As filed with the Securities and Exchange Commission on January 20, 1998
Securities Act File No. 333-26791
Investment Company Act File No. 811-7861
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM N-2
Registration Statement Under the Securities Act of 1933 /x/
Pre-Effective Amendment No. 2 /x/
Post-Effective Amendment No. / /
and
Registration Statement Under the Investment Company Act of 1940 /x/
Amendment No. 2 /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
-----------
Approximate date of proposed public offering: As soon as possible after
this Registration Statement becomes effective.
<TABLE>
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- ---------------------------------------- ------------------------------ -------------------------------- --------------------------
<S> <C> <C> <C>
Title of Securities Amount Proposed Maximum Aggregate Amount of
Being Registered Being Registered Offering Price Registration Fee
- ---------------------------------------- ------------------------------ -------------------------------- --------------------------
Common Stock, $.001 Par Value 1,825,000 Shares $39,639,000(1) $11,693.51(2)
- ---------------------------------------- ------------------------------ -------------------------------- --------------------------
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(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) Previously paid.
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.
================================================================================
<PAGE>
The Mallard Fund, Inc.
Form N-2 Cross Reference Sheet
<TABLE>
<CAPTION>
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>
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.
- --------------------------------------------------------------------------------
Price to Public (1) Sales Load Proceeds to Fund(2)
Per Share........... $ 21.72 None $21.72
Total............... $39,639,000 None $39,639,000
- --------------------------------------------------------------------------------
(footnotes on following page)
The date of this Prospectus is January 21, 1998.
<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.
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.
----------------
2
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary.............................................................4
Fund Expenses..................................................................9
The Fund..................................................................... 10
Use Of Proceeds...............................................................10
Investment Objective And Policies.............................................10
Investment Restrictions.......................................................13
Special Considerations And Risk Factors.......................................14
Purchase Of Shares............................................................18
Restrictions On Transferability...............................................19
Control Persons...............................................................19
Tender Offers.................................................................19
Liquidation...................................................................20
Management....................................................................21
Portfolio Transactions........................................................24
Dividends And Other Distributions.............................................25
Taxes.........................................................................25
Net Asset Value...............................................................28
Description Of Capital Stock..................................................28
Performance Information.......................................................29
Administrator, Transfer And Dividend Disbursing Agent, Custodian..............30
Additional Information........................................................30
Financial Statements..........................................................31
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
4
<PAGE>
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.
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
5
<PAGE>
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 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
6
<PAGE>
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 in private investment
companies and may enter into commitments to
make future investments in private
investment companies, provided, however,
that at the time of each investment or
commitment, the Fund does not have more than
65% of its total assets invested in or
committed to private investment companies.
In addition, the Fund may invest up to 10%
of its total assets in any one private
investment company and also may invest up to
10% of its total assets in other collective
investment funds. See "Investment Objective
and Policies."
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 80% and 20% 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
7
<PAGE>
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."
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 Ten Years
$3 $11 $19 $43
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.
<PAGE>
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
10
<PAGE>
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
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 in Underlying Private Funds that are organized as
hedge funds ("Underlying Hedge Funds") and Underlying Private Funds that are
organized as private equity or venture capital funds ("Underlying Private Equity
Funds") and may enter into commitments to make future investments in Underlying
Private Funds, provided, however, that at the time of each investment or
commitment, the Fund does not have more than 65% of its total assets invested in
or committed to investments in Underlying Private Funds. Generally, at any one
time, the Fund will not have more than 50% of its total assets invested in
Underlying Private Funds. However, the Fund could have 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 Fund
at a point in time when the Fund already had 50% of its total assets invested in
Underlying Private Funds. In addition, the Fund may invest up to 10% of its
total assets in any one Underlying Private Fund and 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
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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
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
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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).
(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.
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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 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
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<PAGE>
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
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
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<PAGE>
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
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
Underlying Collective Funds generally are not readily marketable and may be
17
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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.
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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.
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 80% and 20% 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
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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
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.
20
<PAGE>
The liquidation of the Fund may take longer than would be the case for
a fund that held more liquid investments. As discussed under "Investment
Objective and Policies," the Fund may invest, and make commitments to invest up
to 65% of its total assets in Underlying Private Funds, which generally are
considered illiquid securities. Moreover, the Fund's commitments to invest in
Underlying Private Funds may extend over several years. Thus, once a decision is
made to liquidate the Fund, initially, the Fund may be only partially liquidated
or the Fund may be liquidated in stages. As a result, a complete liquidation of
the Fund may take longer than for other investment companies.
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. Since January 1998, Mr. Dietrich has been Chairman of the Board of
Directors of Dietrich Industries, Inc. From 1967 until January 1998, Mr.
Dietrich was President and a Director of Dietrich Industries, Inc. As Chairman,
Mr. Dietrich is responsible for managing all aspects of 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.
<TABLE>
<CAPTION>
Position(s) with Principal Occupation(s)
Name, Address, and Age Registrant During Past 5 Years
---------------------- ---------------- ---------------------
<S> <C> <C>
William S. Dietrich II*, 59 Director and President Chairman of the Board, Dietrich
Industries, Inc. since January 1998;
Director and President, Dietrich
Industries, Inc., 1967 to 1998;
Director, Worthington Industries Inc.;
Director, Carpenter Technologies Corp.
