AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 2000
SECURITIES ACT FILE NO. 333-__________
INVESTMENT COMPANY ACT FILE NO. 811-7861
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-2
(Check Appropriate Box or Boxes)
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / PRE-EFFECTIVE AMENDMENT NO.
/ / POST-EFFECTIVE AMENDMENT NO.
AND
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/ AMENDMENT NO. 3
----------------------
THE MALLARD FUND, INC.
(Exact name of Registrant as specified in charter)
500 Grant Street
Suite 2226
Pittsburgh, PA 15219
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (412) 281-2805
Richard F. Berdik
Secretary and Treasurer
The Mallard Fund, Inc.
500 Grant Street
Suite 2226
Pittsburgh, PA 15219
(Name and address of agent for service)
Copies to:
Arthur J. Brown, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N. W.
Washington, D. C. 20036
Approximate date of proposed public offering: As soon as practicable after this
Registration Statement becomes effective.
It is proposed that this filing will become effective (check appropriate box):
/X/ when declared effective pursuant to Section 8(c)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
---------------------------------------------------------------------------------------------------------------------------------
Title of Securities Amount Proposed Maximum Proposed Maximum Amount of
Being Registered Being Registered Offering Price Per Unit Aggregate Offering Registration Fee
------------------------------------- --------------------- ------------------------ ------------------------ -------------------
<S> <C> <C> <C> <C>
Common stock, $.001 par value $10,000,000.00 $2,640.00
------------------------------------- --------------------- ------------------------ ------------------------ -------------------
</TABLE>
<PAGE>
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>
<TABLE>
<CAPTION>
THE MALLARD FUND, INC.
Form N-2 Cross Reference Sheet
ITEM NO. 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. Cover Pages; Other Offering Information Outside Front Cover and Inside Front Cover
Pages of Prospectus; Prospectus Summary
3. Fee Table and Synopsis Fund Expenses
4. Financial Highlights Financial Highlights
5. Plan of Distribution Outside Front Cover of Prospectus;
Prospectus Summary; Purchase of Shares
6. Selling Shareholders Not applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant The Fund; Investment Objective and
Policies; Investment Restrictions;
Special Considerations and Risk Factors;
Description f Capital Stock
9. Management Management; Administrator, Transfer and
Dividend Disbursing Agent, Custodian
10. Capital Stock, Long-Term Debt and
Other Securities Description of Capital Stock, Purchase of
Shares, Special Considerations and Risk
Factors, Liquidation, Dividends and Other
Distributions, Taxes
11. Defaults and Arrears on Senior Securities Not applicable
12. Legal Proceedings Not applicable
13. Table of Contents of the Statement of Additional Not applicable
Information
14. Cover Page Not applicable
15. Table of Contents Not applicable
16. General Information and History Not applicable
17. Investment Objective and Policies Investment Objective and Policies;
Investment Restrictions; Special
Considerations and Risk Factors; Portfolio
Transactions
18. Management Management; Administrator, Transfer and
Dividend Disbursing Agent, Custodian
19. Control Persons and Principal Holders of
Securities Prospectus Summary; Management
20. Investment Advisory and Other Services Management; Administrator, Transfer and
Dividend Disbursing Agent, Custodian
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 INFORMATION IS THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[500,000] Shares
The Mallard Fund, Inc.
Common Stock
----------------
The Mallard Fund, Inc. (the "Fund") is a 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, private venture capital 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.
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 March 31, 2001, 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 [$2,000,000]. 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. (See "Liquidity")
(CONTINUED ON FOLLOWING PAGE)
----------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER THE
INFORMATION IN THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
PRICE TO PUBLIC (1) SALES LOAD PROCEEDS TO FUND(2)
--------------- ----------- ----------------
<S> <C> <C> <C>
Per Share........................................... $[21.77] None $[____]
Total............................................... $[10,885,000] None $[________]
-------------------------------------------------------------------------------------------------------------------------
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
The date of this Prospectus is [________], 2000.
