. An open-end fund values securities in its portfolio for
which market quotations are readily available at their current market value
(generally the last reported sales price) and all other securities and assets at
fair value pursuant to methods established in good faith by the board of
directors of the underlying fund. Money market funds with portfolio securities
that mature in 397 days or less may use the amortized cost or penny-rounding
methods to value their securities. Shares of closed-end funds that are listed on
U.S. exchanges are valued at the last sales price on the day the securities are
valued or, lacking any sales on such day, at the last available bid price.
Shares of closed-end funds traded in the OTC market and listed on NASDAQ are
valued at the last trade price on NASDAQ at 4:00 p.m., New York time; other
shares traded in the OTC market are valued at the last bid price available prior
to valuation.
Other Fund assets are valued at current market value or, where
unavailable, at fair value as determined in good faith by or under the direction
of the Board of Directors. The Board of Directors has established general
guidelines for calculating fair value of non-publicly traded securities. Values
assigned to fair value investments are based on available information and do not
necessarily represent amounts that might ultimately be realized, since such
amounts depend on future developments inherent in long-term investments.
Securities having 60 days or less remaining to maturity are valued at their
amortized cost.
24
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 100 million shares of capital stock, $.001
par value, all of which is classified as common stock. Although it has no
current intention of doing so, the Board of Directors of the Fund is authorized
to classify and reclassify any unissued shares of capital stock from time to
time by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or terms and conditions of
redemption of such shares by the Fund. The description of the capital stock are
subject to the provisions contained in the Fund's Articles of Incorporation and
By-Laws.
Shares of the stock have no preemptive, conversion, exchange, or
redemption rights. Each share has equal voting, dividend, distribution and
liquidation rights. The outstanding shares of stock are, and those offered
hereby, when issued, will be, fully paid and nonassessable. Stockholders are
entitled to one vote per share. All voting rights for the election of directors
are noncumulative, which means that the holders of more than 50% of the shares
can elect 100% of the directors then nominated for election if they choose to do
so and, in such event, the holders of the remaining shares will not be able to
elect any directors.
Shares of stock of the Fund cannot be transferred without the approval
of the Fund. Transferees must meet certain eligibility criteria. The Fund
has the right to reject any transfer. See "Restrictions on
Transferability."
Any additional offerings of the Fund's stock, if made, will require
approval of its Board of Directors and will be subject to the requirement of the
1940 Act that shares may not be sold at a price below the then-current net asset
value, exclusive of underwriting discounts and commissions, except, among other
things, in connection with an offering to existing stockholders or with the
consent of a majority of the holders of the Fund's outstanding voting
securities.
As of the date of this registration statement, the Dietrich CRAT and the
Dietrich CRUT own all of the outstanding voting securities of the Fund.
Moreover, even if all the shares of stock offered hereby are issued to other
persons, the Dietrich CRAT will continue to hold over 50% of the outstanding
voting securities of the Fund and will thereby be deemed to control the Fund. As
a result of this control relationship, the Dietrich CRAT will be able to vote
its shares of stock to elect the directors it prefers regardless of how any
other holders of stock vote for the election of directors.
The following chart indicates the Funds' stock outstanding as of November
30, 1997.
Amount Outstanding
Exclusive of
Amount Held by amount Held by
Amount Registrant or Registrant or
Title Of Class Authorized For Its Account for its Account
-------------- ---------- --------------- ---------------
Common stock...... 100,000,000 - 6,927,197
PERFORMANCE INFORMATION
From time to time the Fund may include its total return for various
specified time periods in advertisements or information furnished to present or
prospective stockholders.
The Fund may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the value of such investment at the end of
the period.
25
<PAGE>
The calculation of yield and total return does not reflect the amount of
any stockholder's tax liability.
From time to time, quotations of the Fund's average annual total return
("Standardized Return") may be included in advertisements, sales literature or
shareholder reports. Standardized Return shows percentage rates reflecting the
average annual change in the value of an assumed initial investment of $1,000
assuming the investment has been held for periods of one year, five years and
ten years as of a stated ending date. If a five- and/or ten-year period has not
yet elapsed, data will be provided as of the end of a period corresponding to
the life of the Fund. Standardized Return assumes that all dividends and capital
gain distributions were reinvested in shares of the Fund.
In addition, other total return performance data ("Non-Standardized
Return") regarding the Fund may be included in advertisements, sales, literature
or shareholder reports. Non-Standardized Return shows a percentage rate of
return encompassing all elements of return (i.e., income and capital
appreciation or depreciation); and it assumes reinvestment of all dividends and
capital gain distributions. Non-Standardized Return may be quoted for the same
or different periods as those for which Standardized Return is quoted.
Non-Standardized Return may consist of cumulative total returns, average annual
total returns, year-by-year rates or any combination thereof. Cumulative total
return represents the cumulative change in value of an investment in the Fund
for various periods. Average annual total return refers to the annual compound
rate of return of an investment in the Fund. Total return figures are based on
historical performance of the Fund, show the performance of a hypothetical
investment and are not intended to indicate future performance.
ADMINISTRATOR, TRANSFER AND DIVIDEND DISBURSING AGENT, CUSTODIAN
Rodney Square Management Corporation ("RSMC") serves as administrator for
the Fund. As administrator, RSMC provides office facilities and supplies and
administrative services and also assists in the preparation of reports to
shareholders, proxy statements and filings with the SEC and state securities
authorities. RSMC also performs certain accounting services (including
determining the Fund's net asset value per share), financial reporting, and
compliance monitoring activities. For the services provided as Administrator,
RSMC receives an annual fee equal to $80,000 from the Fund plus an amount equal
to 0.02% of the average daily net assets of the Fund in excess of $100 million.
In the event of the Fund's termination of the administration agreement with RSMC
within the initial three year term, the Fund will pay RSMC a fee equal to
one-half of the annual fee under the agreement.
American Stock Transfer and Trust Company serves as the Fund's Transfer
Agent and Dividend Disbursing Agent. For providing transfer and dividend
disbursing services, the Fund pays an annual fee of $6,000 plus a one time fee
of $3,500 for the initial public offering.
Mellon Bank, N.A. ("Mellon") serves as custodian of the Fund's assets. The
Fund pays Mellon an annual fee equal to 0.01% of the average daily net assets of
the Fund for all assets held in domestic custody. In addition, the Fund
reimburses Mellon for its out-of-pocket expenses.
ADDITIONAL INFORMATION
LEGAL MATTERS
Certain legal matters in connection with the stock offered hereby will be
passed on for the Fund by Kirkpatrick & Lockhart LLP, Washington, D.C.
26
<PAGE>
INDEPENDENT ACCOUNTANTS
The Fund's independent accountants, Coopers & Lybrand L.L.P., will conduct
an annual audit of the Fund, assist in the preparation of the Fund's federal and
state income tax returns and consult with the Fund as to matters of accounting,
regulatory filings, and federal and state income taxation.
FURTHER INFORMATION
Further information concerning the Fund may be found in the Registration
Statement, on file with the SEC.
FINANCIAL STATEMENTS
The Fund will send unaudited semi-annual and audited annual financial
statements of the Fund to stockholders, including a list of the portfolio of
investments held by the Fund. Unaudited financial statements for the semi-annual
period ending September 30, 1997 are incorporated herein by reference to the
semi-annual report to shareholders filed with the Securities and Exchange
Commission on December 17, 1997.
The financial statement included in this Prospectus has been included in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in auditing and accounting. The
audited financial statements of the Fund as of May 30, 1997 appear on the
following pages.
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The Mallard Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Mallard Fund, Inc. (the "Fund"), including the schedule of investments, as of
May 30, 1997. This financial statement is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. Our procedures included
confirmation of investments owned as of May 30, 1997 by correspondence with the
custodian and issuers. 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Mallard Fund, Inc. as of
May 30, 1997 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 5, 1997
28
<PAGE>
THE MALLARD FUND, INC.
Schedule of Investments/May 30, 1997
(Showing Percentage of Total Value of Net Assets)
- --------------------------------------------------------------------------------
VALUE
SHARES (NOTE 3)
MUTUAL FUNDS - 83.6%
American Funds - EuroPacific Growth Fund(2) 438,297 $12,075,069
Brandywine Fund, Inc.(2) 404,352 14,690,120
Emerging Markets Growth Fund, Inc.(1)(4) 331,957 22,041,949
Morgan Stanley Emerging Markets Portfolio(2) 1,228,851 21,455,739
T. Rowe Price Institutional Funds - Foreign Equity
Fund(2) 882,002 15,214,529
Templeton Institutional Emerging Markets Fund(2) 2,109,576 30,251,326
-----------
TOTAL MUTUAL FUNDS (Cost $115,728,732) 115,728,732
===========
LIMITED PARTNERSHIPS - 15.0%
Bulldog Capital Partners Limited Partnership(3)(4) 1,959,124
Dorchester Partners, L.P.(3)(4) 2,609,678
Everest Capital Frontier, L.P.(3)(4) 3,200,180
Feirstein Partners, L.P.(3)(4) 2,880,315
Forum Capital Partners(3)(4) 1,069,985
Maverick Fund USA, Ltd.(3)(4) 3,077,543
Murray Partners, L.P.(3)(4) 2,139,197
Oracle Partners, L.P.(3)(4) 1,940,600
The Varde Fund IV-A, L.P.(3)(4) 2,001,508
----------
TOTAL LIMITED PARTNERSHIPS (Cost $20,878,130) 20,878,130
==========
FUND OF FUNDS - 0.8%
Knightsbridge Integrated Holdings III-Limited(3)(4)(5)
(Cost $1,037,070) 3,000 1,307,070
----------
TOTAL INVESTMENTS (Cost $137,643,932)* - 99.4% 137,643,932
OTHER ASSETS AND LIABILITIES, NET - 0.6% 900,000
-----------
NET ASSETS - 100.00% $138,543,932
===========
- --------------------------------------------------------------------------------
1 Closed-end investment company.
2 Open-end investment company.
3 Not readily marketable security.
4 Restricted security (see Note 6).
5 As of May 30, 1997, the Fund committed to investing an additional $2,040,870
of capital in Knightsbridge Integrated Holdings III-Limited.
* Cost for federal income tax purposes.
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
THE MALLARD FUND, INC.
Statement of Assets and Liabilities
as of 5/30/97
Assets:
Cash $ 900,000
Investments, at value (Cost $137,643,932)(Note 3) 137,643,932
Deferred Organizational Costs (Note 4) 171,221
Deferred Offering Costs (Note 4) 190,927
-------------
Total Assets 138,906,080
-------------
Liabilities:
Accrued Organizational Costs (Note 4) 171,221
Accrued Offering Costs (Note 4) 190,927
-------------
Total Liabilities 362,148
-------------
Net Assets $ 138,543,932
=============
Net assets:
Common Stock, $0.001 par value
Authorized 100,000,000 shares; 6,927,197
shares issued and outstanding $ 6,927
Paid-in capital 138,537,005
Net Assets $ 138,543,932
=============
Net Asset Value Per Share
($138,543,932 / 6,927,197 shares of common stock) $20.00
======
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
THE MALLARD FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 30, 1997
1. ORGANIZATION: The Mallard Fund, Inc. (the "Fund") was organized on October
15, 1996 as a Maryland corporation. The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a
closed-end, management investment company. The Fund has not commenced
operations except those related to organizational matters and the sale of
6,927,197 shares of common stock (the "initial shares") through a private
placement to the William S. Dietrich II Charitable Remainder Annuity Trust
and the William S. Dietrich II Charitable Remainder Unit Trust on May 30,
1997.
2. MANAGEMENT ESTIMATES: The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make certain estimates and assumptions that may affect the
reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
3. PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. Shares of open-end funds are valued at their
respective net asset values under the 1940 Act. An open-end fund values
securities in its portfolio for which market quotations are readily
available at their current market value (generally the last reported sales
price) and all other securities and assets at fair value pursuant to
methods established in good faith by the board of directors of the
underlying fund. Shares of closed-end funds that are listed on U.S.
exchanges are valued at the last sales price on the day the securities are
valued or, lacking any sales on such day, at the last available bid price.
Shares of closed-end funds traded in the OTC market and listed on NASDAQ
are valued at the last trade price on NASDAQ at 4:00 p.m., New York Time;
other shares traded in the OTC market are valued at the last bid price
available prior to valuation. Other Fund assets are valued at current
market value or, where unavailable, at fair value as determined in good
faith by or under the direction of the Board of Directors.
The Board of Directors has established general guidelines for calculating
fair value of non-publicly traded securities. At May 30, 1997, the Fund
held 15.8% of its net assets in securities valued in good faith by the
Board of Directors with an aggregate cost of $21,915,200 and fair value of
$21,915,200. The net asset value of the Fund is calculated quarterly or at
any other times determined by the Board of Directors.
In determining fair value, management considers all relevant qualitative
and quantitative information available. These factors are subject to
change over time and are reviewed periodically. The values assigned to
fair value investments are based on available information and do not
necessarily represent amounts that might ultimately be realized, since
such amounts depend on future developments inherent in long-term
investments. However, because of the inherent uncertainty of valuation,
31
<PAGE>
THE MALLARD FUND, INC.
NOTES TO FINANCIAL STATEMENTS - concluded
MAY 30, 1997
those estimated values may differ significantly from the values that would
have been used had a ready market of the investment existed, and the
differences could be material.
4. ORGANIZATIONAL COSTS AND OFFERING COSTS: Organizational costs have been
capitalized by the Fund and are being amortized over sixty months
commencing with operations. In the event any of the initial shares of the
Fund are redeemed by any holder thereof during the period that the Fund is
amortizing organizational costs, the redemption proceeds payable to the
holder thereof by the Fund will be reduced by the unamortized
organizational costs in the same ratio as the number of initial shares
being redeemed bears to the number of initial shares outstanding at the
time of redemption. Offering costs amounting to $190,927 will be charged
to paid-in capital when the Fund's offering period commences.
5. TRANSACTIONS WITH AFFILIATES: The William S. Dietrich II Charitable
Remainder Annuity Trust and the William S. Dietrich II Charitable
Remainder Unit Trust, affiliates of William S. Dietrich II, the Fund's
President and Chief Investment Officer, hold 5,838,290 (84.3%) and
1,088,907 (15.7%), respectively, of the 6,927,197 shares of common stock
of the Fund.
6. RESTRICTED SECURITIES: Certain of the Fund's investments are restricted as
to resale and are valued at the direction of the Fund's Board of Directors
in good faith, at fair value, after taking into consideration appropriate
indications of value. The table below shows the number of shares held, the
acquisition dates, aggregate costs, fair value as of May 30, 1997, per
share value of the securities and percentage of net assets which the
securities comprise.
<TABLE>
<S> <C> <C> <C> <C> <C>
SECURITY NUMBER OF ACQUISITION FAIR VALUE VALUE PERCENTAGE OF
SHARES DATES AT 05/30/97 PER SHARE NET ASSETS
Emerging Markets Growth
Fund, Inc. 331,957 05/30/97 $22,041,949 $3.1819 15.91%
Bulldog Capital Partners L.P. -- 05/30/97 1,959,124 0.2828 1.41%
Dorchester Partners, L.P. -- 05/30/97 2,609,678 0.3767 1.88%
Everest Capital Frontier, L.P. -- 05/30/97 3,200,180 0.4620 2.31%
Feirstein Partners, L.P. -- 05/30/97 2,880,315 0.4158 2.08%
Forum Capital Partners -- 05/30/97 1,069,985 0.1545 0.78%
Maverick Fund USA, Ltd. -- 05/30/97 3,077,543 0.4443 2.22%
Murray Partners, L.P. -- 05/30/97 2,139,197 0.3088 1.54%
Oracle Partners, L.P. -- 05/30/97 1,940,600 0.2801 1.40%
The Varde Fund IV-A, L.P. -- 05/30/97 2,001,508 0.2889 1.44%
Knightsbridge Integrated
Holdings III-Limited 3,000 05/30/97 1,037,070 0.1498 0.75%
----------- ------- ------
$43,957,149 $6.3456 31.73%
=========== ======= ======
</TABLE>
The Fund may incur certain costs in connection with the disposition of the above
securities.
32
<PAGE>
A-10
APPENDIX
DESCRIPTION OF THE TYPES OF SECURITIES THAT MAY BE ACQUIRED BY UNDERLYING
INVESTMENT VEHICLES AND THE VARIOUS INVESTMENT TECHNIQUES SUCH FUNDS MAY
EMPLOY
Certain of these securities and restrictions apply to all the Underlying
Investment Vehicles while other securities and restrictions apply only to
Underlying Funds or Underlying Private Funds, as noted below.
FOREIGN SECURITIES
An Underlying Investment Vehicle may invest up to 100% of its assets in
securities of foreign issuers. Investments in foreign securities involve special
risks and considerations that are not present when a Fund invests in domestic
securities.
EXCHANGE RATES
Since an Underlying Investment Vehicle may purchase securities denominated in
foreign currencies, changes in foreign currency exchange rates will affect the
value of the Underlying Investment Vehicle's (and accordingly the Fund's) assets
from the perspective of U.S. investors. Changes in foreign currency exchange
rates also may affect the value of dividends and interest earned, gains and
losses realized on the sale of securities and net investment income and gains,
if any, to be distributed by a fund. The rate of exchange between the U.S.
dollar and other currencies is determined by the forces of supply and demand in
foreign exchange markets. These forces are affected by the international balance
of payments and other economic and financial conditions, government
intervention, speculation and other factors. The Underlying Investment Vehicle
may seek to protect itself against the adverse effects of currency exchange rate
fluctuations by entering into currency-forward, futures or options contracts.
Hedging transactions will not, however, always be fully effective in protecting
against adverse exchange rate fluctuations. Furthermore, hedging transactions
involve transaction costs and the risk that the Underlying Investment Vehicle
will lose money, either because exchange rates move in an unexpected direction,
because another party to a hedging contract defaults, or for other reasons.
EXCHANGE CONTROLS
The value of foreign investments and the investment income derived from them
also may be affected (either favorably or unfavorably) by exchange control
regulations. Although it is expected that Underlying Investment Vehicles will
invest only in securities denominated in foreign currencies that are fully
exchangeable into U.S. dollars without legal restriction at the time of
investment, there is no assurance that currency controls will not be imposed
after the time of investment. In addition, the value of foreign fixed-income
investments will fluctuate in response to changes in U.S. and foreign interest
rates.
LIMITATIONS OF FOREIGN MARKETS
There is often less information publicly available about a foreign issuer than
about a U.S. issuer. Foreign issuers are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign issuers are less liquid and at
times more volatile than securities of comparable U.S. issuers. Foreign
brokerage commissions, custodial expenses, and other fees also generally are
higher than for securities traded in the United States. Foreign settlement
procedures and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of an Underlying Investment
Vehicle's assets held abroad) and expenses not present in the settlement of
domestic investments. A delay in settlement could hinder the ability of an
Underlying Investment Vehicle to take advantage of changing market conditions,
with a possible adverse effect on net asset value. There may also be
difficulties in enforcing legal rights outside the United States.
A-1
<PAGE>
FOREIGN LAWS, REGULATIONS AND ECONOMIES
There may be a possibility of nationalization or expropriation of assets,
imposition of currency exchange controls, confiscatory taxation, political or
financial instability, and diplomatic developments that could affect the value
of an Underlying Investment Vehicle's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the United States or
in other foreign countries. The laws of some foreign countries may limit an
Underlying Investment Vehicle's ability to invest in securities of certain
issuers located in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
or gross national product, inflation rate, capital reinvestment, resource
self-sufficiency and balance of payment positions.
FOREIGN TAX CONSIDERATIONS
Income received by an Underlying Investment Vehicle from sources within foreign
countries may be reduced by withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Any such taxes paid by an Underlying Investment
Vehicle will reduce the net income of the Underlying Investment Vehicle
available for distribution to the Funds. Special tax considerations apply to
foreign securities.