Jennings R. Lambeth#, 77 Director Business Consultant - Self-employed;
2 Gateway Center, Suite 680 Director, J&L Specialty Steel, Inc.
Pittsburgh, Pennsylvania 15222
Evans Rose, Jr.#, 65 Director Lawyer, Cohen & Grigsby, P.C.
2900 CNG Tower
Pittsburgh, Pennsylvania 15222
Richard F. Berdik, 53 Secretary and Treasurer President, Dietrich Industries, Inc.
since January 1998; Treasurer, Dietrich
Industries, Inc., 1996 to 1998; until
December 1995, Mr. Berdik was Chief
Financial Officer of Dietrich
Industries, Inc.
</TABLE>
* 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:
<TABLE>
<CAPTION>
Capacity in Which Aggregate
Compensation Compensation Total Compensation
Name of Person Was Received From Fund From Fund(1)
-------------- ------------------- ----------------- ---------------
<S> <C> <C> <C>
William S. Dietrich II Director -0- -0-
Jennings R. Lambeth Director $5,000 $5,000
Evans Rose, Jr. Director $5,000 $5,000
</TABLE>
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.
(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.
23
<PAGE>
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
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.
24
<PAGE>
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 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
25
<PAGE>
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.
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
26
<PAGE>
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
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
27
<PAGE>
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.
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
28
<PAGE>
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
December 31, 1997.
<TABLE>
<CAPTION>
Amount Outstanding
Amount Held by Exclusive of
Registrant or Amount Held by Registrant or
Title of Class Amount Authorized for its Account for its Account
-------------- ----------------- --------------- ---------------
<S> <C> <C> <C>
Common stock...... 100,000,000 - 8,312,636
</TABLE>
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.
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
29
<PAGE>
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.
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.
30
<PAGE>
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.
31
<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
<PAGE>
THE MALLARD FUND, INC.
Schedule of Investments/May 30, 1997
(Showing Percentage of Total Value of Net Assets)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Value
Shares (Note 3)
MUTUAL FUNDS - 83.6% ------ --------
<S> <C> <C>
American Funds - EuroPacific Growth Fund2 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 Portfolio2 1,228,851 21,455,739
T. Rowe Price Institutional Funds - Foreign Equity Fund2 882,002 15,214,529
Templeton Institutional Emerging Markets Fund2 2,109,576 30,251,326
-----------
TOTAL MUTUAL FUNDS (Cost $115,728,732) 115,728,732
-----------
LIMITED PARTNERSHIPS - 15.0%
Bulldog Capital Partners Limited Partnership3,4 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 Partners3,4 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-Limited3,4,5
(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
-----------
- -------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
The Mallard Fund, Inc.
Statement of Assets and Liabilities
as of 5/30/97
<TABLE>
<CAPTION>
<S> <C>
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 DIVIDED BY 6,927,197 shares of common stock) $20.00
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
The Mallard Fund, Inc.
Notes to Financial Statements - concluded
May 30, 1997
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
report 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,
those estimated values may differ significantly from the values that would
<PAGE>
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 5,524,481.82 (79.75%) and
1,402,714.80 (20.25%), 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>
<CAPTION>
Security Number of Acquisition Fair Value Value Percentage of
-------- Shares Dates at 05/30/97 Per Share Net Assets
--------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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.
<PAGE>
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
A-1
<PAGE>
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.
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
A-2
<PAGE>
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
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.
A-3
<PAGE>
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.
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
A-4
<PAGE>
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
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
A-5
<PAGE>
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
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
A-6
<PAGE>
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,
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
A-7
<PAGE>
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.
A-8
<PAGE>
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
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.
A-9
<PAGE>
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,
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
A-10
<PAGE>
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.
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-11
<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. Instruments defining the rights of holders of
Registrant's shares of beneficial interest.2
e. None.
f. None.
g. Consulting Contract.3
h. Underwriting Agreement.3
i. None.
j. Custodian Agreement.3
k. Administration Agreement.3
l. Opinion and Consent of Counsel.3
m. None.
n. Consent of Independent Auditors - Filed herewith.
o. None.
p. Letter of Investment Intent.3
q. None.
r. Financial Data Schedule.3
Item 25. Marketing Arrangements
Inapplicable.
- --------------------
1 Incorporated by reference to Registrant's Registration Statement on Form N-2
filed under the Securities Act of 1933 (File No. 333-26791) on May 9, 1997.
2 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.
3 Incorporated by reference to Registrant's Registration Statement on Form N-2
filed under the Securities Act of 1933 and Investment Company Act of 1940 (File
Nos. 333-26791, 811-7861) on December 17, 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 December 31, 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 19th day of January, 1998.
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 19th day of January, 1998.
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, II,
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> <C> <C> <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. Instruments defining the rights of holders of Registrant's shares
of beneficial interest.2
e. None.
f. None.
g. Consulting Contract.3
h. Underwriting Agreement.3
i. None.
j. Custodian Agreement.3
k. Administration Agreement.3
l. Opinion and Consent of Counsel.3
m. None.
n. Consent of Independent Auditors - Filed herewith.
o. None.
p. Letter of Investment Intent.3
q. None.
r. Financial Data Schedule .3
1 Incorporated by reference to Registrant's Registration Statement on Form N-2
filed under the Securities Act of 1933 (File No. 333-26791) on May 9, 1997.
2 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.
3 Incorporated by reference to Registrant's Registration Statement on Form N-2
filed under the Securities Act of 1933 and Investment Company Act of 1940 (File
Nos. 333-26791, 811-7861) on December 17, 1997.
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. 2 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
January 16, 1998