<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 has been filed with the
Securities and Exchange Commission and may be obtained by writing to the Fund or
Mellon Financial Markets, LLC at One Mellon Center, 4th Floor, Pittsburgh, PA
15258 or by calling (412) 234-7142.
Since the Fund's stock will not be readily marketable and should 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, 2003, 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 your investment. The leverage
used 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, 2000. 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 $[------]).
----------------
[GRAPHIC OMITTED] MELLON
--------------------------------------
2
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.............................................................4
Fund Expenses..................................................................8
The Fund ....................................................................10
Use Of Proceeds...............................................................10
Investment Objective And Policies.............................................10
Investment Restrictions.......................................................13
Special Considerations And Risk Factors.......................................13
Purchase Of Shares............................................................20
Tender Offers.................................................................20
Liquidation...................................................................21
Management ...................................................................22
Portfolio Transactions........................................................24
Dividends And Other Distributions.............................................25
Taxes.........................................................................25
Net Asset Value...............................................................27
Description Of Capital Stock..................................................28
Performance Information.......................................................29
Administrator, Transfer And Dividend Disbursing Agent, Custodian..............30
Additional Information........................................................30
Financial Statements..........................................................30
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 non-diversified, closed-end
management investment company organized in
1997. See "The Fund."
The Offering . . . . . . . . Mellon Financial Markets, LLC (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 March 31, 2001, unless extended. 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.
[Immediately] after the Fund determines its
net asset value, the subscriptions will be
payable and the shares will be issued. The
offering will be made on a "best efforts"
basis.
The minimum initial purchase during the
subscription period is [$2,000,000]. 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 [500,000]. 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, private venture capital 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.
The Fund currently is invested primarily in
private venture capital and public and private
investment pools that invest in emerging
markets and U.S. equities.
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
--------------------------------------
4
<PAGE>
making decisions to buy, sell, or hold a
particular security subject to the oversight
of the Board of Directors. The Fund invests in
various pooled investment vehicles all, or
almost all, of which have investment advisers
which, in turn, provide portfolio management
for those vehicles.
Administrator and
Custodian . . . . . . . . . Arthur Andersen LLP ("Arthur Andersen")
provides administrative and accounting
services to the Fund necessary for the Fund's
operations. 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 an amount that on an annual basis is
equal to approximately [__]% 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 gain and income
distributions. If, for any calendar year, the
total distributions required by the __%
pay-out policy exceed the Fund's net
investment income and net realized capital
gains, which normally is expected to be the
case, the excess generally will be treated as
a tax-free return of capital, reducing a
shareholder's adjusted basis in its shares.
See "Taxes."
Tender Offers and
Liquidation . . . . . . . . The Board of Directors will consider, on an
annual basis, the possibility of making tender
offers (each a "Tender Offer") to repurchase
all of the shares of the Fund at a price equal
to the net asset value per share. Any Tender
Offer will be on an "all or none" basis. The
Board of Directors, however, is under no
obligation to authorize the making of a Tender
Offer and no assurance can be given that in
any particular year a Tender Offer will be
made. See "Tender Offers." If the Board of
Directors does not commence a Tender Offer by
December 31, 2003, 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 . . . . . LIQUIDITY OF FUND. The Fund's stock is not
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. Moreover, while the Board
will consider making a tender offer for shares
at least annually, as noted above, it is not
required to make any offerings. 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 concentrates 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
--------------------------------------
5
<PAGE>
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, among other
things, on its ability to allocate
successfully its assets among different asset
categories and to select and monitor portfolio
investment vehicles within each specified
category. Specifically, the Fund selects from
a broad range of asset categories, including
speculative equity securities vehicles, such
as emerging markets funds, venture capital
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 depends on the
ability of the advisers and managers of the
pooled investment vehicles to achieve their
objective. There can be no assurance that the
investment objective of the Fund, or of any of
the pooled investment vehicles in which it
invests, will be achieved.
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.