EMERGING MARKETS
Risks may be intensified in the case of investments by an Underlying Investment
Vehicle in emerging markets or countries with limited or developing capital
markets. Security prices in emerging markets can be significantly more volatile
than in more developed nations, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the risk
of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries with emerging
markets may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt or inflation rates. Local securities markets may trade
a small number of securities and may be unable to respond effectively to
increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements. Debt obligations of
developing countries may involve a high degree of risk, and may be in default or
present the risk of default. Governmental entities responsible for repayment of
the debt may be unwilling to repay principal and interest when due, and may
require renegotiation or rescheduling of debt payments. In addition, prospects
for repayment of principal and interest may depend on political as well as
economic factors.
FOREIGN CURRENCY TRANSACTIONS
An Underlying Investment Vehicle may enter into forward contracts to purchase or
sell an agreed-upon amount of a specific currency at a future date that may be
any fixed number of days from the date of the contract agreed upon by the
parties at a price set at the time of the contract. Under such an arrangement, a
fund would, at the time it enters into a contract to acquire a foreign security
for a specified amount of currency, purchase with U.S. dollars the required
amount of foreign currency for delivery at the settlement date of the purchase;
the Underlying Investment Vehicle would enter into similar forward currency
transactions in connection with the sale of foreign securities. The effect of
such transactions would be to fix a U.S. dollar price for the security to
protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the particular foreign currency during
the period between the date the security is purchased or sold and the date on
which payment is made or received (usually 3 to 14 days). These contracts are
traded in the interbank market between currency traders (usually large
commercial banks) and their customers. A forward contract usually has no deposit
requirement and no commissions are charged for trades. While forward contracts
A-2
<PAGE>
tend to minimize the risk of loss due to a decline in the value of the currency
involved, they also tend to limit any potential gain that might result if the
value of such currency were to increase during the contract period.
REPURCHASE AGREEMENTS
An Underlying Investment Vehicle may enter into repurchase agreements with banks
and broker-dealers under which it acquires securities, subject to an agreement
with the seller to repurchase the securities at an agreed-upon time and an
agreed-upon price. Repurchase agreements involve certain risks, such as default
by, or insolvency of, the other party to the repurchase agreement. An Underlying
Investment Vehicle's right to liquidate its collateral in the event of a default
could involve certain costs, losses or delays. To the extent that proceeds from
any sale upon default of the obligation to repurchase are less than the
repurchase price, the Underlying Investment Vehicle could suffer a loss.
ILLIQUID AND RESTRICTED SECURITIES
An Underlying Investment Vehicle that is a mutual fund may invest up to 15% of
its net assets in securities for which there is no readily available market
("illiquid securities"). This figure includes securities whose disposition would
be subject to legal restrictions ("restricted securities") and repurchase
agreements having more than seven days to maturity. Illiquid and restricted
securities often have a market value lower than the market price of unrestricted
securities of the same issuer and are not readily marketable without some time
delay. This could result in the mutual fund being unable to realize a favorable
price upon disposition of such securities, and in some cases might make
disposition of such securities at the time desired by the mutual fund
impossible.
LOANS OF PORTFOLIO SECURITIES
An Underlying Fund may lend its portfolio securities as long as: (1) the loan is
continuously secured by collateral consisting of U.S. Government securities or
cash or cash equivalents maintained on a daily mark-to-market basis in an amount
at least equal to the current market value of the securities loaned; (2) the
Underlying Fund may at any time call the loan and obtain the securities loaned;
(3) the Underlying Fund will receive any interest or dividends paid on the
loaned securities; and (4) the aggregate market value of the securities loaned
will not at any time exceed one-third of the total assets of the Underlying
Fund. Lending portfolio securities involves risk of delay in the recovery of the
loaned securities and in some cases, the loss of rights in the collateral if the
borrower fails.
SHORT SALES
An Underlying Investment Vehicle may sell securities short. In a short sale the
Underlying Investment Vehicle sells stock it does not own and makes delivery
with securities "borrowed" from a broker. The Underlying Investment Vehicle then
becomes obligated to replace the security borrowed by purchasing it at the
market-price at the time of replacement. This price may be more or less than the
price at which the security was sold by the Underlying Investment Vehicle. Until
the security is replaced, the Underlying Investment Vehicle is obligated to pay
to the lender any dividends or interest accruing during the period of the loan.
In order to borrow the security, the Underlying Investment Vehicle may be
required to pay a premium that would increase the cost of the security sold. The
proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.
When it engages in short sales, an Underlying Investment Vehicle that is an
Underlying Fund also must deposit in a segregated account an amount of cash or
liquid securities equal to the difference between (1) the market value of the
securities sold short at the time they were sold short and (2) the value of the
collateral deposited with the broker in connection with the short sale (not
including the proceeds from the short sale). While the short position is open,
the Underlying Investment Vehicle must maintain daily the segregated account at
such a level that (1) the amount deposited in the account plus the amount
deposited with the broker as collateral equals the current market value of the
securities sold short, and (2) the amount deposited in it plus the amount
deposited with the broker as collateral is not less than the market value of the
securities at the time they were sold short.
A-3
<PAGE>
An Underlying Investment Vehicle will incur a loss as a result of a short sale
if the price of the security increases between the date of the short sale and
the date on which the Underlying Investment Vehicle replaces the borrowed
security. The Underlying Investment Vehicle will realize a gain if the security
declines in price between such dates. The amount of any gain will be decreased
and the amount of any loss increased by the amount of any premium, dividends or
interest the Underlying Investment Vehicle may be required to pay in connection
with a short sale.
SHORT SALES "AGAINST THE BOX"
A short sale is "against the box" if at all times when the short position is
open the Underlying Investment Vehicle owns an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.
INDUSTRY CONCENTRATION
An Underlying Investment Vehicle may concentrate its investments within one
industry. Since the investment alternatives within an industry are limited, the
value of the shares of such a fund may be subject to greater market fluctuation
than an investment in a fund that invests in a broader range of securities.
OPTIONS
An Underlying Investment Vehicle may write (sell) listed call options ("calls")
if the calls are covered through the life of the option. A call is covered if
the Underlying Investment Vehicles owns the optioned securities. When an
Underlying Investment Vehicle writes a call, it receives a premium and gives the
purchaser the right to buy the underlying security at any time during the call
period (usually not more than nine months in the case of common stock) at a
fixed exercise price regardless of market price changes during the call period.
If the call is exercised, the Underlying Investment Vehicles will forgo any gain
from an increase in the market price of the underlying security over the
exercise price.
An Underlying Investment Vehicle may purchase a call on securities to effect a
"closing purchase transaction." This is the purchase of a call covering the same
underlying security and having the same exercise price and expiration date as a
call previously written by the fund on which it wishes to terminate its
obligation. If the fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call previously
written by the fund expires (or until the call is exercised and the fund
delivers the underlying security).
An Underlying Investment Vehicle may write and purchase put options ("puts").
When a fund writes a put, it receives a premium and gives the purchaser of the
put the right to sell the underlying security to the Underlying Investment
Vehicles at the exercise price at any time during the option period. When an
Underlying Investment Vehicle purchases a put, it pays a premium in return for
the right to sell the underlying security at the exercise price at any time
during the option period. An Underlying Investment Vehicle also may purchase
stock index puts, which differ from puts on individual securities in that they
are settled in cash based upon values of the securities in the underlying index
rather than by delivery of the underlying securities. Purchase of a stock index
put is designed to protect against a decline in the value of the portfolio
generally rather than an individual security in the portfolio. If any put is not
exercised or sold, it will become worthless on its expiration date.
A mutual fund's option positions may be closed out only on an exchange which
provides a secondary market for options of the same series, but there can be no
assurance that a liquid secondary market will exist at any given time for any
particular option. In this regard, trading in options on certain securities
(such as U.S. Government securities) is relatively new so that it is impossible
to predict to what extent liquid markets will develop or continue.
A custodian, or a securities depository acting for it, generally acts as escrow
agent for the securities upon which the Underlying Investment Vehicles has
written puts or calls, or as to other securities acceptable for such escrow so
A-4
<PAGE>
that no margin deposit is required of the Underlying Investment Vehicles. Until
the underlying securities are released from escrow, they cannot be sold by the
fund.
In the event of a shortage of the underlying securities deliverable in the
exercise of an option, the Options Clearing Corporation has the authority to
permit other generally comparable securities to be delivered in fulfillment of
option exercise obligations. If the Options Clearing Corporation exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options Clearing
Corporation may impose special exercise settlement procedures.
OPTIONS TRADING MARKETS
Options in which the Underlying Investment Vehicles will invest are generally
listed on Exchanges. Exchanges on which such options currently are traded are
the Chicago Board Options Exchange and the American, New York, Pacific, and
Philadelphia Stock Exchanges. Options on some securities may not, however, be
listed on any Exchange but traded in the over-the-counter market. Options traded
in the over-the-counter market involve the additional risk that securities
dealers participating in such transactions would fail to meet their obligations
to the Underlying Investment Vehicle. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on the use of options
discussed herein, a mutual fund is subject to the investment restrictions
described in its Prospectus and the statement of additional information.
The staff of the SEC currently is of the view that the premiums that an
Underlying Fund that is a mutual fund pays for the purchase of unlisted options,
and the value of securities used to cover unlisted options written by the
Underlying Fund, are considered to be invested in illiquid securities or assets
for the purpose of calculating whether a mutual fund is in compliance with its
fundamental investment restriction prohibiting it from investing more than 15%
(or, in many cases, 10%) of its total assets (taken at current value) in any
combination of illiquid assets and securities.
FUTURES CONTRACTS
An Underlying Investment Vehicle may enter into futures contracts for the
purchase or sale of debt securities and stock indexes. A futures contract is an
agreement between two parties to buy and sell a security or an index for a set
price on a future date. Futures contracts are traded on designated "contract
markets" which, through their clearing corporations, guarantee performance of
the contracts.
A financial futures contract sale creates an obligation by the seller to deliver
the type of financial instrument called for in the contract in a specified
delivery month for a stated price. A financial futures contract purchase creates
an obligation by the purchaser to take delivery of the type of financial
instrument called for in the contract in a specified delivery month at a stated
price. The specific instruments delivered or taken, respectively, at settlement
date are not determined until on or near such date. The determination is made in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made. Futures contracts are traded in the United States only on
commodity exchanges or boards of trade (known as "contract markets") approved
for such trading by the Commodity Futures Trading Commission (the "CFTC"), and
must be executed through a futures commission merchant or brokerage firm that is
a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or acceptance
of commodities or securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out a
futures contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument or commodity with
the same delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. On the other hand, if the price of the offsetting purchase
A-5
<PAGE>
exceeds the price of the initial sale, the seller realizes a loss. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss.
An Underlying Investment Vehicle may sell financial futures contracts in
anticipation of an increase in the general level of interest rates. Generally,
as interest rates rise, the market value of the securities held by an Underlying
Investment Vehicle will fall, thus reducing its net asset value. This interest
rate risk may be reduced without the use of futures as a hedge by selling such
securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs in the form of dealer spreads and brokerage
commissions and would typically reduce the fund's average yield as a result of
the shortening of maturities.
The sale of financial futures contracts serves as a means of hedging against
rising interest rates. As interest rates increase, the value of an Underlying
Investment Vehicle's short position in the futures contracts will also tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of the fund's investments being hedged. While an Underlying Investment
Vehicle will incur commission expenses in selling and closing out futures
positions (by taking an opposite position in the futures contract), commissions
on futures transactions tend to be lower than transaction costs incurred in the
purchase and sale of portfolio securities.
An Underlying Investment Vehicle may purchase interest rate futures contracts in
anticipation of a decline in interest rates when it is not fully invested. As
such purchases are made, an Underlying Investment Vehicle would probably expect
that an equivalent amount of futures contracts will be closed out.
Unlike when an Underlying Investment Vehicle purchases or sells a security, no
price is paid or received by the fund upon the purchase or sale of a futures
contract. Upon entering into a contract, the Underlying Investment Vehicle is
required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash and/or U.S. Government securities. This is
known as "initial margin." Initial margin is similar to a performance bond or
good faith deposit which is returned to an Underlying Investment Vehicle upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance margin", to and
from the broker (or the custodian) are made on a daily basis as the price of the
underlying security or commodity fluctuates, making the long and short positions
in the futures contract more or less valuable. This is known as "marking to the
market."
An Underlying Investment Vehicle may elect to close some or all of its futures
positions at any time prior to their expiration in order to reduce or eliminate
a hedge position then currently held by the fund. The Underlying Investment
Vehicle may close its positions by taking opposite positions that will operate
to terminate the fund's position in the futures contracts. Final determinations
of variation margin are then made, additional cash is required to be paid by or
released to the Underlying Investment Vehicles, and the fund realizes a loss or
a gain. Such closing transactions involve additional commission costs.
A stock index futures contract may be used to hedge an Underlying Investment
Vehicle's portfolio with regard to market risk as distinguished from risk
related to a specific security. A stock index futures contract is a contract to
buy or sell units of an index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date, a final cash
settlement occurs. Changes in the market value of a particular stock index
futures contract reflect changes in the specified index of equity securities on
which the future is based.
In the event of an imperfect correlation between the futures contract and the
portfolio position that is intended to be protected, the desired protection may
not be obtained and the fund may be exposed to risk of loss. Further,
A-6
<PAGE>
unanticipated changes in interest rates or stock price movements may result in a
poorer overall performance for the fund than if it had not entered into futures
contracts on debt securities or stock indexes.
The market prices of futures contracts also may be affected by certain factors.
First, all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, you may close futures contracts through offsetting transactions,
which could distort the normal relationship between the securities and futures
markets. Second, the deposit requirements in the futures market are less
stringent than margin requirements in the securities market. Accordingly,
increased participation by speculators in the futures market also may cause
temporary price distortions.
Positions in futures contracts may be closed out only on an exchange or board of
trade providing a secondary market for such futures. There is no assurance that
a liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time.
The risk to an Underlying Investment Vehicle from investing in futures is
potentially unlimited. Gains and losses on investments in options and futures
depend upon the Underlying Investment Vehicle's investment adviser's ability to
predict correctly the direction of stock prices, interest rates and other
economic factors.
In order to assure that Underlying Funds have sufficient assets to satisfy their
obligations under their futures contracts, the Underlying Funds are required to
establish segregated accounts with their custodians. Such segregated accounts
are required to contain an amount of cash, and other liquid, securities equal in
value to the current value of the underlying instrument less the margin deposit.
OPTIONS ON FUTURES CONTRACTS
An Underlying Investment Vehicle may also purchase and sell listed put and call
options on futures contracts. An option on a futures contract gives the
purchaser the right in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), at a specified exercise price at any time during the
option period. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Underlying Investment Vehicle also may purchase put options on
futures contracts in lieu of, and for the same purpose as, a sale of a futures
contract. An Underlying Investment Vehicle may also purchase such put options in
order to hedge a long position in the underlying futures contract in the same
manner as it purchases "protective puts" on securities.
The holder of an option may terminate the position by selling an option of the
same series. There is, however, no guarantee that such a closing transaction can
be effected. An Underlying Investment Vehicle is required to deposit initial and
maintenance margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those applicable to
futures contracts described above and, in addition, net option premiums received
will be included as initial margin deposits.
In addition to the risks which apply to all options transactions, there are
several risks relating to options on futures contracts. The ability to establish
and close out positions on such options is subject to the development and
maintenance of a liquid secondary market. It is not certain that this market
will develop. In comparison with the use of futures contracts, the purchase of
options on futures contracts involves less potential risk to a fund because the
maximum amount of risk is the premium paid for the option (plus transaction
costs). There may, however, be circumstances when the use of an option on a
futures contract would result in a loss to an Underlying Investment Vehicle when
the use of a futures contract would not, such as when there is no movement in
the prices of the underlying securities. Writing an option on a futures contract
involves risks similar to those arising in the sale of futures contracts, as
described above.
HEDGING
An Underlying Investment Vehicle may employ many of the investment techniques
described for investment and hedging purposes. For example, an Underlying
Investment Vehicle may purchase or sell put and call options on common stocks to
A-7
<PAGE>
hedge against movements in individual common stock prices, or purchase and sell
stock index futures and related options to hedge against market wide movements
in common stock prices. Although such hedging techniques generally tend to
minimize the risk of loss that is hedged against, they also may limit the
potential gain that might have resulted had the hedging transaction not
occurred. Also, the desired protection generally resulting from hedging
transactions may not always be achieved.
WARRANTS
An Underlying Investment Vehicle may invest in warrants. Warrants are options to
purchase equity securities at specific prices valid for a specified period of
time. The prices do not necessarily move in parallel to the prices of the
underlying securities. Warrants have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer. If a warrant is not
exercised within the specified time period, it becomes worthless and the fund
loses the purchase price and the right to purchase the underlying security.
LEVERAGE
An Underlying Fund that is a mutual fund may borrow up to 25% of the value of
its net assets on an unsecured basis from banks to increase its holdings of
portfolio securities. Under the 1940 Act, such fund is required to maintain
continuous asset coverage of 300% with respect to such borrowings and to sell
(within three days) sufficient portfolio holdings in order to restore such
coverage if it should decline to less than 300% due to market fluctuation or
otherwise. Such sale must occur even if disadvantageous from an investment point
of view. Leveraging aggregates the effect of any increase or decrease in the
value of portfolio securities on the Underlying Fund's net asset value. In
addition, money borrowed is subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the interest and option premiums received from the
securities purchased with borrowed funds.
HIGH YIELD SECURITIES AND THEIR RISKS
An Underlying Investment Vehicle may invest in high yield, high-risk,
lower-rated securities, commonly known as "junk bonds." Such fund's investment
in such securities is subject to the risk factors outlined below.
YOUTH AND GROWTH OF THE HIGH YIELD BOND MARKET
The high yield, high risk market is relatively new and at times is subject to
substantial volatility. An economic downturn or increase in interest rates may
have a more significant effect on the high yield, high risk securities in an
Underlying Investment Vehicle's portfolio and their markets, as well as on the
ability of securities' issuers to repay principal and interest. Issuers of high
yield, high risk securities may be of low credit worthiness and the high yield,
high risk securities may be subordinated to the claims of senior lenders. During
periods of economic downturn or rising interest rates, the issuers of high
yield, high risk securities may have greater potential for insolvency and a
higher incidence of high yield, high risk bond defaults may be experienced.
SENSITIVITY OF INTEREST RATE AND ECONOMIC CHANGES
The prices of high yield, high risk securities have been found to be less
sensitive to interest rate changes than higher-rated investments but are more
sensitive to adverse economic changes or individual corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress that would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a high yield, high risk security owned by an
Underlying Investment Vehicle defaults, the fund may incur additional expenses
in seeking recovery. Periods of economic uncertainty and changes can be expected
to result in increased volatility of market prices of high yield, high risk
securities and the Fund's net asset value. Yields on high yield, high risk
securities will fluctuate over time. Furthermore, in the case of high yield,
A-8
<PAGE>
high risk securities structured as zero coupon or pay-in-kind securities, their
market prices are affected to a greater extent by interest rate changes and
thereby tend to be more volatile than market prices of securities which pay
interest periodically and in cash.
PAYMENT EXPECTATIONS
Certain securities held by an Underlying Investment Vehicle, including high
yield, high risk securities, may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, such fund
would have to replace the security with a lower yielding security, resulting in
a decreased return for the investor. Conversely, a high yield, high risk
security's value will decrease in a rising interest rate market, as will the
value of the Underlying Investment Vehicle's assets.
LIQUIDITY AND VALUATION
The secondary market may at times become less liquid or respond to adverse
publicity or investor perceptions, making it more difficult for an Underlying
Investment Vehicle to accurately value high yield, high risk securities or
dispose of them. To the extent such fund owns or may acquire illiquid or
restricted high yield, high risk securities, these securities may involve
special registration responsibilities, liabilities and costs, and liquidity
difficulties, and judgment will play a greater role in valuation because there
is less reliable and objective data available.