Interests in other pooled investment vehicles,
such as private investment companies,
generally are not redeemable by the holder and
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."
LEVERAGE. The Fund has borrowed, and may
borrow additional, 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." To the extent
costs of borrowing, including interest,
associated therewith 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.
--------------------------------------
6
<PAGE>
Leverage creates certain other 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."
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 invests in
private investment companies and enters 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 75% of its total assets invested in, and
does not have more than 100% 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. See
"Investment Objective and Policies."
NON-DIVERSIFIED STATUS. The Fund is registered
as a "non-diversified" investment company so
that it is 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 "diversified" fund to any single
economic, political or regulatory occurrence.
Control Persons . . . . . . The William S. Dietrich II Charitable
Remainder Annuity Trust (the "Dietrich CRAT"),
the William S. Dietrich II Charitable
Remainder Unit Trust (the "Dietrich CRUT") and
the William S. Dietrich II Charitable
Remainder Unit Trust II (the "Dietrich CRUT
II") own approximately 84%, 15% and 1% 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
well over 50% of the shares of the Fund. As a
result of this stock ownership, the Dietrich
CRAT would be deemed to control the Fund
within the meaning of Section 2(a)(9) of the
Investment Company Act of 1940 ("1940 Act").
Because of its ownership, the Dietrich CRAT
will be able to vote on and control all
matters relating to the management and
policies of the Fund, such as the election of
directors and any changes in the Fund's
fundamental investment restrictions. William
S. Dietrich II, president of the Fund, is the
sole trustee of each and therefore indirectly
controls the Fund and will continue to do so
following the offering. See "Control Persons."
--------------------------------------
7
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in
understanding the various costs and expenses that an investor in the Fund will
bear, directly or indirectly.
STOCKHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price)(1)....................None
Dividend reinvestment fees ..........................................None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS)
Other expenses(2)....................................................0.39%
Total annual operating expenses......................................0.39%
====
(1) No sales load or commission will be payable in connection with this offer.
(2) "Other expenses" are based on expenses incurred during the Fund's most
recent Fiscal Year ended March 31, 2000 and include director compensation,
administrative, custodial, transfer agency, legal, audit, and other
miscellaneous Fund expenses. Effective [September 1, 2000], no investment
consulting fees were paid by the Fund.
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
-------- ----------- ---------- ---------
$4 $13 $22 $49
This example assumes that the percentage amounts listed under total
annual operating expenses remain the same in the years shown. The above tables
and the assumption in the example of a 5% annual return and reinvestment at net
asset value are required by regulation of the Securities and Exchange Commission
applicable to all closed-end investment companies; the assumed 5% annual return
is not a prediction of, and does not represent, the projected or actual
performance of the stock. Actual expenses and annual rates of return may be more
or less than those assumed for purposes of the example.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND
THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
--------------------------------------
8
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED)
For a share outstanding throughout each period.
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEAR FOR THE YEAR FOR THE PERIOD
APRIL 1, 2000 TO APRIL 1, 1999 TO APRIL 1, 1998 TO MAY 30, 1997# TO
SEPTEMBER 30, 2000 MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET ASSET VALUE- BEGINNING OF PERIOD $22.70 $11.52 $16.75 $19.97**
-------------------------------------------------------------------------
INVESTMENT OPERATIONS:
Net investment income 1.35 0.44 0.09 0.97
Net realized and unrealized gain on investments (2.28) 13.54 (2.55) (0.59)
-------------------------------------------------------------------------
Total from investment operations (0.93) 13.98 (2.46) 0.38
-------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income 0.00 (0.44) (0.09) (0.97)
In excess of net investment income 0.00 (2.36) (2.68) (0.05)
In excess of realized gain 0.00 0.00 0.00 (0.54)
Return of capital 0.00 0.00 0.00 (2.04)
-------------------------------------------------------------------------
Total Distributions 0.00 (2.80) (2.77) (3.60)
-------------------------------------------------------------------------
NET ASSET VALUE- END OF PERIOD $21.77 $22.70 $11.52 $16.75
======= ======= ====== ======
TOTAL RETURN (a) (4.10%) 148.39% (12.18%) 0.85%(b)
RATIOS (TO AVERAGE NET ASSETS)/ SUPPLEMENTAL INFORMATION
Expenses (excluding interest) 0.08% 0.25% 0.58% 1.06%*
Expenses (including interest) 0.31% 0.81% 1.23% 1.95%*
Net Investment Income 1.32% 3.10% 0.66% 5.05%*
Portfolio Turnover Rate 5.82% 64.92% 26.98% 28.87%
Net Assets at end of period (000 omitted) $259,625 $269,817 $116,820 $139,236
Number of shares outstanding at end of period 11,926,553 11,883,910 10,140,988 8,312,636
Amount of bank loans outstanding at end
of the period (000 omitted) $15,709 $15,582 $10,109 $24,170
Average amount of bank loans outstanding
during the period (000 omitted) $18,085 $15,108 $13,699 $17,713
Amount of maximum month end bank loans
during the period (000 omitted) $21,966 $22,098 $24,745 $24,170
Average amount of bank loans per share during the period $1.52 $1.41 $1.35 $2.13
Weighted average interest rate of bank loans
during the period 6.89% 5.74% 5.69% 6.04%
</TABLE>
* Annualized
** Initial public offering price of $20.00 per share less offering expenses
of $0.03 per share.
*** Total return affected by asset donation. (See note 7) # Commencement of
perations.
# Commencement of Operations
(a) Based on per share net asset value. Per share market price is not readily
determinable since fund shares are not currently sold to the public. Total
return assumes reinvestment of dividends at the most recent quarterly net
asset value and does not reflect brokerage commissions or initial
underwriting discounts.
(b) Total investment return has not been annualized.
--------------------------------------
9
<PAGE>
THE FUND
The Fund is a 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 a secondary offering of
shares of common stock. The Fund's principal office is located at 500 Grant
Street, Suite 2226, Pittsburgh, Pennsylvania 15219, and its telephone number is
(412) 281-2805.
USE OF PROCEEDS
The net proceeds of the offering, assuming all shares offered hereby
are sold are expected to be $[___________] after deducting offering expenses
payable by the Fund of approximately $[_______]. The Fund will invest the net
proceeds in accordance with the Fund's investment objective and policies as soon
as reasonably practicable 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 and
private venture capital 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
predominantly 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. The Chief Investment Officer
selects investments for the fund by regularly reviewing opportunities in the
open-end and closed-end fund markets. He also meets with the management of
potential investment opportunities, attends annual meetings of funds in which
the Fund invests, or is considering investing, and receives information from
--------------------------------------
10
<PAGE>
third parties regarding capital markets, special investments of all kinds and
other investment and financial products. The Chief Investment Officer determines
the asset allocation best able to meet the Fund's objective and then chooses the
investment opportunities most consistent with that allocation.
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 overweighs
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 Fund is not restricted 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 Venture
Capital 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 75% of its total assets invested
in, and does not have more than 100% 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. The Fund may invest up to 10%
of its total assets in Underlying Collective Funds. These percentage limitations
are applied at the time a transaction is effected and are subject to change by
the Board of Directors.
Pending investment, for temporary defensive purposes, or for other
purposes such as to pay distributions, the Fund may hold up to 100% of its
assets in cash and/or U.S. Government securities and other money market
instruments, including money market funds. To the extent the Fund employs a
temporary defensive strategy, it will not be invested so as to achieve directly
its investment objective. The Fund may invest up to 15% of its total assets
directly in equity and debt securities other than cash and money market
instruments.
--------------------------------------
11
<PAGE>
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, 2000, the Fund had
outstanding borrowings of $15,708,732 from the line of credit at an annualized
average interest rate of 6.89%. See "Special Considerations and Risk Factors --
Leverage."