TAXATION
Special tax considerations are associated with investing in high yield bonds
structured as zero coupon or pay-in-kind securities. An Underlying Investment
Vehicle will report the interest on these securities as income even though it
receives no cash interest until the security's maturity or payment date.
Further, an Underlying Investment Vehicle organized as a regulated investment
company must distribute substantially all of its income to you to qualify for
pass-through treatment under the tax law. Accordingly, such a fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash or may have to leverage itself by borrowing the cash to satisfy
distribution requirements.
CREDIT RATINGS
Credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield, high risk securities. Since credit rating
agencies may fail to change the credit ratings in a timely manner to reflect
subsequent events, the investment adviser to an Underlying Fund that is a mutual
fund should monitor the issuers of high yield, high risk securities in the
fund's portfolio to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments, and to attempt to
assure the securities' liquidity so the fund can meet redemption requests. To
the extent that an Underlying Investment Vehicle invests in high yield, high
risk securities, the achievement of the fund's investment objective may be more
dependent on the Underlying Investment Vehicle's own credit analysis than is the
case for higher quality bonds. An Underlying Investment Vehicle may retain a
portfolio security whose rating has been changed.
ASSET-BACKED SECURITIES
An Underlying Investment Vehicle may invest in mortgage pass-through securities,
which are securities representing interest in pools of mortgage loans secured by
residential or commercial real property in which payments of both interest and
principal on the securities are generally made monthly, in effect passing
through monthly payments made by individual borrowers on mortgage loans which
underlie the securities (net of fees paid to the issuer or guarantor of the
securities). Early repayment of principal on some mortgage-related securities
(arising from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose an Underlying Investment Vehicle to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost.
A-9
<PAGE>
Like other fixed income securities, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
are declining, the value of mortgage-related securities with prepayment features
may not increase as much as other fixed income securities.
An Underlying Investment Vehicle may invest in collateralized mortgage
obligations (CMOs), which are hybrid mortgage-related instruments. Similar to a
bond, interest and pre-paid principal on a CMO are paid, in most cases,
semiannually. CMOs are collateralized by portfolios of mortgage pass-through
securities and are structured into multiple classes with different stated
maturities. Monthly payments of principal, including prepayments, are first
returned to investors holding the shortest maturity class; investors holding the
longer maturity classes receive principal only after the first class has been
retired.
Other mortgage-related securities in which an Underlying Investment Vehicle may
invest include other securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans on real
property, such as CMO residuals or stripped mortgage-backed securities, and may
be structured in classes with rights to receive varying proportions of principal
and interest. In addition, the Underlying Investment Vehicles may invest in
other asset-backed securities that have been offered to investors or will be
offered to investors in the future. Several types of asset-backed securities
have already been offered to investors, including certificates for automobile
receivables, which represent undivided fractional interests in a trust whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interest in the vehicles securing the contracts.
A-10
<PAGE>
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Included in Part A of the Registration Statement:
The following audited financial statements as of May 30, 1997
of the Fund are filed herewith:
- Report of Independent Accountants
- Schedule of Investments
- Statement of Assets and Liabilities
- Notes to Financial Statements
2. Exhibits:
a.1. Articles of Incorporation dated October 15, 1996.1
a.2. Article of Amendment to the Articles of Incorporation
dated April 21, 1997.1
b. By-Laws.1
c. None.
d. Incorporated by reference from Articles VI, IX, X and
XII of Registrant's Articles of Incorporation and
from Articles II, VI and X of Registant's By-Laws.
e. None.
f. None.
g. Consulting Contract - Filed herewith.
h. Underwriting Agreement - Filed herewith.
i. None.
j. Custodian Agreement - Filed herewith.
k. Administration Agreement - Filed herewith.
l. Opinion and Consent of Counsel - Filed herewith.
m. None.
n. Consent of Independent Auditors - Filed herewith.
o. None.
p. Letter of Investment Intent - Filed herewith.
q. None.
r. Financial Data Schedule - Filed herewith.
ITEM 25. MARKETING ARRANGEMENTS
Inapplicable.
__________________
1 Filed as exhibits to Registrant's Registration Statement under the
Securities Act of 1933 on May 9, 1997.
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated offering expenses to be
incurred in connection with the offering described in this Registration
Statement:
Registration Fee (estimate)............ $ 11,702
------
Printing (estimate).................... $ 8,419
-----
Fees and Expenses of Qualification under
State Securities Laws (including fees of
counsel) (estimate) $ 7,585
-----
Legal Fees and Expenses (estimate)..... $ 156,221
-------
Miscellaneous (estimate)............... $ 7,000
-----
Total......................... $ 190,927
-------
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Number of Record
Holders as of
Title of Class November 30, 1997
-------------- -----------------
Common Stock, par value 2
$0.001 per share
ITEM 29. INDEMNIFICATION
Pursuant to Article IX of the Fund's By-Laws, the Fund shall indemnify
former and present directors, officers, employees and agents, to the full extent
permitted by and in accordance with the General Corporation Law of Maryland now
or hereafter in force; provided that the Fund is not authorized to indemnify any
such person against any liability to the Fund or its security holders to which
he would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Under Section 8.01 of the Underwriting Agreement, the Fund will
indemnify the underwriter against certain claims and losses.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information as to the directors and officers of the investment advisers
is included in Form ADV (File Nos. 801-14255 and 801-47508), filed with the
Securities and Exchange Commission, which is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Fund are maintained at the Fund's
office at Rodney Square North, 1100 N. Market Street, Wilmington, DE 19890, at
the office of the Fund's custodian at Mellon Bank, N.A., 3 Mellon Bank Center,
Pittsburgh, PA 15259, and at the office of the Fund's transfer agent at American
Stock Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
(a) Registrant undertakes to suspend offering of the shares covered
hereby until it amends its Prospectus contained herein if (1) subsequent to the
effective date of this Registration Statement, its net asset value per share
declines more than ten percent from its net asset value per share as of the
effective date of this Registration Statement, or (2) the net asset value
increases to an amount greater than its net proceeds as stated in the
prospectus.
<PAGE>
(b) Registrant undertakes that:
(1) For the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer of controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of Allegheny
and State of Pennsylvania on the 5th day of December, 1997.
THE MALLARD FUND, INC.
By: /S/ WILLIAM S. DIETRICH II
------------------------
William S. Dietrich II
President
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement of The Mallard Fund, Inc. has been signed below by the
following persons in the capacities indicated on the 5th day of December, 1997.
Signature Title
--------- -----
/s/ William S. Dietrich II Director And President
--------------------------
William S. Dietrich II
Richard F. Berdik* Chief Financial Officer
--------------------------
Richard F. Berdik
Evans Rose, Jr.* Director
--------------------------
Evans Rose, Jr.
Jennings R. Lambeth* Director
--------------------------
Jennings R. Lambeth
*By: /s/ William S. Dietrich II
-------------------------------------
William S. Dietrich, Attorney-in-fact,
Pursuant To Power Of Attorney Filed
Herewith.
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned, acting in the capacity or capacities stated opposite
their respective names below, hereby constitute and appoint William S. Dietrich
II and Richard F. Berdik, and each of them severally, the attorneys-in-fact of
the undersigned with full power to them and each of them to do any and all acts
and things and to execute any and all instruments which said attorneys-in-fact
may deem necessary or advisable to comply with the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof in connection with the filing under the Securities Act of 1933,
as amended, of all such registration statements, pre-effective and
post-effective amendments or supplements thereto, or any new or revised
prospectuses relating thereto or supplements thereto, as may be necessary or
desirable in connection with the registration by The Mallard Fund, Inc. of its
shares of Common Stock in a public offering including specifically in each case,
but without limiting the generality of the foregoing, the power and authority to
sign the name of The Mallard Fund, Inc. and the names of the undersigned
directors and officers in the capacities indicated below to all such
registration statements, pre-effective and post-effective amendments or
supplements thereto.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William S. Dietrich II Chairman and President (principal executive April 21, 1997
- ------------------------------------- officer) and Director
William S. Dietrich II
/s/ Evans Rose, Jr. Director April 21, 1997
- -------------------------------------
Evans Rose, Jr.
/s/ Jennings R. Lambeth Director April 21, 1997
- -------------------------------------
Jennings R. Lambeth
/s/ Richard F. Berdik Treasurer and Secretary (principal financial April 21, 1997
- ------------------------------------- and accounting officer)
Richard F. Berdik
</TABLE>
<PAGE>
THE MALLARD FUND, INC.
EXHIBIT INDEX
Exhibit Document Description
- ------- --------------------
a.1. Articles of Incorporation dated October 15, 1996.1
a.2. Article of Amendment to the Articles of Incorporation dated April 21,
1997.1
b. By-Laws.1
c. None.
d. Incorporated by reference from Articles VI, IX, X and XII of
Registrant's Articles of Incorporation and Articles II, VI
and X of Registrant's By-Laws.
e. None.
f. None.
g. Consulting Contract - Filed herewith.
h. Underwriting Agreement - Filed herewith.
i. None.
j. Custodian Agreement - Filed herewith.
k. Administration Agreement - Filed herewith.
l. Opinion and Consent of Counsel - Filed herewith.
m. None.
n. Consent of Independent Auditors - Filed herewith.
o. None.
p. Letter of Investment Intent - Filed herewith.
q. None.
r. Financial Data Schedule - Filed herewith.
1 Filed as exhibits to Registrant's Registration Statement under the
Securities Act of 1933 on May 9, 1997.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The Mallard Fund, Inc.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> MAY-30-1997
<PERIOD-END> MAY-30-1997
<INVESTMENTS-AT-COST> 137,644
<INVESTMENTS-AT-VALUE> 137,644
<RECEIVABLES> 0
<ASSETS-OTHER> 1,262
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,906
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 362
<TOTAL-LIABILITIES> 362
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 138,544
<SHARES-COMMON-STOCK> 6,927
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 138,544
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,927
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 138,544
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 20.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.00
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
INVESTMENT CONSULTING AGREEMENT
The undersigned Mallard Fund, Inc., a Maryland corporation formed as an
Investment Company registered with the United States Securities and Exchange
Commission, hereafter referred to as "the Fund" and Cambridge Capital Advisors,
Inc. and Cambridge Associates, Inc., both Massachusetts corporations registered
with the United States Securities and Exchange Commission as investment
advisers, hereafter referred to collectively as "the Advisors" agree as follows:
1. INVESTMENT ADVICE TO THE FUND
The Fund hereby appoints the Advisors to monitor and provide investment advice
regarding any cash, securities, and other investments owned by the Fund
(referred to hereafter as the "Investment Assets").
2. DUTIES OF ADVISORS
The Advisors shall:
(a) Make recommendations to the Fund from time to time on investment
objectives, investment policies, investment management structures,
investments and cash management for the Investment Assets.
(b) Provide written reports on various topics related to investment and
financial management.
(c) Provide quarterly and annual investment performance measurement and
evaluation of investments of the Investment Assets.
In performing its obligations under this Agreement, the Advisors shall discharge
their duties and exercise their powers hereunder with the care, skill, prudence
and diligence that, under the circumstances then prevailing, a prudent person
acting in a like capacity would use. The Advisors shall only act in an advisory,
and not in a discretionary, capacity.
3. RESTRICTIONS ON THE ADVISORS AND EXCLUSIONS FROM SERVICES
The Advisors may not enter into any transaction on behalf of the Fund or bind
the Fund in any way.
The Advisors shall at no time have custody, possession, or control of any of the
Investment Assets or any cash, securities, or other assets of the Fund.
The Advisors shall not provide or otherwise be responsible for the provision of
legal counsel. The Fund shall obtain legal counsel as it deems necessary.
<PAGE>
4. CONFIDENTIALITY
The Advisors shall regard as confidential all information concerning the affairs
of the Fund, but shall be permitted to disclose to third parties the fact that
the Advisors are performing advisory activities on the Fund's behalf. The Fund
and any of its affiliated parties shall regard as confidential all information
and recommendations furnished by the Advisors to the Fund subject to disclosure
as may be required by law.
5. SERVICES TO OTHER CLIENTS
The Advisors and their affiliates may act and continue to act as investment
advisors for others so long as their services under this Agreement are not
impaired thereby, and nothing in this Agreement shall in any way be deemed to
restrict the right of the Advisors or their affiliates to perform investment
advisory or other services for any other person or entity, and the performance
of such services for others shall not be deemed to violate or give rise to any
duty or obligation to the Fund.
6. FEES
The Advisors' compensation shall be determined as follows:
Annual fee
As full compensation for all services rendered and expenses assumed by the
Advisors hereunder, the Fund shall pay an Annual Fee based on total Investment
Assets and calculated as the sum of:
55 basis points (0.55%) of Alternative Assets (excluding Fund of
Funds assets)
30 basis points (0.30%) of Alternative Fund of Funds assets
10 basis points (0.10%) of Base Assets
Twenty-five percent (25%) of the Annual Fee as determined above shall be billed
and paid in arrears at the end of each quarter based on the market value of the
Marketable Investment Assets as reported by the various investment managers on
the last day of the most recently ended calendar quarter and the total amount
committed to Non-marketable Alternative Investment Assets on the last day of the
most recently ended calendar quarter.
"Non-marketable Alternative Assets," "Alternative Assets," "Fund of Funds,"
"Base Assets," and "Marketable Alternative Assets" shall have the definitions
provided in Exhibit A.
7. ASSIGNMENT
This Agreement shall automatically terminate without penalty in the event of its
assignment. Notwithstanding this paragraph, notice is hereby provided and the
Fund hereby agrees that certain research, data collection, and other services to
be provided under this Agreement may be based on information provided by
Cambridge Associates (UK) Limited ("CA-UK"). CA-UK is registered as an
investment advisor under the Investment Advisers Act of 1940 as amended and is
under common ownership and control with the Advisors.
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8. WARRANTY AND REPRESENTATIONS
The Advisors represent and warrant that they are registered investment advisors
under the Investment Advisers Act of 1940, as amended, and that such
registrations are currently effective and that they are eligible to serve as
investment advisers to the Fund. The Fund acknowledges receipt, at least 48
hours prior to entering into this Agreement, of a copy of Part II of the
Advisors' current filings with the Securities and Exchange Commission on Form
ADV. In all matters relating to the performance of this Agreement, the Advisers
will act in conformity with the Articles of Incorporation, by-laws, and
Registration Statement of the Fund and with the instructions and directions of
the Board of Directors and will comply with the requirements of the Investment
Company Act of 1940, the rules thereunder, and all other applicable federal and
state laws and regulations.
9. NOTICES
Except as otherwise expressly provided in this Agreement, whenever any notice is
required or permitted to be given under any provision of this Agreement, such
notice shall be in writing, shall be signed by or on behalf of the party giving
the notice and shall be mailed by first class mail or sent by courier or telefax
with confirmation of transmission to the other party at the address set forth
below or to such other address as a party may from time to time specify. Any
such notice shall be deemed duly given when delivered at such address.
10. EFFECTIVE PERIOD OF AGREEMENT AND TERMINATION
The initial term of this Agreement shall be from July 1, 1997 through June 30,
1998. Unless sooner terminated as provided herein, this Agreement will continue
in effect for one year. Thereafter, if not terminated, this Agreement will
continue automatically for successive periods of twelve months each, provided
that such continuance is specifically approved at least annually (i) by vote of
a majority of those Directors of the Fund, 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 (ii) by the Board or by vote of a
majority of the outstanding voting securities of the Fund. If this Agreement is
terminated, fees payable to the Advisors shall be adjusted on a pro rata basis.
Notwithstanding the foregoing, this Agreement may be terminated by the Fund at
any time, without the payment of any penalty, by vote of the Board or by a vote
of a majority of the outstanding voting securities of the Fund on sixty days'
written notice to the Advisors or by the Advisors at any time on sixty days'
written notice to the Fund.
11. AMENDMENTS
Any amendments to this Agreement including the Exhibit shall be effective only
if in writing and signed by an authorized officer on behalf of the Advisors and
by an Authorized Signer of the Fund and such amendment is approved by a majority
of the Fund's outstanding voting securities.
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12. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
Massachusetts law, without regard to its principles of conflicts of law, except
insofar as Massachusetts law is inconsistent with the Investment Company Act of
1940.
13. DEFINITIONS
As used in this Agreement, the terms "assignment," "interested person,"
"majority of outstanding voting securities," and "value" shall have the meanings
provided therefor in the Investment Company Act of 1940 and the rules and
regulations thereunder.
14. LIMITATION OF LIABILITY
Notwithstanding any other provision of this Agreement, nothing in this Agreement
shall be construed to limit any liability to the Fund or its shareholders to
which the Advisors would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence in the performance of their duties, or by reason
of their reckless disregard of their obligations and duties under this
Agreement.
15. ENTIRE AGREEMENT
This Agreement, including the Exhibit attached hereto, constitutes the entire
agreement between the parties concerning the subject matter hereof and
supersedes all prior agreements and understandings, oral or written, between
them regarding such subject matter. Any Exhibit attached to this Agreement, as
may be amended from time to time, shall be integral parts of this Agreement.
Notwithstanding any other provision of this Agreement, nothing in this Agreement
shall be construed to limit any liability to the Fund or its shareholders to
which the Advisors would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence in the performance of their duties, or by reason
of their reckless disregard of their obligations and duties under this
Agreement.
4
<PAGE>
CAMBRIDGE CAPITAL ADVISORS, INC. THE MALLARD FUND, INC.
By: /s/ James N. Bailey By: /s/ Richard F. Bedrik
- --------------------------- -----------------------------
James N. Bailey, President Richard F. Bedrik
Date: July 1, 1997 Date: __________________________
Address: One Winthrop Square Address: 301 McKnight East Drive
Boston, MA 02110 Pittsburgh, PA 15237
Phone: 617-457-7500 Phone:
Fax: 617-457-7501 Fax:
CAMBRIDGE ASSOCIATES, INC.
By: /s/ James N. Bailey
- ------------------------------
James N. Bailey, Treasurer
Date: July 1, 1997
Address: One Winthrop Square
Boston, MA 02110
Phone: 617-457-7500
Fax: 617-457-7501
5
<PAGE>
EXHIBIT A
to
INVESTMENT ADVISORY AGREEMENT
between
CAMBRIDGE CAPITAL ADVISORS, INC. and CAMBRIDGE ASSOCIATES, INC.
and
THE MALLARD FUND, INC.
July 1, 1997
"ALTERNATIVE ASSETS" include any amounts invested in any of the following asset
classes:
MARKETABLE ALTERNATIVE ASSETS
-----------------------------
Hedge funds (defined to include any partnerships that invest
primarily in publicly-traded securities)
Fund of funds (defined as a general partnership or other type of
entity formed to invest in a diversified pool of marketable
alternative asset investment managers)
NON-MARKETABLE ALTERNATIVE ASSETS
---------------------------------
Any investment vehicle that invests in the following assets:
Domestic private equity (including leveraged buyouts, mezzanine
and restructuring funds)
International private equity
Distressed securities (defined as vehicles with greater than
one-year lockup features)
Fund of funds (defined as a general partnership or other type of
entity formed to invest in a diversified pool of non-marketable
alternative asset investment managers)
"BASE ASSETS" is equal to the total value of Investment Assets less the value of
Alternative Assets.
Exhibit h
THE MALLARD FUND, INC.
UNDERWRITING AGREEMENT
August 4, 1997
Rodney Square Distributors, Inc.
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Gentlemen:
The Mallard Fund, Inc. ("Company"), a Maryland corporation, proposes to
issue and sell though you ("Underwriter") up to 2,000,000 shares of the
Company's $0.001 par value common stock ("Shares"). The offering of the shares
is further described in the Registration Statement filed on Form N-2 with the
United States Securities and Exchange Commission ("Commission").