SECURITIES LENDING. The Fund may from time to time lend securities
from its portfolio with a value not exceeding 33-1/3% of its total assets to
banks, brokers and other financial institutions and receive collateral in cash
or securities issued or guaranteed by the United States Government. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. This limitation is a
fundamental policy, and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If cash
collateral is received by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of such investment is
retained by the Fund. Alternatively, if securities are delivered to the Fund as
collateral, the Fund and the borrower negotiate a rate for the loaned premium to
be received by the Fund for lending its portfolio securities. In either event,
the total yield on the Fund is increased by loans of its securities. The Fund
will have the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans. In the event that the borrower defaults on its
obligation to return borrowed securities, because of insolvency or otherwise,
the Fund could experience delays and costs in gaining access to the collateral
and could suffer a loss to the extent that the value of the collateral falls
below the market value of the borrowed securities. The Fund has no present
intention of lending its portfolio securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with respect to its permitted investments but currently intends to do so only
with member banks of the Federal Reserve System or with primary dealers in U.S.
Government securities. Under a repurchase agreement, the Fund buys a security at
one price and simultaneously promises to sell the same security back to the
seller at a higher price. The Fund's repurchase agreements will provide that the
value of the collateral underlying the repurchase agreement will always be at
least equal to the repurchase price, including any accrued interest earned on
the repurchase agreement, and will be marked to market daily. The repurchase
date usually is within seven days of the original purchase date. Repurchase
agreements are deemed to be loans under the 1940 Act. In all cases, the Board of
Directors must be satisfied with the creditworthiness of the other party to the
agreement before entering into a repurchase agreement. In the event of the
bankruptcy (or other insolvency proceeding) of the other party to a repurchase
agreement, the Fund might experience delays in recovering its cash. To the
extent that, in the meantime, the value of the securities the Fund purchases may
have declined, the Fund could experience a loss. The Fund has no present
intention of entering into repurchase agreements.
--------------------------------------
12
<PAGE>
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.
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 consist of the administrative fees and operational costs
of the Fund.
--------------------------------------
13
<PAGE>
The Fund concentrates its investments in the shares of open-end and
closed-end investment companies, venture capital funds, 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."
RISK OF UNDERLYING FUNDS. 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
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.
--------------------------------------
14
<PAGE>
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 VENTURE CAPITAL FUNDS. Investing in Underlying
Venture Capital Funds involves risks related to directly investing in venture
capital companies, as well as other risks. Underlying Venture Capital Funds will
not be registered as investment companies under the 1940 Act and, therefore, the
Fund will not be able to avail itself of the protections of the 1940 Act with
respect to the Underlying Venture Capital Funds. Although the Fund will receive
information from each Underlying Venture Capital Fund regarding its historical
performance and investment strategy, in most cases the Fund has little or no
means of independently verifying this information. The Underlying Venture
Capital Fund's manager may use proprietary investment strategies that are not
fully disclosed to the Fund, which may involve risks under some market
conditions that are not anticipated by the Fund.
Venture capital companies represent highly speculative investments.
Venture capital companies' concepts generally are unproven, the companies have
little or no track record, and the prospect of an initial public offering is
highly contingent upon factors that are often not in the companies' control. In
addition, venture capital companies tend to rely even more heavily on the
abilities of their key personnel than more mature companies do. The loss of one
or a few key managers can substantially hinder or delay a venture capital
company's implementation of its business plan. In addition, venture capital
companies may not be able to attract and retain qualified managers and
personnel.
An Underlying Venture Capital Fund's ability to realize value from an
investment in a venture capital company is to a large degree dependent upon the
successful completion of the company's IPO or the sale of the venture capital
company to another company, which may not occur for a period of several years
after the date of the fund's investment, if ever. There can be no assurance that
any of the venture capital companies in which such funds invests will complete
public offerings or be sold, or, if such events occur, as to the timing and
values of such offerings or sales. Underlying Venture Capital Funds may also
lose all or part of their investment if these companies fail or their product
lines fail to achieve an adequate level of market recognition or acceptance.
Venture capital companies that have already received funding from
other sources may involve special risks, and the economic terms that an
Underlying Venture Capital Fund obtains from them may be less favorable than if
the fund had invested earlier. For example, preferred stock acquired in later
rounds of financing may have less favorable conversion ratios than preferred
--------------------------------------
15
<PAGE>
stock issued to earlier investors. A lower ratio will tend to reduce the
Underlying Venture Capital Fund's economic interest upon completion of an IPO.
Depending on the specific facts and the circumstances of a venture
capital investment, there may not be a reasonable basis to revalue it for a
substantial period of time after an Underlying Venture Capital Fund's
investment. If a venture capital company does not complete an IPO or a sale to
or merger with a public company, there may never be a public market benchmark
for valuing the investment and it may be very difficult for the Underlying
Venture Capital Fund to dispose of its investment, or it may be possible to
dispose of the investment only at a substantial loss.
In addition to the general venture capital risks noted above,
investing in Underlying Venture Capital Funds presents additional risk. The Fund
must rely upon the judgment of the general partner or other manager of an
Underlying Venture Capital Fund in selecting the companies in which the
Underlying Venture Capital Fund invests and in deciding when to sell its
investments. An Underlying Venture Capital Fund may employ a high degree of
leverage, which can magnify any losses incurred by its investors, including the
Fund. An Underlying Venture Capital Fund will also require the Fund to pay
management fees and/or performance fees or allocations to its general partner or
manager, which reduce the return to investors, including the Fund and its
shareholders. These fees are in addition to the management fee and incentive fee
paid by the Fund. An Underlying Venture Capital Fund may also incur certain
costs associated with the evaluation of venture capital investments, including
fees of outside legal counsel, which may reduce the Fund's return. Investments
in Underlying Venture Capital Funds may be highly illiquid. The Fund may not be
able to dispose of an Underlying Venture Capital Fund holding when it wishes to,
or may be able to do so only at a substantial loss.
RISK OF UNDERLYING HEDGE FUNDS. Underlying Hedge Funds involve
special risks. Underlying Hedge Funds will not be registered as investment
companies under the 1940 Act and, therefore, the Fund will not be able to avail
itself of the protections of the 1940 Act with respect to the Underlying Hedge
Funds. Although the Fund will receive information from each Underlying Hedge
Fund regarding its historical performance and investment strategy, in most cases
the Fund has little or no means of independently verifying this information. The
Underlying Hedge Fund's manager may use proprietary investment strategies that
are not fully disclosed to the Fund, which may involve risks under some market
conditions that are not anticipated by the Fund.
Some or all of the Underlying Hedge Funds may make margin purchases
of securities. This practice is known as leverage. Trading equity securities on
margin involves an initial cash requirement representing at least 50% of the
underlying security's value with respect to transactions in U.S. markets and
varying (typically lower) percentages with respect to transactions in foreign
markets. Borrowings to purchase equity securities typically will be secured by
the pledge of those securities. The financing of securities purchases may also
be effected through reverse repurchase agreements with banks, brokers and other
financial institutions.
Although leverage will increase investment return if an Underlying
Hedge Fund earns a greater return on the investments purchased with borrowed
funds than it pays for the use of those funds, the use of leverage will decrease
investment return if an Underlying Hedge Fund fails to earn as much on
investments purchased with borrowed funds as it pays for the use of those funds.
The use of leverage will therefore magnify the volatility of changes in the
value of the Company's investments in Underlying Hedge Funds. In the event that
an Underlying Hedge Fund's equity or debt instruments decline in value, the
Underlying Hedge Fund could be subject to a "margin call" or "collateral call,"
pursuant to which the Underlying Hedge Fund must either deposit additional
collateral with the lender or suffer mandatory liquidation of the pledged
securities to compensate for the decline in value. In the event of a sudden,
precipitous drop in value of an Underlying Hedge Fund's assets, the Underlying
Hedge Fund might not be able to liquidate assets quickly enough to pay off its
--------------------------------------
16
<PAGE>
borrowing. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by return on the securities purchased. The
Underlying Hedge Fund also may be required to maintain minimum average balances
in connection with its borrowings or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the cost
of borrowing over the stated interest rate.