SECTION 1
---------
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
In order to induce the Underwriter to enter into this Agreement, the Company
represents and warrants to and agrees with the Underwriter as follows:
1.01 REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on
Form N-2 (File No. 333-26791) (the "Registration Statement") with respect to the
Shares, including as part thereof a Preliminary Prospectus, copies of which have
heretofore been delivered by the Company to the Underwriter, has been prepared
by the Company in conformity with the requirements of the Securities Act of
1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as
amended (the "1940 Act", and together with the 1933 Act, the "Acts") and the
rules and regulations ("Rules and Regulations") of the Commission thereunder,
and said Registration Statement has been filed with the Commission under the
1933 Act and 1940 Act; one or more amendments to said Registration Statement,
copies of which have heretofore been delivered to the Underwriter, has or have
heretofore been filed; and the Company may file on or prior to the effective
date additional amendments to said Registration Statement, including the final
Prospectus.
As used in this Agreement, the term "Registration Statement" refers to and
means said Registration Statement on Form N-2 and all amendments thereto,
including the Prospectus, all exhibits and financial statements, as of the time
said Registration Statement becomes effective; the term "Prospectus" refers to
and means the Prospectus included in the Registration Statement when it becomes
effective; and the term "Preliminary Prospectus" refers to and means any
prospectus included in said Registration Statement before it becomes effective.
The terms "effective date" and "effective" refer to the date the Commission
declares the Registration Statement effective pursuant to Section 8 of the 1933
Act.
<PAGE>
1.02 ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. The Commission has
not issued any order preventing or suspending the use of any Preliminary
Prospectus with respect to the offering of Shares for sale, and each Preliminary
Prospectus has conformed in all material respects with the requirements of the
Acts and the applicable Rules and Regulations of the Commission thereunder and,
to the best of the Company's knowledge, has not included at the time of filing
any untrue statement of a material fact necessary to make the statements therein
not misleading. When the Registration Statement becomes effective and until the
completion of the offering, the Registration Statement and the Prospectus and
any further amendments or supplements thereto will contain all statements which
are required to be stated therein in accordance with the Acts and Rules and
Regulations for the purposes of the proposed public offering of the Shares, and
all statements of material fact contained in the Registration Statement and
Prospectus will be true and correct, and neither the Registration Statement nor
the Prospectus will include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, the Company does not make
any representations or warranties as to information contained in or omitted from
the Registration Statement or the Prospectus in reliance upon written
information furnished on behalf of the Underwriter specifically for use therein.
1.03 FINANCIAL STATEMENTS. The financial statements of the Company together
with related notes as set forth in the Registration Statement and Prospectus
will present fairly the financial position of the Company. Such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the period concerned except as
otherwise stated therein.
1.04 INDEPENDENT PUBLIC ACCOUNTANT. Coopers & Lybrand L.L.P., which has
certified or shall certify certain of the financial statements filed or to be
filed with the Commission as part of the Registration Statement and Prospectus,
is an independent certified public accountant within the meaning of the Acts and
the Rules and Regulations.
1.05 NO MATERIAL ADVERSE CHANGE. Except as may be reflected in or
contemplated by the Registration Statement or the Prospectus, subsequent to the
dates as of which information is given in the Registration Statement and
Prospectus, and prior to the completion of the offering (i) there shall not be
any material adverse change in the condition, financial or otherwise, of the
Company or in its business taken as a whole; (ii) there shall not have been any
material transaction entered into by the Company other than transactions in the
ordinary course of the Company's business; (iii) the Company shall not have
incurred any material obligations, contingent or otherwise, which are not
disclosed in the Prospectus; (iv) there shall not have been nor will there be
any change in the capital stock or long-term debt (except current payments) of
the Company; and (v) the Company has not and will not have paid or declared any
dividends or other distributions on its common stock.
2
<PAGE>
1.06 NO DEFAULTS. The Company is not in any default which has not been
waived in the performance of any obligation, agreement or condition contained in
any debenture, note or any other evidence of indebtedness or any material
indenture or loan agreement of the Company. The execution and delivery of this
Agreement, the Fund Administration and Accounting Services Agreement, the
Investment Consulting Agreement and the Custodian Agreement described in the
Registration Statement, the consummation of the transactions herein
contemplated, and the Company's compliance with the terms of such agreements
will not conflict with or result in a breach of any of the terms, conditions or
provisions of, or constitute a default under, the articles of incorporation, as
amended, or bylaws of the Company, any note, indenture, mortgage, deed of trust,
or any other material agreement or instrument to which the Company is a party or
by which the Company or any of its property is bound, or any existing law,
order, rule, regulation, writ, injunction, or decree of any government,
governmental instrumentality, agency or body except such as may be required
under the Acts or blue sky or securities laws of any state or jurisdiction or
except such as has been therefore obtained.
1.07 INCORPORATION AND STANDING OF THE COMPANY. The Company is and at the
completion of the offering will be duly incorporated and validly existing in
good standing as a corporation under the laws of the State of Maryland with
authorized and outstanding capital stock as set forth in the Registration
Statement and the Prospectus, and with full power and authority (corporate and
other) to own its property and conduct its business, present and proposed, as
described in the Registration Statement and Prospectus. The Company has full
power and authority to enter into this Agreement, and the Company is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which it owns or leases real property or transacts business requiring such
qualification, except where failure so to register or to qualify does not have a
material, adverse effect on the condition (financial or otherwise), business,
properties, net assets or results of operation of the Company. The Company has
no subsidiaries.
1.08 LEGALITY OF OUTSTANDING SHARES. The outstanding common stock of the
Company has been duly and validly authorized, issued and is fully paid and
nonassessable and will conform to all statements with regard thereto contained
in the Registration Statement and the Prospectus. No sales of securities have
been made by the Company in violation of the registration provisions of the 1933
Act.
3
<PAGE>
1.09 LEGALITY OF SHARES. The Shares have been duly and validly authorized
and, when issued and delivered against payment therefor, will be validly issued,
fully paid and nonassessable. The Shares, upon issuance, will not be subject to
the preemptive rights of any shareholders of the Company. The Shares will
conform to all statements with regard thereto in the Registration Statement and
the Prospectus.
1.10 PRIOR SALES. No securities of the Company have been sold except as set
out in the Registration Statement.
1.11 LITIGATION. Except as set forth in the Registration Statement and
Prospectus, there is and at the completion of the offering there will be no
action, suit or proceeding before any court or governmental agency, authority or
body pending or to the knowledge of the Company threatened which might result in
judgments against the Company not adequately covered by insurance or which
collectively might result in any material adverse change in the condition
(financial or otherwise), the business or the prospects of the Company, or would
materially affect the properties or assets of the Company.
1.12 FINDER. The Company knows of no outstanding claims for services in the
nature of a finder's fee or origination fee with respect to the sale of the
Shares hereunder resulting from its acts for which the Underwriter may be
responsible.
1.13 REGISTRATION UNDER THE 1940 ACT. The Company is duly registered with
the Commission under the 1940 Act as a closed-end, non-diversified, management
investment company (as those terms are defined in the 1940 Act) and in all
material respects complies with and has complied with the terms and provisions
of the Acts and the Rules and Regulations of the Commission thereunder, and with
all investment company regulatory requirements of applicable state securities or
Blue Sky laws. The statements contained in Form N-8A, filed by the Company with
the Commission, as amended to the date hereof, are appropriately responsive in
all respects to the requirements of said form and of such Rules and Regulations
of the Commission, and the statements contained therein were accurate as of the
date made.
1.14 EXHIBITS. There are no contracts or other documents which are required
to be filed as exhibits to the Registration Statement by the 1933 Act or by the
Rules and Regulations which have not been so filed and each contract to which
the Company is a party and to which reference is made in the Prospectus has been
4
<PAGE>
duly and validly executed, is in full force and effect in all material respects
in accordance with their respective terms, and none of such contracts have been
assigned by the Company. The Company knows of no present situation or condition
or fact which would prevent compliance with the terms of such contracts, as
amended to date. Except for amendments or modifications of such contracts in the
ordinary course of business, the Company has no current intention of exercising
any right which it may have to cancel any of its obligations under any of such
contracts. The Company has no knowledge that any other party to any of such
contracts has any intention not to render full performance under such contracts.
1.15 COMPLIANCE WITH APPLICABLE SECURITIES LAWS. Any offers or sales of
securities (other than the Shares) made by the Company have been made in
material compliance with the registration and other requirements of the 1933
Act, the 1940 Act, and all applicable state securities or Blue Sky laws or
applicable exceptions therefrom.
1.16 AUTHORITY. The execution and delivery of this Agreement and the Fund
Administration and Accounting Services Agreement and Custodian Agreement
described in the Registration Statement have been duly authorized by all
necessary corporate action by the Company and are each valid, binding and
legally enforceable obligations of the Company.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITER
The Underwriter represents and warrants to and agrees with the Company
that:
2.01 REGISTRATION AS BROKER-DEALER AND MEMBER OF NASD. The Underwriter is
registered as a broker-dealer with the Commission under the Securities Exchange
act of 1934 ("1934 Act"), and is registered as a broker-dealer in all states in
which it conducts business and is a member in good standing with the National
Association of Securities Dealers, Inc.
2.02 NO PENDING PROCEEDINGS. There is not now pending or threatened against
the Underwriter an action or proceeding of which it has been advised, either in
any court of competent jurisdiction, before the Securities and Exchange
Commission or any state securities commission concerning its activities as a
broker or dealer, nor has the Underwriter been named as a "cause" in any such
action or proceeding.
5
<PAGE>
2.03 PERFORMANCE. The performance of this Agreement by the Underwriter is
and will not be in violation of any order, writ, decree or regulation applicable
to the Underwriter or in violation of any contract, agreement or obligation to
which the Underwriter or its controlling persons are a party.
SECTION 3
EMPLOYMENT OF THE UNDERWRITER
In reliance upon the representations and warranties and subject to the
terms and conditions of this Agreement:
3.01 UNDERWRITER'S BEST-EFFORTS AGENCY. The Company employs the Underwriter
as its exclusive agent to sell for the Company's account the Shares, on a cash
basis only, at a price equal to the net asset value of a share of common stock
of the Company on the third business day following the close of the subscription
offering period as described in subparagraph 3.03 of this Agreement. The
Underwriter agrees to use its best efforts, as agent for the Company, to sell
the shares subject to the terms and conditions set forth in this Agreement. It
is understood between the parties that there is no firm commitment by the
Underwriter to purchase any or all of the Shares.
3.02 CONDITIONS OF UNDERWRITER'S OBLIGATION. The obligation of the
Underwriter to offer the Shares is subject to (i) receipt by it of written
advice from the Commission that the Registration Statement is effective; (ii)
the Shares being qualified for offering under applicable laws in the states as
may be reasonably designated by the Underwriter; (iii) the absence of any
prohibitory action by any governmental body, agency or official; (iv) the terms
and conditions contained in this Agreement and in the Registration Statement
covering the offering to which this Agreement relates, and (v) the Company duly
executing and entering into the Fund Administration and Accounting Services
Agreement with the Underwriter's affiliate, Rodney Square Management
Corporation.
3.03 TERMINATION UPON CLOSE OF SUBSCRIPTION OFFERING PERIOD. The Company
and the Underwriter agree that unless all of the Shares offered are sold within
sixty (60) days after the effective date (which may be extended for an
additional period not to exceed thirty (30) days by mutual agreement between the
Company and the Underwriter), the agency between the Company and the Underwriter
will terminate.
3.04 PROMPT DELIVERY OF FUNDS. The Underwriter will promptly transmit all
Share purchase monies to the Company in accordance with Rule 15c2-4(a) under the
1934 Act.
3.05 ADDITIONAL UNDERWRITERS AND DEALERS. The Underwriter shall have the
right to associate with such other Underwriters and dealers as it may determine.
6
<PAGE>
SECTION 4
FEES AND EXPENSES
4.01 UNDERWRITER'S ACCOUNTABLE EXPENSE ALLOWANCE. It is understood that the
Company shall reimburse the Underwriter for each and every expense it may incur,
including administrative cost, on an accountable basis not to exceed an
aggregate total of $3,500.00. If prior to the completion of the offering, the
Company does not or cannot proceed with the offering, or the covenants or
representations set out in this Agreement are not materially correct or cannot
be materially complied with, or in the event of a material change in the
financial condition, business, prospects or obligations of the Company (of which
the Company will advise the Underwriter promptly), the Company shall promptly
reimburse the Underwriter in full for its accountable, out-of-pocket expenses,
including legal fees and disbursements, subject to the limitations of this
paragraph. The Underwriter will pay all of its fees and expenses out of the
accountable expense allowance, including, but not limited to, the following:
fees and expenses of any legal counsel whom the Underwriter may employ to
represent it in connection with or on account of the offering by the Company,
and all mailing, telephone, facsimile, travel, clerical or other office or other
administrative costs incurred or to be incurred by the Underwriter or by its
sales personnel in connection with the offering.
4.02 EXPENSES OF THE COMPANY. The Company agrees that it will directly pay
and advance the following fees and expenses:
(a) All fees and expenses of its own separate legal counsel for services
rendered or to be rendered in respect of the offering;
(b) All fees and expenses of its independent certified public accountants
incurred in respect of the offering;
(c) All costs in issuing and delivering the Shares;
(d) All costs of printing and delivering to the Underwriter and dealers
as many copies of the Registration Statement and amendments,
Preliminary Prospectuses and definitive Prospectuses as are
reasonably requested by the Underwriter;
(e) All expenses of producing and disseminating Rule 134 and/or Rule 482
notices, letters or advertisements related to the offering of the
Shares;
(f) All of the Company's mailing, telephone, facsimile, travel, clerical
and other office or other administrative costs incurred or to be
incurred in connection with the offering of the Shares;
(g) All fees and costs which may be imposed by the Commission, the NASD
and various state and local securities authorities relating to the
Company's registration or qualification of, or their review in
respect thereof, the Company's offering of the Shares;
(h) All other expenses incurred by the Company in performance of its
obligations under this Agreement.
7
<PAGE>
SECTION 5
REGISTRATION STATEMENT AND PROSPECTUS
5.01 DELIVERY OF REGISTRATION STATEMENTS. The Company shall deliver to the
Underwriter without charge two signed copies of the Registration Statement,
including all financial statements and exhibits filed therewith and any
amendments or supplements thereto, and shall deliver without charge to the
Underwriter five conformed copies of the Registration Statement and any
amendment or supplement thereto, including such financial statements and
exhibits. The signed copies of the Registration Statement so furnished to the
Underwriter will include signed copies of any and all consents and certificates
of the independent public accountant certifying to the financial statements
included in the Registration Statement and Prospectus and signed copies of any
and all consents and certificates of any other persons whose profession gives
authority to statements made by them and who are named in the Registration
Statement or Prospectus as having prepared, certified, or reviewed any part
thereof.
5.02 DELIVERY OF PRELIMINARY PROSPECTUS. The Company will deliver to the
Underwriter, without charge, prior to the effective date of the Registration
Statement as many copies of each Preliminary Prospectus filed with the
Commission bearing in red ink the statement required by the Commission's Rule
481(6)(2) as may be reasonably requested by the Underwriter. The Company
consents to the use of such documents by the Underwriter and by dealers prior to
the effective date of the Registration Statement. The Company will deliver, at
its expense, such copies of the Preliminary Prospectus as may be reasonably
necessary in order to recirculate the Preliminary Prospectus and/or to permit
compliance with the provisions of Rule 15c2-8(b) under the 1934 Act.
5.03 DELIVERY OF PROSPECTUS. The Company will deliver, at its expense, as
many printed copies of the Prospectus as the Underwriter may reasonably request
for the purposes contemplated by this Agreement and shall deliver said printed
copies of the Prospectus to the Underwriter as soon as practicable after the
effective date. The Company will deliver such additional copies at its expense
as may be reasonably necessary to permit dealers to comply with the requirements
of Rule 174.
5.04 FURTHER AMENDMENTS AND SUPPLEMENTS. If delivery of a Prospectus is
required under the 1933 Act at any time prior to the completion of the offering
and if at such time any event occurs or any event known to the Company relating
to or affecting the Company shall occur as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a material
fact, or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or if it is necessary at any time after the effective date of the
Registration Statement to amend or supplement the Prospectus to comply with the
1933 Act, the Company will forthwith notify the Underwriter thereof and prepare
8
<PAGE>
and file with the Commission such further amendment to the Registration
Statement or supplemental or amended Prospectus as may be required and furnish
and deliver to the Underwriter and to others whose names and addresses are
designated by the Underwriter, all at the cost of the Company, a reasonable
number of copies of the amended or supplemented Prospectus which as so amended
or supplemented will not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the Prospectus not
misleading in the light of the purchaser, and which will comply in all respects
with the 1933 Act. In case the Underwriter is required to deliver a Prospectus
in connection with sales of any of the Shares at any time after the completion
of the offering, upon the Underwriter's request the Company shall prepare and
deliver, at its expense, as many copies of an amended or supplemented Prospectus
as will enable the Underwriter to comply with the prospectus delivery
requirements of the 1933 Act.
5.05 USE OF PROSPECTUS. The Company authorizes the Underwriter in
connection with the distribution of the Shares and all dealers to whom any of
the Shares may be sold by the Underwriter to use the Prospectus as from time to
time amended or supplemented, in connection with the offering and sale of the
Shares and in accordance with the applicable provisions of the 1933 Act and
applicable state blue sky or securities laws.
SECTION 6
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Underwriter that:
6.01 OBJECTION OF THE UNDERWRITER TO AMENDMENTS OR SUPPLEMENTS. After the
date hereof, the Company will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment or supplement
to the Registration Statement or Prospectus unless and until a copy of such
amendment or supplement has been previously furnished to the Underwriter within
a reasonable time period prior to the proposed filing thereof, or of which the
Underwriter or counsel for the Underwriter has reasonably objected to, in
writing, on the ground that such amendment or supplement is not in compliance
with the 1933 Act or the Rules and Regulations.
6.02 COMPANY'S BEST-EFFORTS TO CAUSE REGISTRATION STATEMENT TO BECOME
EFFECTIVE. The Company will use its best efforts to cause the Registration
Statement and any post-effective amendments subsequently filed, to become
effective as promptly as reasonably practicable and will promptly advise the
Underwriter, and will confirm such advice in writing (i) when the Registration
Statement shall have become effective and when any amendment thereto shall have
become effective and when any amendment of or supplement to the Prospectus shall
be filed with the Commission; (ii) when the Commission shall make a request or
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suggestion for any amendment to the Registration Statement or the Prospectus or
for additional information and the nature and substance thereof; (iii) of the
issuance by the Commission of an order suspending the effectiveness of the
Registration Statement pursuant to Section 8 of the 1933 Act or of the
initiation of any proceedings for that purpose; (iv) of the happening of any
event which in the judgment of the Company makes any material statement in the
Registration Statement or Prospectus untrue or which requires the making of any
changes to the Registration Statement or Prospectus in order to make the
statements therein not misleading; and (v) of the refusal to qualify or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution of any proceedings for any of such purposes.
The Company will use every reasonable effort to prevent the issuance of any such
order preventing or suspending such use, to prevent any such refusal to qualify
or any such suspension, and to obtain as soon as possible a lifting of any such
order, the reversal of any such refusal and the termination of any such
suspension.
6.03 PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The Company will
prepare and file with the Commission, upon the request of the Underwriter, such
amendments or supplements to the Registration Statement or Prospectus, in form
satisfactory to counsel to the Company, as in the opinion of counsel to the
Underwriter and of counsel to the Company may be necessary in connection with
the offering or distribution of the Shares and will use its best efforts to
cause the same to become effective as promptly as possible.
6.04 BLUE-SKY QUALIFICATION. The Company will, as and when requested by the
Underwriter, use reasonable efforts to qualify the Shares or such part thereof
as the Company may determine for sale under the securities laws of the states
which the Company shall designate, and will comply with such laws so long as
required for the purposes of the sale and offering for sale of the Shares;
provided, however, the Company shall not be required to make a blue sky filing
in any state in which an exemption from registration is available.
6.05 FINANCIAL STATEMENTS. The Company at its own expense will prepare and
give such financial statements and other information to and as may be required
by the Commission, or the proper public bodies of the states in which the Shares
may be qualified.
6.06 REPORTS AND FINANCIAL STATEMENTS TO THE UNDERWRITER. During the period
of three years from the completion of the offering, the Company will deliver to
the Underwriter copies of all reports, other communications and financial
statements furnished to its stockholders and deliver to the Underwriter as soon
as available all reports and financial statements furnished to or filed with the
Commission and, as soon as practicable and to the extent the Company has
knowledge of any information, every press release and every material news item
and article in respect of the Company or its affairs and such additional
information concerning the business and financial condition of the Company as
the Underwriter may form time to time reasonably request.
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6.07 REPORTS TO SHAREHOLDERS. During the period of three (3) years from the
completion of the offering, the Company will as promptly as possible after each
annual fiscal period render and distribute an annual report to its shareholders
which will include audited balance sheet statements, statements of income and
changes of net assets as to which statements the Company's independent certified
public accountants shall have rendered an opinion, and for each of the first
three quarters of each fiscal year (beginning with the fiscal quarter ending
after the effective date of the Registration Statement), summary financial
information of the Company for such quarter in reasonable detail.
6.08 SECTION 11(A) FINANCIALS. The Company will make generally available to
its security holders and will deliver to the Underwriter, as soon as
practicable, but in no event later than the first day of the twentieth full
calendar month following the effective date of the Registration Statement, an
earnings statement (as to which no opinion need be rendered, but which will
satisfy the provisions of Section 11(a) of the 1933 Act) covering a period of at
least 12 months beginning after the effective date of the Registration
Statement.
6.09 POST-EFFECTIVE AVAILABILITY OF PROSPECTUS. Within the time during
which the Prospectus is required to be delivered under the 1933 Act, the Company
will comply, at its own expense, with all requirements imposed upon it by the
1933 Act, as now or hereafter amended, by the Rules and Regulations, as from
time to time may be in force, and by any order of the Commission, so far as
necessary to permit the continuance of sales or dealings in the Shares through
the completion of the offering.
6.10 APPLICATION OF PROCEEDS. The Company will apply the net proceeds form
the sale of the Shares substantially in the manner set forth in the Registration
Statement and Prospectus.
6.11 DELIVERY OF DOCUMENTS. Upon the completion of the offering, the
Company will deliver to the Underwriter true and correct copies of the articles
of incorporation of the Company and all amendments thereto, all such copies to
be certified by the State Department of Assessments and Taxation of the State of
Maryland; true and correct copies of the bylaws of the Company and of the and of
all meetings of the directors and shareholders of the Company held prior to the
completion of the offering which in any way relate to the subject matter of this
Agreement; and true and correct copies of all material contracts to which the
Company is a party.
6.12 COOPERATION WITH THE UNDERWRITER'S DUE DILIGENCE. At all times prior
to the completion of the offering, the Company will cooperate with the
Underwriter in such investigation as the Underwriter may make or cause to be
made of all the properties, business and operations of the Company in connection
with the sale and public offering of the Shares, and the Company will make
available to the Underwriter in connection therewith such information in its
possession or control as the Underwriter may reasonably request.
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6.13 NO SALE PERIOD. No offering, sale or other disposition of any common
stock or other equity security will be made within one year after the completion
of the offering, directly or indirectly, by the Company, otherwise than
hereunder or with the Underwriter's written consent, which shall not be
unreasonably withheld.
6.14 COMPLIANCE WITH CONDITIONS PRECEDENT. The Company will use all
reasonable efforts to comply or cause to be complied with the conditions
precedent to the several obligations of the Underwriter in Section 9 hereof.
6.15 COMPLIANCE WITH THE 1940 ACT. The Company will take all steps
necessary to ensure that at all times the Company complies with the requirements
of the 1940 Act and the Rules and Regulations thereunder.
SECTION 7
THREAT OF REGULATORY ACTION
7.01 THREAT OF REGULATORY ACTION. The Company and the Underwriter agree to
advise each other immediately and confirm in writing the receipt of any threat
of or the initiation of any steps or procedures which would impair or prevent
the right to offer the Shares or the issuance of any "suspension orders" or
other prohibitions preventing or impairing the proposed offering of the Shares.
In the case of the happening of any such event, neither the Company nor the
Underwriter will acquiesce in such steps, procedures or suspension orders if
such acquiescence would adversely affect the other party and, in such event,
each party agrees to actively defend any such actions or orders unless both
parties agree in writing to acquiesce in such actions or orders or unless
counsel for each party advises the parties that the probability of successfully
defending against such actions is remote.
SECTION 8
INDEMNIFICATION
8.01 INDEMNIFICATION BY THE COMPANY.
(a) The Company agrees to indemnify, defend and hold harmless the
Underwriter from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable legal or other
expenses) incurred by the Underwriter in connection with defending or
investigating any such claims or liabilities, whether or not
resulting in any liability to the Underwriter, which the Underwriter
may incur under the federal or state securities laws and the
regulations promulgated thereunder, a state statute or the common law
resulting from any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or in any
application or other papers filed with the various state securities
authorities (hereinafter collectively called "Blue Sky Applications")
or that shall arise out of or be based upon any omission or alleged
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omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided, however, that this indemnity agreement shall not apply to
any such losses, claims, damages, liabilities and expenses arising
out of or based upon any such violation based upon a statement or
omission made in reliance upon written information furnished for use
in the Registration Statement or in a Blue Sky Application by the
Underwriter.
(b) Notwithstanding any other provision of this Agreement, nothing in
this Agreement shall be deemed to protect the Underwriter against any
liability to which the Underwriter would be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance
of the Underwriter's duties, or by reason of the Underwriter's
reckless disregard of the Underwriter's obligations and duties under
the 1933 Act or this Agreement.
(c) The Underwriter agrees to give the Company an opportunity to
participate in the defense or preparation of the defense of any
action brought against the Underwriter to enforce any such claim or
liability and the Company shall have the right so to participate. The
agreement of the Company under the foregoing indemnity is expressly
conditioned upon notice of any such action having been sent by the
Underwriter to the Company, by letter or telegram (addressed as
provided in this Agreement), promptly after the receipt of written
notice of such action against the Underwriter, such notice either
being accompanied by copies of papers served or filed in connection
with such action or by a statement of the nature of the action to the
extent known to Underwriter. Failure to notify the Company as herein
provided shall not relieve it from any liability which it may have to
the Underwriter other than on account of the indemnity agreement
contained in paragraph 8.01 of this Agreement.
8.02 INDEMNIFICATION BY THE UNDERWRITER.
(a) The Underwriter likewise agrees to indemnify, defend and hold
harmless the Company against any and all losses, claims, damages,
liabilities, and expenses to which the Company may become subject,
arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement
or in any Blue Sky Application or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, resulting
from the use of written information furnished to the Company by the
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Underwriter for use in the preparation of the Registration Statement
or in any Blue Sky Application.
(b) The Company agrees to give the Underwriter an opportunity to
participate in the defense or preparation of the defense of any
action brought against the Company to enforce any such claim or
liability and the Underwriter shall have the right so to participate.
The Underwriter's liability under the foregoing indemnity is
expressly conditioned upon notice of any such action having been sent
by the Company to the Underwriter, by letter or telegram (addressed
as provided in this Agreement), promptly after the receipt by the
Company of written notice of such action against the Company, such
notice either being accompanied by copies of papers served or filed
in connection with such action or by a statement of the nature of the
action to the extent known to the Company. Failure to notify the
Underwriter as herein provided shall not relieve the Underwriter from
any liability which it may have to the Company other than on account
of the indemnity agreement contained in paragraph 8.02 of this
Agreement.
(c) The provisions of paragraphs 8.01 and 8.02 shall not in any way
prejudice any right or rights which the Underwriter may have against
the Company or the Company may have against the Underwriter under any
statute, including the 1933 Act, at common law or otherwise.
(d) The indemnity agreements contained in paragraph 8.01 and 8.02 shall
survive the termination of this Agreement and shall inure to the
benefit of the Company, the Underwriter, their respective successors
and their heirs, personal representatives and successors and shall be
valid irrespective of any investigation made by or on behalf of the
Underwriter or the Company.
8.03 CONTRIBUTION. If the indemnification provided in paragraphs 8.01 and
8.02 is unavailable to or insufficient to hold harmless an indemnified party
under paragraphs 8.01 and 8.02 in respect of any losses, claims, damages,
expenses or liabilities (or actions in respect thereof) referred to therein,
then each indemnifying party shall in lieu of indemnifying such indemnified
party contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, expenses or liabilities (or actions in
respect thereof) in such proportion as is appropriate to reflect the relative
fault of the Company and the Underwriter in connection with the statements or
omissions which resulted in such losses, claims, damages, expenses or
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liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriter and their
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriter agree that
it would not be just and equitable if contribution pursuant to this paragraph
8.03 were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this paragraph 8.03. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, expenses or liabilities (or actions in
respect thereof) referred to above in this paragraph 8.03 shall be deemed to
include any legal or other expenses to which such indemnified party would be
entitled if paragraphs 8.01 and 8.02 were applied. Notwithstanding the
provisions of this paragraph 8.03, the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total price which the
Shares underwritten by it and distributed to the public exceeds the amount of
any damages which the Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission plus
the Underwriter's proportionate share of such legal or other expenses; and any
punitive or exemplary damages if the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by or statements made by the Underwriter. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11 of the
1933 Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
SECTION 9
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE UNDERWRITER
All obligations of the Underwriter under this Agreement are subject to the
accuracy, at all times during the pendancy of the offering, of the
representations and warranties on the part of the Company herein contained, to
the fulfillment of or compliance by the Company with all covenants and
conditions hereof, and to the following additional conditions precedent:
9.01 EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration
Statement shall have become effective on or prior to September 15, 1997, or such
later date as shall be consented to in writing by the Underwriter. On or prior
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to the completion of the offering, no order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission or be pending. Any
request for additional information on the part of the Commission (to be included
in the Registration Statement or Prospectus or otherwise) which has not been
withdrawn shall have been complied with to the satisfaction of the Commission.
Neither the Registration Statement nor the Prospectus nor any amendment thereto
shall have been filed to which counsel to the Underwriter shall have reasonably
objected in writing or have not given their consent.
9.02 ACCURACY OF THE REGISTRATION STATEMENT. The Underwriter shall not have
disclosed in writing to the Company that the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto contains an untrue
statement of a fact which, in the opinion of such counsel, is material and is
required to be stated therein, or is necessary to make the statements therein
not misleading.
9.03 CASUALTY AND OTHER CALAMITY. Between the date hereof and the
completion of the offering, the Company shall not have sustained any loss on
account of calamity or any other causes of such character as materially
adversely affects its business or property, considered as an entire entity,
whether or not such loss such loss is covered by insurance.
9.04 LITIGATION AND OTHER PROCEEDINGS. Between the date hereof and the
completion of the offering, there shall be no litigation instituted or
threatened against the Company and there shall be no proceeding instituted or
threatened against the Company by or before any federal or state commission,
regulatory body or administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding would materially
adversely affect the business, operations or financial condition or income of
the Company considered as an entity.
9.05 LACK OF A MATERIAL CHANGE. Except as contemplated herein or as set
forth in the Registration Statement and Prospectus, during the period subsequent
to the date of the last audited balance sheet included in the Registration
Statement and prior to the completion of the offering, the Company (A) shall
have conducted its business in the usual and ordinary manner as the same was
being conducted on the date of the last audited balance sheet included in the
Registration Statement, and (B) except in the ordinary course of its business,
the Company shall not have incurred any liabilities or obligations (direct or
contingent) or disposed of any of its assets, or entered into any material
transaction or suffered or experienced any substantially adverse change in its
condition, financial or otherwise. At the completion of the offering, the
capital stock and surplus accounts of the Company shall be substantially the
same as at the date of the last audited balance sheet included in the
Registration Statement, without considering the proceeds from the sale of the
Shares, other than as may be set forth in the Prospectus, and except as the
surplus reflects the result of continued losses form operations.
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9.06 REVIEW BY AND OPINION OF UNDERWRITER'S COUNSEL. The authorization of
the Shares, the Registration Statement, the Prospectus and all corporate
proceedings and other legal matters incident thereto and to this Agreement shall
be reasonably satisfactory in all respects to counsel to the Underwriter. The
Underwriter shall have received an opinion dated as of the completion of the
offering from its counsel, satisfactory to the Underwriter, relating to the
incorporation of the Company, the validity of the Shares, the Registration
Statement, the Prospectus and other related matters as Underwriter may
reasonably request, and counsel shall have received such papers and information
as they may reasonably request to enable them to pass upon such matters.
9.07 OPINION OF COUNSEL. The Company shall have furnished to the
Underwriter the opinion, dated as of the completion of the offering, addressed
to the Underwriter, from Kirkpatrick & Lockhart L.L.P., counsel to the Company,
to the effect that based upon a review by them of the Registration Statement,
Prospectus, the Company's articles of incorporation, bylaws, and relevant
corporate proceedings, an examination of such statutes as they deem necessary
and such other investigation by such counsel as they deem necessary to express
such opinion:
(i) The Company has been duly incorporated and is a validly existing
corporation in good standing with the State of Maryland, with full
corporate power and authority to own and operate its properties and
carry on its business as set forth in the Registration Statement and
Prospectus;
(ii) The Company is, to the best of counsel's knowledge, in compliance in
all material respects with all laws requiring qualification or
registration to do business as a foreign corporation in all
jurisdictions in which the Company's ownership of property or its
conduct of business requires such qualification or registration,
except where the failure so to register or to qualify does not have a
material, adverse effect on the condition (financial or otherwise),
business, properties, net assets or results of operation of the
Company;
(iii) The Company has authorized and outstanding capital stock as set forth
in the Registration Statement and Prospectus; the outstanding common
stock of the Company and the Shares conform to the statements
concerning them in the Registration Statement and Prospectus; the
outstanding common stock of the Company has been duly and validly
issued and is fully paid and nonassessable and contains no preemptive
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rights; the Shares have been duly and validly authorized and, upon
issuance thereof in accordance with this Agreement, will be duly and
validly issued, fully paid and nonassessable, and will not be subject
to the preemptive rights of any shareholder of the Company;
(iv) The Company is duly registered with the Commission under the 1940 Act
as a closed-end, non-diversified, management investment company (as
such terms are defined in the 1940 Act) and, except as to matters
relating to financial statements, schedules and other financial and
statistical data, as to which such counsel need not express any
opinion, to the best of counsel's knowledge, in all respects complies
with the terms and provisions of the 1940 Act and the Rules and
Regulations thereunder; to the best of such counsel's knowledge, the
statements contained in the Form N-8A, filed by the Company with the
Commission, as amended to the date hereof, are appropriately
responsive in all respects to the requirements of said form and of
such Rules and Regulations of the Commission, and the statements
contained therein were accurate as of the date made;
(v) This Agreement, the Investment Consulting Agreement, the Custodian
Agreement and the Fund Administration and Accounting Services
Agreement have each been duly authorized, executed and delivered by
the Company and, assuming the due execution and delivery by the other
parties thereto, constitute valid and binding agreements of the
Company enforceable in accordance with their terms, except to the
extent (A) that the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights
generally, and (B) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought;
(vi) The performance of this Agreement, the Investment Consulting
Agreement, the Custodian Agreement and the Fund Administration and
Accounting Services Agreement and the consummation of the
transactions herein and therein contemplated will not conflict with
or result in a breach or any violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company is a party or
by which the Company is bound, the Articles of Incorporation or
Bylaws of the Company, any statute or law or any order, rule or
regulation known to such counsel of any court or governmental agency
or body having jurisdiction over the Company or any of its
properties;
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(vii) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body is
required for the sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, the
Investment Consulting Agreement, the Custodian Agreement or the Fund
Administration and Accounting Services Agreement, except (A) such as
may be required of the Underwriter; (B) such as have been obtained
under the 1933 Act and the 1940 Act; and (C) such consents,
approvals, authorizations, orders, regulations or qualifications as
may be required under state securities or Blue Sky laws in connection
with the offering and distribution of the Shares by the Underwriter;
(viii)The Company is not in violation of its Articles of Incorporation or
Bylaws, and to the best knowledge of such counsel, the Company is not
presently in violation of any material law, rule or regulation, or in
breach of, or in default in the performance of any obligation under,
any material indenture, mortgage, deed of trust, loan agreement,
bond, debenture, note agreement or other evidence of indebtedness or
any other material agreement or instrument to which the Company is a
party or any of its properties may be bound or affected;
(ix) The Company has all requisite corporate and authority and, to the
best of such counsel's knowledge, are operating in compliance in all
material respects with all material authorizations, licenses,
permits, consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business (the
"Licenses"); and, to the best of such counsel's knowledge, all such
Licenses are valid and in full force and effect, and the Company is
in compliance in all material respects with all laws, regulations,
orders and decrees applicable to it;
(x) To the best of such counsel's knowledge, the selection of Coopers &
Lybrand L.L.P. was, and the terms of their employment are, such as to
comply with the provisions of the 1940 Act and the Rules and
Regulations of the Commission thereunder; and
(xi) The Registration Statement has become effective under the 1933 Act
and, to the best of the knowledge of such counsel, no order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated by the Commission under the 1933 Act; and except as to
matters relating to financial statements, schedules and other
financial and statistical data, as to which such counsel need not
express any opinion, the Registration Statement and Prospectus, and
each amendment and supplement thereto, comply as to form in all
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material respects with the requirements of the 1933 Act and the Rules
and Regulations thereunder, and after a reasonable investigation such
counsel has no reason to believe that either the Registration
Statement or the prospectus, or any such amendment or supplement
thereto, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the
circumstances under which made (except that no opinion need be
expressed as to financial statements contained in the Registration
Statement or Prospectus); and such counsel is familiar with all
contracts referred to in the Registration Statement or Prospectus and
such contracts are accurately summarized or disclosed therein in all
material respects or filed as exhibits thereto as required, and such
counsel, after a reasonable investigation, does not know of any legal
or governmental proceedings pending or threatened to which the
Company is the subject of such a character required to be disclosed
in the Registration Statement or the Prospectus which are not
disclosed and accurately described therein in all material respects.
As to routine factual matters such counsel may rely on the certificate
of an appropriate officer of the Company.
9.08 ACCOUNTANT'S LETTER. The Underwriter shall have received a letter
addressed to it and dated the date of this Agreement and the date of completion
of the offering, respectively, from Coopers & Lybrand L.L.P., independent public
accountants for the Company, stating in effect that (i) with respect to the
Company they are independent public accountants with in the meaning of the 1933
Act and the applicable published Rules and Regulations thereunder; (ii) in their
opinion, the financial statements examined by them of the Company at all dates
and for all periods referred to in their opinion and included in the
Registration Statement and Prospectus, comply in all material respects with the
applicable accounting requirements of the 1933 Act and the published Rules and
Regulations thereunder with respect to registration statements on Form N-2;
(iii) on the basis of certain indicated procedures (but not an examination in
accordance with generally accepted accounting principles), including a reading
of the latest available interim unaudited financial statements of the Company,
if any, whether or not appearing in the Prospectus, inquiries of the officers of
the Company or other persons responsible for its financial and accounting
matters regarding the specific items for which representations are requested
below and a reading of the minute books of the Company, nothing has come to
their attention which would cause them to believe that (1) during the period
from the last audited balance sheet included in the Registration Statement to a
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specified date not more than five days prior to the date of such letter (a)
there has not been any change in the capital stock or other securities of the
Company or any payment or declaration of any dividend or other distribution in
respect thereof or exchange therefor from that shown on its audited balance
sheets or in the debt of the Company form that shown in the Registration
Statement or Prospectus other than as set forth in or contemplated by the
Registration Statement or Prospectus; or (b) there have been any material
decreases in the net current assets or net assets as compared with amounts shown
in the last audited balance sheet included in the Prospectus so as to make said
financial statements misleading; or that (2) any dollar amounts, percentages or
other financial information set forth in the Registration Statement and
Prospectus are not in agreement with the Company's general ledger, financial
records or computations made by the Company therefrom.
9.09 OFFICERS' CERTIFICATE. The Company shall have furnished to the
Underwriter a certificate by the President and chief financial officer, dated on
and as of the date of the completion of the offering to the effect that:
(i) The representations and warranties of the Company in this Agreement
are true and correct at and as of the completion of the offering, and
the Company has complied with all the agreements and has satisfied
all the conditions on its part to be performed or satisfied at or
prior to the completion of the offering.
(ii) The Registration Statement has become effective and no order
suspending the effectiveness of the Registration Statement has been
issued and to the best of the knowledge of the respective signers, no
proceeding for that purpose has been initiated or is threatened by
the Commission.
(iii) The respective signers have each carefully examined the Registration
Statement and Prospectus and any amendments and supplements thereto,
and to the best of their knowledge the Registration Statement and the
Prospectus and any amendments and supplements thereto contain all
statements required to be stated therein, and all statements
contained therein are true and correct, and neither the Registration
Statement nor Prospectus nor any amendment or supplement thereto
includes any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading and, since the effective date
of the Registration Statement, there has occurred no event required
to be set forth in an amended or a supplemented Prospectus which has
not been so set forth.
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(iv) Except as set forth in the Registration Statement and Prospectus
since the respective dates as of which the periods for which
information is given in the Registration Statement and Prospectus and
prior to the date of such certificate, (A) there has not been any
substantially adverse change, financial or otherwise, in the affairs
or condition of the Company, and (B) the Company has not incurred any
liabilities, direct or contingent, or entered into any transactions,
otherwise than in the ordinary course of business.
(v) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, no dividends or
distributions whatsoever have been declared and/or paid with respect
to the common stock of the Company.
9.10 BLUE-SKY REGISTRATION. The Shares shall be duly registered in such
states as the Company shall designate pursuant to Section 6.04 of this
Agreement, and each such registration shall be in effect and not subject to any
stop order or other proceeding at all times during the pendancy of the offering.
9.11 APPROVAL OF UNDERWRITER'S COUNSEL. All opinions, letters, certificates
and evidence mentioned above or elsewhere in this Agreement shall be deemed to
be in compliance with the provisions hereof only if they are in form and
substance satisfactory to counsel to the Underwriter, whose approval shall not
be unreasonably withheld. The suggested form of such documents shall be provided
to counsel for the Underwriter at least one day prior to the completion of the
offering.
9.12 OFFICERS' CERTIFICATE AS A COMPANY REPRESENTATION. Any certificate
signed by an officer of the Company and delivered to the Underwriters or to
counsel for the Underwriter will be deemed a representation and warranty by the
Company to the Underwrites as to the statements made therein.
SECTION 10
TERMINATION
10.01 TERMINATION BECAUSE OF NON-COMPLIANCE. This Agreement may be
terminated by the Underwriter by notice to the Company in the event that the
Company shall have failed or been unable to comply with any of the terms,
conditions or provisions of this Agreement on the part of the Company to be
performed, complied with or fulfilled within the respective times herein
provided for, unless compliance therewith or performance or satisfaction thereof
shall have been expressly waived by the Underwriter in writing.
22
<PAGE>
10.02 TERMINATION BECAUSE OF ADVERSE CHANGES. This Agreement may be
terminated by the Underwriter by notice to the Company if the Underwriter
believes in its sole judgment that any adverse changes have occurred in the
management of the Company, that material adverse changes have occurred in the
financial condition or obligations of the Company or if the Company shall have
sustained a loss by strike, fire, flood, accident or other calamity of such a
character as, in the sole judgment of the Underwriter, may interfere materially
with the conduct of the Company's business and operations regardless of whether
or not such loss shall have been insured.
10.03 ADDITIONAL CAUSES FOR TERMINATION. This Agreement may be terminated
by the Underwriter by notice to the Company at any time if, in the sole judgment
of the Underwriter, payment for and delivery of the Shares is rendered
impracticable or inadvisable because (i) additional material governmental
restrictions not in force and effect on the date hereof shall have been imposed
upon the trading in securities generally, or minimum or maximum prices shall
have been generally established on the New York or American Stock Exchange, or
trading in securities generally on either such Exchange shall have been
suspended, or a general moratorium shall have been established by federal or
state authorities, or (ii) a war or other national calamity shall have occurred,
or (iii) substantial and material changes in the condition of the market (either
generally or with reference to the sale of the shares to be offered hereby)
beyond normal fluctuations are such that it would be undesirable, impractical or
inadvisable, in the sole judgment of the Underwriter, to proceed with this
Agreement or with the public offering, or (iv) of any other matter materially
adversely affecting the Company.
10.04 TERMINATION BECAUSE OF THREAT OF REGULATORY ACTION OR BANKRUPTCY. In
the event any action or proceeding shall be instituted or threatened against the
Underwriter, either in any court of competent jurisdiction, before the
Commission or any state securities commission concerning its activities as a
broker or dealer that would prevent the Underwriter from acting as such, at any
time prior to the effective date hereunder, or in any court pursuant to any
federal, state, local or municipal statute, a petition in bankruptcy or
insolvency or for reorganization or for the appointment of a receiver or trustee
of the Underwriter's assets or if the Underwriter makes an assignment for the
benefit of creditors, the Company shall have the right on three days written
notice to the Underwriter to terminate this Agreement without any liability to
the Underwriter of any kind except for the payment of expenses as provided in
Section 4.01 and 4.02 herein.
23
<PAGE>
SECTION 11
NOTICES
Except as otherwise expressly provided in this Agreement:
11.01 NOTICE TO THE COMPANY. Whenever notice is required by the provisions
of this Underwriting Agreement to be given to the Company, such notice shall be
in writing addressed to the Company as follows:
Richard F. Berdick
Secretary and Treasurer
The Mallard Fund, Inc.
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
with a copy to:
Arthur J. Brown, Esquire
Kirkpatrick & Lockhart L.L.P.
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
11.02 NOTICE TO THE UNDERWRITER. Whenever notice is required by the
provisions of this Agreement to be given to the Underwriter, such notice shall
be given in writing addressed to the Underwriter at the address set out at the
beginning of this Agreement, with a copy to: Rodney Square Management
Corporation, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Carl M. Rizzo.
SECTION 12
----------
MISCELLANEOUS PROVISIONS
------------------------
12.01 SURVIVAL. The representations and warranties made in this Agreement
shall survive the termination of this Agreement and shall continue in full force
and effect regardless of any investigation made by the party relying upon any
such representation or warranty.
12.02 BENEFIT. This Agreement is made solely for the benefit of the Company
and its officers, directors and controlling persons within the meaning of
Section 15 of the 1933 Act and of the Underwriter and its officers, directors
and controlling persons within the meaning of Section 15 of the 1933 Act, and
their respective successors, heirs and personal representatives, and no other
person shall acquire or have any right under or by virtue of this Agreement. The
term "successor" as used in this Agreement shall not include any purchaser, as
such, of the Shares.
24
<PAGE>
12.03 PARTICIPATING DEALERS. The Underwriter will provide upon the
completion of the offering a list of the names and addresses of all
participating dealers and shall provide the Company with such changes of the
address or name of such participating dealers as occur and of which the
Underwriter is notified. Further, the Underwriter shall use its best efforts to
maintain the current name and address of all participating dealers during the
terms of this Agreement.
12.04 GOVERNING LAW. The validity, interpretation and construction of this
Agreement and of each part hereof will be governed by the laws (without regard,
however, to such laws as to conflicts of law) of the State of Delaware.
12.05 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
If this Agreement correctly sets forth our understanding, please indicate
your acceptance in the space provided below for that purpose.
Very truly yours,
THE MALLARD FUND, INC.,
a Maryland corporation
By: /s/ William S. Dietrich II
---------------------------------
William S. Dietrich II, President
Confirmed and accepted as of
the date of this Agreement:
RODNEY SQUARE DISTRIBUTORS, INC.,
a Delaware corporation
By: /s/ Jeffrey O. Stroble
---------------------------------
Jeffrey O. Stroble, President
25
CUSTODIAN CONTRACT
between
THE MALLARD FUND, INC.
and
MELLON BANK, N.A.
<PAGE>
TABLE OF CONTENTS
Page
I. Employment of Custodian and Property to be Held by It..................1
II. Duties of the Custodian with Respect to Property of the
Fund Held by the Custodian.............................................1
A. Holding Securities...............................................1
B. Delivery of Securities...........................................1
C. Registration of Securities.......................................3
D. Bank Accounts....................................................3
E. Investment and Availability of Federal Funds.....................3
F. Collection of Income.............................................4
G. Payment of Fund Moneys...........................................4
H. Liability for Payment in Advance of Receipt of Securities
Purchased........................................................5
I. Appointment of Agents............................................5
J. Deposit of Fund Assets in Securities Systems.....................5
K. Segregated Accounts..............................................7
L. Ownership Certificates for Tax Purposes..........................7
M. Proxies..........................................................7
N. Communications Relating to Fund Portfolio Securities.............7
O. Proper Instructions..............................................8
P. Actions Permitted Without Express Authority......................8
Q. Evidence of Authority............................................9
III. Duties of Custodian with Respect to Books of Account and
Calculation of Net Asset Value and Net Income..........................9
IV. Records................................................................9
V. Reports................................................................9
VI. Opinion of Fund's Independent Accountant..............................10
VII. Reports to Fund by Independent Public Accountants.....................10
VIII. Compensation of Custodian.............................................10
IX. Responsibility of Custodian...........................................10
X. Effective Period, Termination and Amendment...........................11
XI. Successor Custodian...................................................11
XII. Directors.............................................................12
XIII. Pennsylvania Law to Apply.............................................12
XIV. Acknowledgment of Brokerage Services..................................12
<PAGE>
CUSTODIAN CONTRACT
This Contract between The Mallard Fund, Inc., a Maryland corporation,
(herein after called the "Fund"), and Mellon Bank, N.A., a national banking
association, (hereinafter called the "Custodian"),
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows .
I. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets
pursuant to the provisions of the Articles of Incorporation. The Fund agrees to
deliver to the Custodian all securities and cash owned by it, and all payments
of income, payments of principal or capital distributions received by it with
respect to all securities owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares of common stock
("Shares") of the Fund as may be issued or sold from time to time. The Custodian
shall not be responsible for any property of the Fund held or received by the
Fund and not delivered to the Custodian.
The Custodian may from time to time employ one or more sub-custodians,
provided that the employment of any sub-custodian shall not relieve the
Custodian of any of its responsibilities or liabilities hereunder.
II. Duties of the Custodian with Respect to Property of the Fund Held by
the Custodian
A. Holding Securities
The Custodian shall hold, earmark and physically segregate for the account
of the Fund all non-cash property, including all securities owned by the
Fund, other than securities which are maintained pursuant to Section J of
this Article II in a clearing agency which acts as a securities depository
or in a Book-entry system authorized by the U.S. Department of the
Treasury, collectively referred to herein as "Securities Systems."
B. Delivery of Securities
The Custodian shall release and deliver securities owned by the Fund held
by the Custodian or in a Securities System account of the Custodian only
upon receipt of proper instructions, which may be continuing instructions
when deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
<PAGE>
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section J hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section I of this Article II or into the name or nominee
name of any sub-custodian appointed pursuant to Article I; or for
exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities are to be
delivered to the Custodian;
7) To the broker selling the same for examination in accordance with
the "street delivery" custom; provided that the Custodian shall
adopt such procedures, as the Fund from time to time shall approve,
to ensure their prompt return to the Custodian by the broker in the
event the broker elects not to accept them;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral, as agreed
upon from time to time by the Custodian and the Fund, which may be
in the form of cash or obligations issued by the United States
government, its agencies or instrumentalities or a letter of credit.
11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, against receipt of
amounts borrowed;
12) For any other proper corporate purposes, but only upon receipt of,
in addition to proper instructions, a certified copy of a resolution
of the Board of Directors signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary, specifying the
securities to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purposes to be proper
corporate purposes, and naming the person or persons to whom
delivery of such securities shall be made.
2
<PAGE>
C. Registration of Securities
Securities held by the Custodian (other than bearer securities) shall be
registered in the name of the Fund, or in the name of any nominee of the
Fund, or of any nominee of the Custodian, provided the Custodian maintains
a mechanism for identifying all securities belonging to the Fund, wherever
held or registered, or in the name or nominee name of any agent appointed
pursuant to Section I of Article II hereof or in the name or nominee name
of any sub-custodian appointed pursuant to Article I. A11 securities
accepted by the Custodian on behalf of the Fund under the terms of this
Contract shall be in "street name" or other good delivery form.
D. Bank Accounts
The Custodian shall open and maintain a separate bank account or accounts
in the name of the Fund, subject only to draft or order by the Custodian
acting pursuant to the terms of this Contract, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received
by it from or for the account of the Fund, other than cash maintained by
the Fund in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as Custodian
in the banking department of the Custodian or in such other banks or trust
companies as it may, in its discretion, deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of 1940
("1940 Act"). Such funds shall be deposited by the Custodian in its
capacity as Custodian and shall be withdrawable by the Custodian only in
that capacity.
E. Investment and Availability of Federal Funds
Upon mutual agreement between the Fund and the Custodian, the Custodian
shall, upon the receipt of proper instructions, which may be continuing
instructions when deemed appropriate by the parties,
1) invest in such instruments as may be set forth in such
instructions, on the same day as received, all federal funds
received after a time agreed upon between the Custodian and the
Fund; and
2) make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which
are deposited into the Fund's account.
3
<PAGE>
F. Collection of Income
The Custodian shall collect on a timely basis all income and other
payments with respect to registered securities held hereunder to which the
Fund shall be entitled either by law or pursuant to custom in the
securities business and shall collect on a timely basis all income and
other payments with respect to bearer securities if, on the date of
payment by the Issuer, such securities are held by the Custodian or agent
thereof and shall promptly credit such income, as collected, to the Fund's
custodian account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other
income items requiring presentation as and when they become due and shall
collect interest when due on securities held hereunder.
G. Payment of Fund Moneys
Upon receipt of proper instructions, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out moneys
of the Fund in the following cases only:
1) Upon the purchase of securities for the account of the Fund, but
only (a) against the delivery of such securities to the Custodian
(or any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the 1940 Act to act
as a custodian and has been designated by the Custodian as its agent
for this purpose) registered in the name of the Fund or in the name
of a nominee of the Custodian referred to in Section C of Article II
hereof or in proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section J of Article II hereof or; (c) in
the case of repurchase agreements entered into between the Fund and
the Custodian, or another bank, (i) against delivery of securities
either in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such securities
and (ii) against delivery of the receipt evidencing purchase by the
Fund of securities owned by the Custodian or other bank along with
written evidence of the agreement by the Custodian or other bank to
repurchase such securities from the Fund;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section B of Article
II hereof;
3) For the payment of any expense or liability incurred, by the Fund,
including but not limited to the following payments for the account
of the Fund: interest, dividend disbursements, taxes, trade
association dues, advisory, administration, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated
as deferred expenses;
4) For the payment of any dividends declared pursuant to the
governing documents of the Fund; and
4
<PAGE>
5) For any other proper corporate purposes, but only upon receipt of,
in addition to proper instructions, a certified copy of a resolution
of the Board of Directors of the Fund signed by an officer of the
Fund and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to whom
such payment is to be made.
H. Liability for Payment in Advance of Receipt of Securities
Purchased
In any and every case where payment for purchase of securities for the
account of the Fund is made by the Custodian in advance of receipt of the
securities purchased, in the absence of specific written instructions from
the Fund to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the securities had
been received by the Custodian, except that in the case of repurchase
agreements entered into by the Fund with a bank which is a member of the
Federal Reserve System, the Custodian may transfer funds to the account of
such bank prior to the receipt of (i) written evidence that the securities
subject to such repurchase agreement have been transferred by book-entry
into a segregated non-proprietary account of the Custodian maintained with
The Federal Reserve Bank of Philadelphia or the safekeeping receipt and
(ii) the repurchase agreement, provided that such written evidence or
documents are received prior to the close of business on the same day.
I. Appointment of Agents
The Custodian may at any time or times in its discretion appoint (and may
at any time remove) any other bank or trust company which is itself
qualified under the 1940 Act to act as a custodian, as its agent to carry
out such of the provisions of this Article II as the Custodian may from
time to time direct; provided, however, that the appointment of any agent
shall not relieve the Custodian of any of its responsibilities or
liabilities hereunder.
J. Deposit of Fund Assets in Securities Systems
The Custodian may deposit and/or maintain securities owned by the Fund in
a clearing agency registered with the Securities and Exchange Commission
under Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "Securities Systems" in accordance with applicable
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Fund in a Securities System
provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian, or otherwise for customers.
5
<PAGE>
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the account of
the Fund upon (i) receipt of advice from the Securities System that
such securities have been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The Custodian
shall transfer securities sold for the account of the Fund upon (i)
receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making
of an entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all advices from
the Securities System of transfers of securities for the account of
the Fund shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. The Custodian
shall furnish the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice or notice and
shall furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the Securities System for the
account of the Fund on the next business day;
4) The Custodian shall have received the initial certificate
required by Article IX hereof:
5) The Custodian shall provide the Fund with any report obtained by the
Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the Securities System;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from any failure of
the Custodian or any such agent to enforce effectively such rights
as it may have against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities System or
any other person which the Custodian 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 such loss or damage. The Custodian shall be
subject to the same liability with respect to all securities of the
Fund, and all cash, stock dividends, rights and items of like nature
to which the Fund is entitled, held or received by such securities
systems as if the same were held or received by the Custodian at its
own office.
6
<PAGE>
K. Segregated Accounts
The Custodian 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 cash and/or securities,
including securities maintained in an account by the Custodian pursuant to
Section J hereof, (i) in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association
of Securities Dealers, Inc. (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 organization or
organizations, regarding escrow or other arrangements in connections with
transactions by the Fund, (ii) for purposes of segregating cash or
government securities in connection with options purchased, sold or
written by the Fund or commodity futures contracts or options thereon
purchased or sold by the Fund, (iii) 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 and (iv) as mutually agreed upon from time
to time in writing by the Custodian and the Fund.
L. Ownership Certificates for Tax Purposes
The Custodian shall execute ownership and other certificates and
affidavits for all federal and state tax purposes in connection with
receipt of income or other payments with respect to securities of the Fund
held by it and in connection with transfers of securities.
M. Proxies
The Custodian shall, with respect to the securities held by it hereunder,
promptly deliver to the Fund all proxies, all proxy soliciting materials
and all notices relating to such securities without indication of the
manner in which such proxies are to be voted.
N. Communications Relating to Fund Portfolio Securities
The Custodian shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith) received by
the Custodian from issuers of the securities being held for the Fund. With
respect to tender or exchange offers, the Custodian, shall transmit
promptly to the Fund all written information received by the Custodian
from issuers of the securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange offer or
any other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
7
<PAGE>
O. Proper Instructions
The term "proper instructions" means instructions from the Fund in respect
of any of the Custodian's duties hereunder which have been received by the
Custodian: (a) in writing (including, without limitation, facsimile
transmission) or by tested telex signed or given by such one or more
person or persons as the Fund shall have from time to time authorized to
give the particular class of proper instructions in question and whose
name and (if applicable) signature and office address have been filed with
the Custodian; (b) a telephonic or oral communication by one or more
persons as the Fund shall have from time to time authorized to give the
particular class of proper instructions in question and whose name has
been filed with the Custodian; or (c) upon receipt of such other form of
proper instructions as the Fund may from time to time authorize in writing
and which the Custodian agrees to accept. Proper instructions in the form
of oral communications shall be confirmed by the Fund by tested telex or
writing in the manner set forth in clause (a) above, but the lack of such
confirmation shall in no way affect any action taken by the Custodian in
reliance upon such oral proper instructions prior to the Custodian's
receipt of such confirmation.
The Custodian shall have the right to assume in the absence of notice to
the contrary from the Fund that any person whose name is on file with the
Custodian pursuant to this Section has been authorized by the Fund to give
the proper instructions in question and that such authorization has not
been revoked. The Custodian may act upon, and conclusively rely upon,
without any liability to the Fund or any other person or entity for any
losses resulting therefrom, any proper instructions reasonably believed by
it to be furnished by the proper person or persons as provided above.
P. Actions Permitted Without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
contract, provided that all such payments shall be accounted for to
the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors of the Fund.
8
<PAGE>
Q. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably
believed by it to be genuine and to have been properly executed by or on
behalf of the Fund. The Custodian may receive and accept a certified copy
of a vote of the Board of Directors of the Fund as conclusive evidence (a)
of the authority of any person to act in accordance with such vote or (b)
of any determination or of any action by the Board of Directors pursuant
to the Articles of Incorporation as described in such vote, and such vote
may be considered as in full force and effect until receipt by the
Custodian of written notice to the contrary.
III. Duties of Custodian with Respect to Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors to keep the books of
account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund and/or compute the daily net income of the Fund.
If directed in writing to do so by the Fund, which direction shall be
transmitted to the Custodian reasonably in advance of the date on which it is to
act, the Custodian shall itself keep such books of account and/or compute such
net asset value per share and/or compute the daily net income of the Fund and
shall, upon such written direction, compute daily the Fund's interest received
and accrued, short-term gains and losses realized upon sale of securities,
long-term gains and losses realized upon sale of securities, and unrealized
gains and losses on portfolio securities. If so instructed in writing, which
written instructions shall be transmitted to the Custodian reasonably in advance
of the date on which it is to act, the Custodian shall supply quotations for all
portfolio securities of the Fund to the entity or entities appointed by the
Board of Directors to compute the net asset value per share of the outstanding
shares of the Fund on each day on which such net asset value per share is to be
computed as stated in the Fund's currently effective Registration Statement.
IV. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940 and the rules
and regulations thereunder, with particular attention to Section 31 thereof and
Rules 31a-1 and 31a-2 thereunder, applicable federal and state tax laws and any
other law or administrative rules or procedures which may be applicable to the
Fund. All such records shall be the property of the Fund and shall at all times
during the regular business hours of the Custodian be open for inspection by
duly authorized officers, employees or agents of the Fund and employees and
agents of the Securities and Exchange Commission.
V. Reports
The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by the Fund and held by the Custodian and shall,
when requested to do so by the Fund and for such compensation as shall be agreed
upon between the Fund and the Custodian, include certificate numbers in such
tabulations.
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VI. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-2 and the Fund's Form N-SAR or other
annual or semi-annual reports to the Securities and Exchange Commission and with
respect to any other requirements of such Commission.
VII. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this contract;
such reports, which shall be of sufficient scope and in sufficient detail as may
reasonably be required by the Fund, to provide reasonable assurance that any
material inadequacies would be disclosed, shall state in detail material
inadequacies disclosed by such examination, and, if there are no such
inadequacies, shall so state.
VIII. Compensation of Custodian
The Custodian shall be entitled to receive annual compensation for its
services hereunder in accordance with its schedule attached as Exhibit A to this
Contract. Any compensation agreed to hereunder may be adjusted from time to time
by attaching to Exhibit A to this Contract a revised fee schedule, dated and
signed by an authorized representative of each party hereto.
The Fund shall reimburse the Custodian for all out-of-pocket expenses
reasonably incurred hereunder.
IX. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Fund) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
10
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The Custodian shall be held to the exercise of reasonable care in carrying
out the provisions of this Contract. The Custodian shall be liable for all acts
and omissions of agents (including subcustodians) as if the Custodian performed
the act or omission itself. The Fund shall indemnify the Custodian and hold it
harmless from and against all claims, liabilities, and expenses (including
attorneys' fees) which the Custodian may suffer or incur on account of being
Custodian hereunder except such claims, liabilities and expenses arising from
the Custodian's own negligence or bad faith. Notwithstanding the foregoing,
nothing contained in this paragraph is intended to nor shall it be constructed
to modify the standards of care and responsibility set forth in Article I hereof
with respect to sub-custodians and in Section J(6) of Article II hereof with
respect to Securities Systems.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the reasonable opinion of the Custodian, result in the Custodian or its nominee
assigned to the Fund being liable for the payment of money or incurring
liability of some other form, the Fund, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in an
amount and form satisfactory to it.
X. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid, to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however, that the Custodian shall not act under Section J of Article II hereof
in the absence of receipt of an initial certificate from the Fund that the
Directors of the Fund have approved the initial use of a particular Securities
System, as required by Rule 17f-4 under the 1940 Act; provided further, however,
that the Fund shall not amend or terminate the Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and, further provided, that the Fund may at any time by action of
its Directors (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall reimburse the Custodian
for those costs, expenses and disbursements that are due as of the date of such
termination.
XI. Successor Custodian
If a successor custodian is appointed by the Directors of the Fund, the
Custodian shall, upon termination, deliver to such successor custodian at the
office of the Custodian, duly endorsed and in the form for transfer, all
securities and other assets of the Fund then held by it hereunder. The Custodian
shall also deliver to such successor custodian copies of such books and records
relating to the Fund as the Fund and Custodian may mutually agree.
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<PAGE>
If no such successor custodian is appointed, the Custodian shall, in like
manner, upon receipt of a certified copy of a vote of the Directors of the Fund,
deliver at the office of the Custodian such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company doing business in Pittsburgh, Pennsylvania of its own selection, having
an aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of vote referred to, or of the
Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
XII. Directors
All references to actions of or by Directors or herein shall require
action by such Directors acting as a board or a formally constituted group and
not individually.
XIII. Pennsylvania Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of Pennsylvania.
XIV. Acknowledgment of Brokerage Services
The Fund acknowledges that it may execute purchases and sales through a
brokerage service affiliated with the Custodian at the affiliate's regular
institutional rates so long as that service provides competitive execution. The
Fund acknowledges that any broker or dealer executing transactions on behalf of
the Fund may receive commissions that are reasonable in relation to the value of
the brokerage and/or research services provided.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and on behalf by its duly authorized representative as of
the 28th day of May, 1997.
By: /s/ George F. Partridge
--------------------------------------
Name: George F. Partridge
Title: Vice-President
By: /s/ Richard F. Berdik
--------------------------------------
Name: Richard F. Berdik
Title: Secretary, The Mallard Fund, Inc.
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<PAGE>
Exhibit A
THE MALLARD FUND, INC.
CUSTODIAN FEE SCHEDULE
Custody Services
Structural Charges
Unitization (if required) $3,000 per
unitization
Active manager Account $3,000 per account
Cash Account $ 500 per account
Passive/Line Item Account $1,500 per account
Asset-Based Charges
Domestic Custody 1.00 basis point
Global custody-Developed Markets 9.00 basis points
Developed markets include: Austria, Australia, Belgium, Canada, Cedel,
Euroclear, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
Korea, Mexico, Netherlands, New Zealand, Norway, Philippines, Singapore,
Spain, Sweden, Switzerland, Thailand, United Kingdom
Global Custody-Intermediate Markets 30.0 basis points
Intermediate markets include: Argentina, Indonesia, Malaysia, Portugal,
Shanghai, Shenzen, Sri Lanka
Global Custody-Emerging Markets 50.0 basis points
Emerging markets include: Brazil, Cyprus, Greece, India, Israel,
Jordan, Luxembourg, Pakistan, Peru, Poland, Trinidad/Tobago, Turkey,
Venezuela, and other emerging markets
Transaction Charges
U.S. Depository Transaction $15 per transaction
U.S. Physical Transaction $25 per transaction
Developed Market Transaction $25 per transaction
Intermediate Market Transaction $60 per transaction
Emerging Market Transaction $85 per transaction
Futures Transaction $25 per transaction
Options round-trip $40 per transaction
Other Fees
Wire Transfer $10 per wire
International Wire Transfer $40 per wire
Margin variation wire $15 per wire
Foreign exchange transaction $30 per transaction
(executed outside Mellon)
Establish Futures Broker $2,000 per agreement
Agreement (if boilerplate not used)
<PAGE>
Fee Footnotes
Mellon will pass through to the client any out-of pocket expenses,
including, but not limited to, postage, courier expense, registration
fees, stamp duties, telex charges, custom reporting or custom programming,
internal/external tax, legal and consulting costs, proxy voting expenses,
etc.
The above fees do not contemplate securities lending.
Mellon reserves the right to amend its fees consistent with Article VIII
of this Contract.
2
Exhibit k
FUND ADMINISTRATION AND
ACCOUNTING SERVICES AGREEMENT
BETWEEN
THE MALLARD FUND, INC.
AND
RODNEY SQUARE MANAGEMENT CORPORATION
THIS ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT made this 27th day
of August, 1997, between The Mallard Fund, Inc., a Maryland corporation
(hereinafter the "Fund"), having its principal place of business in
Pennsylvania, and Rodney Square Management Corporation, a Delaware corporation
(hereinafter "Rodney Square"), having its principal place of business in
Wilmington, Delaware.
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an closed-end management investment company and has
issued, or plans to issue, for public sale, shares of common stock ("Shares"),
par value $0.001 per share;
WHEREAS, the Fund desires to employ Rodney Square to provide certain fund
administration and accounting services;
WHEREAS, Rodney Square is willing to furnish such services to the Fund on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the Fund and Rodney Square agree as follows:
1. APPOINTMENT. The Fund hereby appoints Rodney Square to provide certain
administration and accounting services to the Fund for the period and on the
terms set forth in this Agreement. Rodney Square accepts such appointment and
agrees to furnish the services herein set forth in return for the compensation
provided for in Section 18 of this Agreement. Rodney Square agrees to comply
with all relevant provisions of the 1940 Act and applicable rules and
regulations thereunder, and to remain open for business on any day on which the
New York Stock Exchange, the Philadelphia branch office of the Federal Reserve
and Wilmington Trust Company are open for business.
2. DOCUMENTS. The Fund has furnished Rodney Square with copies
properly certified or authenticated of each of the following:
a. The Fund's Articles of Incorporation filed with the
Secretary of State of Maryland on October 15, 1996 and all amendments thereto
and restatements thereof;
b. The Fund's By-laws and all amendments thereto and
restatements thereof (such By-laws, as presently in effect as they shall from
time to time be amended or restated, are herein called "By-laws");
<PAGE>
c. Resolutions of the Fund's Board of Directors authorizing
the appointment of Rodney Square to provide certain fund administration and
accounting services to the Fund and approving this Agreement;
d. Schedule B identifying and containing the signatures of the
Fund's officers and other persons ("Authorized Persons") authorized to issue
"Oral Instructions" and/or "Written Instructions" (all as hereinafter defined)
on behalf of the Fund;
e. The Fund's Notification of Registration filed pursuant to
Section 8(a) of the 1940 Act with the Securities and Exchange Commission
("SEC") on October 15, 1996;
f. The Fund's Registration Statement on Form N-2 under the
Securities Act of 1933 (the "1933 Act") (File No. 333-26791) and under the
1940 Act (File No. 811-7861), as filed with the SEC relating to the Fund and
the Fund's Shares, and all amendments thereto;
g. Copies of the executed Fund agreements listed on Schedule C
attached hereto; and
h. If required, a copy of either (i) a filed notice of eligibility
to claim the exclusion from the definition of "commodity pool operator"
contained in Section 2(a)(1)(A) of the Commodity Exchange Act ("CEA") that is
provided in Rule 4.5 under the CEA, together with all supplements as are
required by the Commodity Futures Trading Commission ("CFTC"), or (ii) a letter
which has been granted the Fund by the CFTC which states that the Fund will not
be treated as a "pool" as defined in Section 4.10(d) of the CFTC's General
Regulations, or (iii) a letter which has been granted the Fund by the CFTC which
states that CFTC will not take any enforcement action if the Fund does not
register as a "commodity pool operator."
The Fund will furnish Rodney Square from time to time with copies,
properly certified or authenticated, of all additions, amendments or supplements
to the foregoing, if any.
3. INSTRUCTIONS CONSISTENT WITH ARTICLES OF INCORPORATION, ETC.
------------------------------------------------------------
a. Unless otherwise provided in this Agreement, Rodney Square shall
act only upon Oral and Written Instructions. "Oral Instructions" as used in this
Agreement shall mean oral instructions actually received by Rodney Square from
an Authorized Person or from a person reasonably believed by Rodney Square to be
an Authorized Person. "Written Instructions" as used in this Agreement shall
mean written instructions signed by two Authorized Persons, delivered by hand,
mail, telegram, cable, telex or facsimile, and actually received by Rodney
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<PAGE>
Square. "Authorized Person" used in this Agreement means any officer of the Fund
and any other person, whether or not any such person is an officer of the Fund,
duly authorized by the Board of Directors of the Fund to give Oral and Written
Instructions on behalf of the Fund and certified by the Secretary or an
Assistant Secretary of the Fund or any amendment thereto as may be received by
Rodney Square from time to time. Although Rodney Square may know of the
provisions of the Articles of Incorporation and By-laws of the Fund, Rodney
Square in its capacity under this Agreement may assume that any Oral or Written
Instructions received hereunder are not in any way inconsistent with any
provisions of such Articles of Incorporation or By-laws or any vote, resolution
or proceeding of the shareholders, or of the Board of Directors, or of any
committee thereof.
b. Rodney Square shall be entitled to rely upon any Oral and/or
Written Instructions actually received by Rodney Square pursuant to this
Agreement. The Fund agrees to forward to Rodney Square Written Instructions
confirming Oral Instructions in such manner that the Written Instructions are
received by Rodney Square, whether by hand delivery, telex, facsimile or
otherwise, by the close of business of the same day that such Oral Instructions
are given to Rodney Square. The Fund agrees that the fact that such confirming
Written Instructions are not received by Rodney Square shall in no way affect
the validity of the transactions or enforceability of the transactions
authorized by the Fund by giving Oral Instructions. The Fund agrees that Rodney
Square shall incur no liability to the Fund in acting upon Oral Instructions
given to Rodney Square hereunder concerning such transactions.
4. FUND ADMINISTRATION. Subject to the direction and control of the
Fund and to the extent not otherwise the responsibility of, or provided by,
other service or supply agents of the Fund, Rodney Square shall provide the
following administrative services:
a. Supply:
(1) office facilities (which may be in Rodney Square's or
its affiliates' own offices);
(2) non-investment related statistical and research data;
(3) executive and administrative services;
(4) stationery and office supplies at Fund expense; and
(5) corporate secretarial services, such as the preparation
and distribution of minutes and materials at Fund expense
for meetings of the Board of Directors or shareholders;
3
<PAGE>
b. Provide personnel to serve as officers of the Fund if so
elected by the Board of Directors;
c. Prepare and file, if necessary, documents necessary to maintain
the Fund's corporate existence with the State of Maryland, annual, semi-annual
and any quarterly reports to the Fund's shareholders and reports of the Fund
with the SEC, post-effective amendments to the Fund's Registration Statement on
Form N-2, Form N-SAR filings, prospectus supplements and the Fund's fidelity
bond;
d. File, coordinate printing and mailing, and assist in the
preparation of proxy and/or information statements.
e. Monitor the Fund's compliance with the investment restrictions
and limitations as stated in the Fund's Registration Statement, the 1940 Act,
and limitations necessary for the Fund to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), or any successor statute;
f. Prepare and distribute to appropriate parties notices
announcing the declaration of dividends and other distributions to
shareholders and prepare necessary tax and regulatory notices;
g. Prepare financial statements and footnotes and other
financial information with such frequency and in such format as required to
be included in reports to shareholders and the SEC; and
h. Assist the Fund in the pursuit of any authorized offers for
tender, or other transactions for repurchase of Fund Shares.
5. FUND ACCOUNTING.
---------------
a. Rodney Square shall provide the following accounting
functions on a daily basis:
(1) Journalize the Fund's investment, capital share and
income and expense activities;
(2) Verify investment buy/sell trade tickets when received
from the Fund;
(3) Maintain individual ledgers for investment securities;
(4) Maintain historical tax lots for each security;
4
<PAGE>
(5) Reconcile cash and investment balances of the Fund with
the Custodian, and provide the Fund with the beginning
cash balance available for investment purposes;
(6) Update the cash availability throughout the day as
required by the Fund;
(7) Post to and prepare the Fund's Statement of Assets and
Liabilities and Statement of Operations;
(8) Calculate expenses payable pursuant to the Fund's
various contractual obligations;
(9) Control all disbursements from the Fund and authorize
such disbursements upon Written Instructions;
(10) Calculate capital gains and losses;
(11) Determine the Fund's net income; and
(12) Prepare and monitor the expense accruals and notify Fund
management of any proposed adjustments.
b. In addition, Rodney Square will:
(1) Prepare quarterly financial statements, which will
include without limitation the Schedule of Investments,
the Statement of Assets and Liabilities, the Statement
of Operations, the Statement of Changes in Net Assets,
the Cash Statement, and the Schedule of Capital Gains
and Losses;
(2) Prepare quarterly security transactions summaries;
(3) Prepare quarterly broker security transactions
summaries;
(4) At such times as stated in the Fund's then current
prospectus:
a. At the Fund's expense obtain security market prices
or if such market prices are not readily available,
then obtain such prices from sources approved by the
Fund, and in either case calculate the market or
fair value of the Fund's investments;
5
<PAGE>
b. In the case of debt instruments with remaining
maturities of sixty (60) days or less, calculate the
amortized cost value of those instruments;
c. Transmit or mail a copy of the portfolio valuations
to the Fund;
d. Compute the net asset value per Share of the Fund;
e. Compute the Fund's yields, total returns, expense
ratios and portfolio turnover rate;
(5) Supply various Fund statistical data as requested on an
ongoing basis;
(6) Assist in the preparation of support schedules necessary
for completion of the Fund's Federal and state tax
returns;
(7) Assist in the preparation and filing of the Fund's
annual and semiannual reports with the SEC on Form
N-SAR;
(8) Assist in the preparation and filing of the Fund's
annual, semiannual and any quarterly reports to
shareholders and any proxy and/or information
statements;
(9) Monitor the Fund's status as a regulated investment
company under Subchapter M of the Internal Revenue Code
of 1986 (the "Code"), as amended from time to time;
(10) Determine the amount of dividends and other
distributions payable to shareholders as necessary to,
among other things, maintain the Fund's qualification as
a regulated investment company under the Code; and
(11) Furnish data necessary for the Fund's transfer agent to
prepare Form 1099 reports and notices.
6. RECORDKEEPING AND OTHER INFORMATION. Rodney Square shall create and
maintain all necessary records in accordance with all applicable laws, rules and
regulations, including, but not limited to, records required by Section 31(a) of
6
<PAGE>
the 1940 Act and the rules thereunder, as the same may be amended from time to
time, pertaining to the various functions (described above) performed by it and
not otherwise created and maintained by another party pursuant to contract with
the Fund. All records shall be the property of the Fund at all times and shall
be available for inspection and use by the Fund or the Fund's authorized
representatives. Upon reasonable request of the Fund, copies of such records
shall be provided by Rodney Square to the Fund or the Fund's authorized
representatives at the Fund's expense. Where applicable, such records shall be
maintained by Rodney Square for the periods and in the places required by Rule
31a-2 under the 1940 Act.
7. LIAISON WITH ACCOUNTANTS. Rodney Square shall act as liaison with the
Fund's independent public accountants and shall provide account analysis, fiscal
year summaries and other audit related schedules. Rodney Square shall take all
reasonable action in the performance of its obligations under this Agreement to
assure that the necessary information is made available to such accountants for
the expression of their opinion, as such may be required by the Fund from time
to time.
8. EXPENSES OF THE FUND. The Fund agrees that it will pay all the Fund's
expenses, other than those expressly stated to be payable by Rodney Square
hereunder, which expenses payable by the Fund shall include, without limitation:
a. Fees payable for investment advisory services, if any;
b. Fees payable for services provided by the Fund's independent
public accountants;
c. The cost of obtaining quotations for calculating the value of
the Fund's assets;
d. Taxes, if any, levied against the Fund;
e. Brokerage fees, mark-ups and commissions in connection with
the purchase and sale of portfolio securities;
f. Costs, including the interest expense, of borrowing money;
g. Costs and/or fees incident to holding meetings of the Board of
Directors and shareholders, preparation (including typesetting, printing and
EDGAR conversion charges) and mailing of prospectuses, reports and proxy
materials to the existing shareholders of the Fund, filing of reports with
regulatory bodies, maintenance of the Fund's existence, and registration of Fund
Shares with federal and state (if applicable) securities authorities;
7
<PAGE>
h. Legal fees and expenses;
i. Costs of printing share certificates representing Fund
Shares;
j. Fees payable to, and expenses of, members of the Directors
who are not "interested persons" of the Fund;
k. Out-of-pocket expenses incurred in connection with the
provision of administration and accounting services;
l. Premiums payable on the fidelity bond required by Section
17(g) of the 1940 Act, and any other premiums payable on insurance policies
related to the Fund's business and its portfolio(s) investment activities;
m. Fees, voluntary assessments and other expenses incurred in
connection with the Fund's membership in investment company organizations; and
n. Such non-recurring expenses as may arise, including actions,
suits or proceedings to which the Fund is a party, and the contractual
obligation which the Fund may have to indemnify its Directors and officers with
respect thereto.
Except as otherwise agreed by Rodney Square, Rodney Square will not
reimburse the Fund for (or have deducted from its fee payable under this
Agreement) any Fund expenses in excess of any expense limitations imposed by
state securities commissions having jurisdiction over the sale of Fund Shares.
9. AUDIT, INSPECTION AND VISITATION. Rodney Square shall make available
during regular business hours all records and other data created and maintained
pursuant to the foregoing provisions of this Agreement for reasonable audit and
inspection by the Fund, any person retained by the Fund or any regulatory agency
having authority over the Fund.
10. APPOINTMENT OF AGENTS. Neither this Agreement nor any rights or
obligations hereunder may be assigned by Rodney Square without the prior written
consent of the Fund. Rodney Square may, however, at any time or times, in its
discretion, appoint (and may at any time remove) other parties as its agent to
carry out such provisions of this Agreement as Rodney Square may from time to
time direct; provided, however, that the appointment of any such agent shall not
relieve Rodney Square of any of its responsibilities or liabilities hereunder,
and Rodney Square shall give the Fund prior written notice of any such
appointments..
8
<PAGE>
11. DELEGATION. On thirty (30) days' prior written notice to the Fund,
Rodney Square may assign any part or all its rights and delegate its duties
hereunder to any wholly-owned direct or indirect subsidiary of Wilmington Trust
Company, provided that (i) the delegate agrees with Rodney Square to comply with
all relevant provisions of the 1940 Act and applicable rules and regulations;
(ii) Rodney Square shall remain responsible for the performance of all its
duties under this Agreement; (iii) Rodney Square and such delegate shall
promptly provide such information as the Fund may request; and (iv) Rodney
Square shall respond to such questions as the Fund may ask, relative to the
delegation, including (without limitation) the capabilities of the delegate.
12. USE OF RODNEY SQUARE'S NAME. The Fund shall not use the name of Rodney
Square or any of its affiliates in any Registration Statement, sales literature
or other material relating to the Fund in a manner not approved prior thereto in
writing by Rodney Square; provided, however, that Rodney Square shall approve
all uses of its and its affiliates' names that merely refer in accurate terms to
their appointments hereunder or that are required by the SEC; and further
provided, that in no event shall such approval be unreasonably withheld.
13. USE OF FUND'S NAME. Neither Rodney Square nor any of its affiliates
shall use the name of the Fund or material relating to the Trust on any forms
(including any checks, bank drafts or bank statements) for other than internal
use in a manner not approved prior thereto by the Fund; provided, however, that
the Fund shall approve all uses of its name that merely refer in accurate terms
to the appointment of Rodney Square hereunder or that are required by the SEC;
and further provided, that in no event shall such approval be unreasonably
withheld.
14. CONFIDENTIALITY. Rodney Square agrees on behalf of itself, its
employees and affiliates to treat confidentially and as proprietary information
of the Fund all records and other information relative to the Fund and its
prior, present or potential shareholders, and not to use such records and
information for any purpose other than for the performance of its
responsibilities and duties hereunder, except, after prior notification to and
approval in writing by the Fund, which approval shall not be unreasonably
withheld (for example, where Rodney Square may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the Fund).
9
<PAGE>
15. EQUIPMENT FAILURE. In the event of equipment failures beyond Rodney
Square's control, Rodney Square shall, at no additional expense to the Fund,
take reasonable steps to minimize service interruptions, but shall have no
liability with respect thereto. Rodney Square shall enter into and shall
maintain in effect with appropriate parties one or more agreements making
reasonable provisions for emergency use of electronic data processing equipment
to the extent appropriate equipment is available.
16. RIGHT TO RECEIVE ADVICE.
a. ADVICE OF FUND. If Rodney Square shall be in doubt as to
any action to be taken or omitted by it, it may request, and shall receive
from the Fund Oral or Written Instructions where appropriate.
b. ADVICE OF COUNSEL. If Rodney Square shall be in doubt as to any
question of law involved in any action to be taken or omitted by Rodney Square
in the performance of its responsibilities pursuant to this Agreement, it may
request written advice from counsel of its own choosing (who may be the
regularly retained counsel for the Fund or Rodney Square or the in-house counsel
for Rodney Square, at the option of Rodney Square).
c. CONFLICTING ADVICE. In case of conflict between Oral and Written
Instructions received by Rodney Square pursuant to subsection (a) of this
section and written advice received by Rodney Square pursuant to subsection (b)
of this section, Rodney Square shall be entitled to rely on and follow the
advice received pursuant to the latter provision alone.
d. PROTECTION OF RODNEY SQUARE. Rodney Square shall be protected in
any action or inaction which it takes in reliance on any written advice or Oral
or Written Instructions received pursuant to subsections (a) or (b) of this
section. However, nothing in this section shall be construed as imposing upon
Rodney Square any obligation (i) to seek such written advice or Oral or Written
Instructions, or (ii) to act in accordance with such written advice or Oral or
Written Instructions when received, unless, under the terms of another provision
of this Agreement, the same is a condition to Rodney Square's properly taking or
omitting to take such action. Nothing in this subsection shall excuse Rodney
Square when an action or omission on the part of Rodney Square constitutes
willful misfeasance, bad faith, negligence or reckless disregard by Rodney
Square of its duties under this Agreement.
10
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17. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. Except as
otherwise provided herein, the Fund assumes full responsibility for ensuring
that the Fund complies with all applicable requirements of the Securities Act of
1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act, the CEA, and any laws, rules and
regulations of governmental authorities having jurisdiction over the Fund and
its business activities.
18. COMPENSATION. For the performance of its obligations under this
Agreement, the Fund shall pay Rodney Square in accordance with the fee
arrangements described in Schedule A attached hereto, as such schedule may be
amended from time to time.
The Fund shall reimburse Rodney Square for all reasonable out of
pocket expenses incurred by Rodney Square or its agents in the performance of
its obligations hereunder. Such reimbursement for expenses incurred in any
calendar month shall be made on or before the tenth day of the next succeeding
month.
19. INDEMNIFICATION.
a. The Fund agrees to indemnify and hold harmless Rodney Square, its
directors, officers, employees, agents and representatives from all taxes,
charges, expenses, assessments, claims and liabilities including, without
limitation, liabilities arising under the 1933 Act, the 1934 Act, or the 1940
Act and any applicable state or foreign securities laws, and amendments thereto
(the "Securities Laws"), and expenses, including without limitation reasonable
attorneys' fees and disbursements, arising directly or indirectly from any
action or omission to act which Rodney Square takes (i) at the request of or on
the direction of or in reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions, provided however, that neither Rodney Square nor any of
the foregoing persons shall be indemnified against any liability (or any
expenses incident to such liability) arising out of Rodney Square's or its
directors', officers' employees', agents' or representatives' own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
b. Rodney Square agrees to indemnify and hold harmless the Fund, its
directors, officers, employees, agents and representatives from all taxes,
charges, expenses, assessments, claims and liabilities, including without
limitation reasonable attorneys' fees and disbursements, arising directly or
11
<PAGE>
indirectly out of Rodney Square's or its directors', officers', employees',
agents' or representatives' own willful misfeasance, bad faith, negligence or
reckless disregard of its duties and obligations under this Agreement.
c. In order that the indemnification provisions contained in this
Section 19 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.
20. RESPONSIBILITY OF RODNEY SQUARE. Rodney Square shall be under no duty
to take any action on behalf of the Fund except as specifically set forth herein
or as may be specifically agreed to by Rodney Square in writing. In the
performance of its duties hereunder, Rodney Square shall be obligated to
exercise care and diligence and to act in good faith and to use its best efforts
within reasonable limits in performing services provided for under this
Agreement. Rodney Square shall be responsible for its own negligent failure to
perform its duties under this Agreement, but to the extent that duties,
obligations and responsibilities are not expressly set forth in this Agreement,
Rodney Square shall not be liable for any act or omission which does not
constitute willful misfeasance, bad faith or gross negligence on the part of
Rodney Square or reckless disregard by Rodney Square of such duties, obligations
and responsibilities. Without limiting the generality of the foregoing or of any
other provision of this Agreement, Rodney Square in connection with its duties
under this Agreement shall not be under any duty or obligation to inquire into
and shall not be liable for or in respect of (i) the validity or invalidity or
authority or lack thereof of any Oral or Written Instruction, notice or other
instrument which conforms to the applicable requirements of this Agreement, and
which Rodney Square reasonably believes to be genuine; or (ii) delays or errors
or loss of data occurring by reason of circumstances beyond Rodney Square's
control, including acts of civil or military authority, national emergencies,
labor difficulties, fire, mechanical breakdown, flood or catastrophe, acts of
God, insurrection, war, riots or failure of the mails, transportation,
communication or power supply, in which circumstances Rodney Square shall take
reasonable actions to minimize loss of data therefore.
21. DURATION, TERMINATION, ETC. The provisions of this Agreement may not
be changed, waived, discharged or terminated orally, but only by written
instrument that shall make specific reference to this Agreement and that shall
be signed by the party against which enforcement of such change, waiver,
discharge or termination is sought.
12
<PAGE>
This Agreement shall become effective as of the day and year first
written above, and unless terminated as hereinafter provided, shall continue in
force for three (3) years from the date of its execution and thereafter from
year to year. This Agreement may be terminated after the initial three (3) year
period on sixty (60) days' written notice given by the Fund to Rodney Square, or
by Rodney Square by six (6) months' written notice given by Rodney Square to the
Fund; provided, however, that this Agreement may be terminated immediately at
any time in the event of a material breach of any provision thereof either by
the Fund or by Rodney Square in the event that such breach shall have remained
unremedied for sixty (60) days or more after receipt of written specification of
such breach.
Upon the termination of this Agreement, the Fund shall pay to Rodney
Square such compensation as may be payable for the period prior to the effective
date of such termination, including reimbursement for any out-of-pocket expenses
reasonably incurred by Rodney Square to such date. In the event that the Fund
designates a successor to any of Rodney Square's obligations hereunder, Rodney
Square shall, at the expense and direction of the Fund, transfer to such
successor all relevant books, records and other data established or maintained
by Rodney Square under the foregoing provisions.
Upon the termination of this Agreement by the Fund within the
initial three (3) year term for any reason (including, without limitation,
liquidation or other cessation of operations of the Fund) other than Rodney
Square's uncured material breach of any provision thereof, the Fund shall
further pay to Rodney Square compensation, in the nature of a severance and
conversion fee, in accordance with the terms set forth in Schedule A attached
hereto, as such schedule may be amended from time to time.
22. AMENDMENTS. This Agreement or any part hereof may be changed or
waived only by an instrument in writing signed by the party against which
enforcement of such change or waiver is sought.
23. NOTICE. Any notice under this Agreement shall be given in
writing addressed and delivered or mailed, postage prepaid, to the other
party to this Agreement at its principal place of business.
24. SEVERABILITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
25. FURTHER ACTIONS. Each Party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the
purposes hereof.
13
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26. GOVERNING LAW. To the extent that state law has not been preempted by
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the law (without regard to law
as to conflicts of law) of the State of Delaware.
27. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding between the parties thereto, and supersedes all other matters
hereof, provided that the parties hereto may embody in one or more separate
documents their agreement, if any, with respect to Written and/or Oral
Instructions. 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. This Agreement shall be binding
and shall inure to the benefits of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties have caused this instrument to be signed
on their behalf by their respective officers thereunto duly authorized all as of
the date first written above.
THE MALLARD FUND, INC.
By: /s/ William S. Dietrich II, President
-------------------------------------
William S. Dietrich II, President
RODNEY SQUARE MANAGEMENT
CORPORATION
By: /s/ Martin L. Klopping
-----------------------------
Martin L. Klopping, President
14
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FUND ADMINISTRATION AND
ACCOUNTING SERVICES AGREEMENT
SCHEDULE A
THE MALLARD FUND, INC.
FEE SCHEDULE
For the services Rodney Square Management Corporation ("Rodney Square")
provides under the Fund Administration and Accounting Services Agreement
attached hereto, The Mallard Fund, Inc. (the "Fund") agrees to pay Rodney Square
the following annual fee for rendering fund administration and accounting
services:
FEE: A minimum fee of $80,000.00, plus
0.02% of the Fund's total assets in excess of $100
-
million.
The foregoing fee shall be payable no less frequently than quarterly, in
arrears, as soon as practicable after the last day of each quarter, based on the
Fund's total assets as determined for and at the close of business on the last
day of the quarter.
Out of pocket expenses shall be reimbursed by the Fund to Rodney Square or
paid directly by the Fund.
SEVERANCE AND CONVERSION FEE
In the event of termination of this Agreement by the Fund within the
initial three (3) year term thereof for any reason (including, without
limitation, liquidation or other cessation of operations of the Fund) other than
Rodney Square's uncured material breach of any provision thereof, the Fund shall
pay Rodney Square a fee in consideration of such severance and, if applicable,
Rodney Square's undertaking to cooperate with the Fund in effecting a conversion
to the Fund's successor service provider(s), in an amount equal to one-half of
the above-stated annual fee (with the asset-based portion thereof determined as
of the Fund's most recent total asset valuation date).
15
<PAGE>
FUND ADMINISTRATION AND
ACCOUNTING SERVICES AGREEMENT
SCHEDULE B
THE MALLARD FUND, INC.
AUTHORIZED PERSONS
The following persons have been duly authorized by the Board of Directors
to give Oral and Written Instructions on behalf of the Fund:
(Name) WILLIAM S. DIETRICH II
(Name) RICHARD F. BERDIK
(Name) JOHN J. KELLEY
(Name)
(Name)
(Name)
16
<PAGE>
FUND ADMINISTRATION AND
ACCOUNTING SERVICES AGREEMENT
SCHEDULE C
THE MALLARD FUND, INC.
FUND AGREEMENTS SCHEDULE
1. The Custodian Contract between the Fund and Mellon Bank, N.A.,
dated May 28, 1997.
2. The Fund's resolution appointing American Stock Transfer and
Trust Company as Transfer Agent dated June 27, 1997.
3. The Investment Consulting Agreement between the Fund, Cambridge
Associates, Inc. and Cambridge Capital Advisors, Inc. dated July
1, 1997.
17
Exhibit L
KIRKPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone (202) 778-9000
Facsimile (202) 778-9100
ARTHUR J. BROWN
(202) 778-9046
[email protected]
December 17, 1997
The Mallard Fund, Inc.
Rodney Square North
1100 N. Market Street
Wilmington, DE 19890
Dear Sir or Madam:
You have requested our opinion regarding certain matters in connection with
the issuance by The Mallard Fund, Inc. ("Fund") of shares of the Fund's common
stock. We have examined the Fund's Articles of Incorporation and other corporate
documents relating to the authorization and issuance of the common stock of the
Fund. Based upon this examination, we are of the opinion that:
1. All legal requirements for the organization of the Fund under the
laws of the State of Maryland have been satisfied, and the Fund is
now a validly existing corporation in good standing under the laws of
the State of Maryland.
2. The authorized capitalization of the Fund consists of 100,000,000
shares of common stock having a par value of $.001 each.
3. The issuance of shares of the Fund's common stock, which currently
are being registered under the Securities Act of 1933, has been duly
authorized by the Fund, subject to compliance with the Securities Act
of 1933 and the Investment Company Act of 1940.
4. When so issued, the Fund's shares will be legally issued, fully paid
and nonassessable.
We hereby consent to the filing of this opinion in connection with
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File
No. 333-26791), which you are about to file with the Securities and Exchange
Commission. We also consent to the reference to our firm under the caption
"Additional Information - Legal Matters" in the Registration Statement.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Arthur J. Brown by MRD
-----------------------------
Arthur J. Brown
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The Mallard Fund, Inc.:
We consent to the inclusion in the Pre-Effective Amendment No. 1 to the
Registration Statement of The Mallard Fund, Inc., (the "Fund"), on Form N-2
(File No. 333-26791) of our report dated December 5, 1997 on our audit of the
financial statement of the Fund as of May 30, 1997 which is included in the
Pre-Effective Amendment to the Registration Statement. We also consent to the
reference to our Firm under the captions "Additional Information" and "Financial
Statements" in the Prospectus.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 11, 1997
THE WILLIAM S. DIETRICH II
CHARITABLE REMAINDER UNITRUST
AND
THE WILLIAM S. DIETRICH II
CHARITABLE REMAINDER ANNUITY TRUST
To the Board of Directors of The Mallard Fund, Inc.:
The undersigned ("Trustee") hereby acknowledges receipt of the draft
registration statement of The Mallard Fund, Inc. ("Fund"). The Trustee
acknowledges that he has knowledge and experience in financial and business
matters and is capable of evaluating the merits and risks of this investment and
that he is familiar with and knowledgeable about the Fund.
The Trustee, on behalf of the William S. Dietrich II Charitable Remainder
Unitrust and the William S. Dietrich II Charitable Remainder Annuity Trust
(together, the "Trusts"), hereby subscribes to purchase a beneficial interest
("Interest") of the Fund in consideration for which the Trustee, on behalf of
the Trusts, agrees to transfer to you upon demand cash or securities in the
amount of at least One Hundred Thousand Dollars ($100,000.00).
The Trustee agrees that the beneficial interest is being purchased for
investment purposes only with no present intention of reselling said Interest.
Dated and effective this 19th day of May, 1997.
DIETRICH CHARITABLE REMAINDER UNITRUST
DIETRICH CHARITABLE REMAINDER ANNUITY TRUST
By: /s/ Thomas Marshall, Trustee
---------------------------------------
Thomas Marshall, Trustee