As further noted below, the 1940 Act requires an investment company
to satisfy an asset coverage requirement of 300% of its indebtedness, including
amounts borrowed, measured at the time the investment company incurs the
indebtedness (the "Asset Coverage Requirement"). This means that the value of
the investment company's total indebtedness may not exceed one-third the value
of its total assets (including such indebtedness). These limits do not apply to
the Underlying Hedge Funds and, therefore, the Fund's portfolio may be exposed
to the risk of highly leveraged investment programs of certain Underlying Hedge
Funds and the volatility of the value of Interests may be great.
In order to obtain "leveraged" market exposure in certain investments
and to increase overall returns, an Underlying Hedge Fund may purchase options
and other synthetic instruments that may involve significant economic leverage
and therefore may, in some cases, involve significant risks of loss.
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
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.
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
--------------------------------------
17
<PAGE>
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 borrows, depends on many factors, the most important of which are
investment outlook, capital commitments it has made, 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.
--------------------------------------
18
<PAGE>
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.
EMERGING MARKETS RISK. The Underlying Funds may invest in a variety
of types of securities with their own risks. Underlying Funds may invest in
securities of foreign, and particularly emerging market issuers. Investing in
emerging markets securities involves particular risks. The value of emerging
market securities may fall due to adverse political, social and economic
developments abroad, and due to decreases in foreign currency values relative to
the U.S. dollar. In addition, there are differences between U.S. and foreign
regulatory requirements and market practices.
ILLIQUID SECURITIES. The Fund has no limitation on the amount of its
assets that may be invested in investments that 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
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."
LIMITED SECONDARY MARKET. 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 is 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.
RELIANCE ON KEY PERSONNEL. The Fund's President and Chief Investment
Officer, William S. Dietrich, II, is the sole person responsible for
identifying, investing in, and monitoring attractive opportunities for the Fund.
If Mr. Dietrich were unable to continue in this capacity, the Fund may not be
able to hire a qualified replacement, or may require an extended time to do so.
This could prevent the Fund from achieving its investment objective.
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 OF FUND. The William S. Dietrich II Charitable Remainder
Annuity Trust (the "Dietrich CRAT"), the William S. Dietrich II Charitable
Remainder Unit Trust (the "Dietrich CRUT") and the William S. Dietrich II
Charitable Remainder Unit Trust II (the "Dietrich CRUT II") own approximately
84%, 15% and 1% 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
--------------------------------------
19
<PAGE>
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 regardless of the voting power of any investors who purchase in
this offering. The trustee of the Dietrich CRAT, the Dietrich CRUT and the
Dietrich CRUT II is William S. Dietrich II. The address of the Dietrich CRAT,
the Dietrich CRUT and the Dietrich CRUT II is 500 Grant Street, Suite 2226,
Pittsburgh, PA 15219-2502.
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 March 31, 2001, 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 [$2,000,000]. The Fund will
not accept monies for subscriptions prior to the close of the offering period.
BEST EFFORTS UNDERWRITING. Mellon Financial Markets, LLC (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 until [March
31, 2001]. The subscription period may be extended for up to an additional 30
days upon agreement between the Fund and the Underwriter. The Fund or the
Underwriter may terminate the subscription offering 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
[________], 2000 ("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.
TENDER OFFERS
No market presently exists for the Fund's shares and it is not
currently expected that a secondary market will develop. Since it is not
expected that any secondary market for the Fund's shares will develop, the Fund
may take actions to provide liquidity to stockholders. The Board of Directors
will consider annually 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 determines 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 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
--------------------------------------
20
<PAGE>
liquidate all or a portion of these interests. Because a large portion of the
Fund's portfolio is illiquid, the Fund may be unable to complete a Tender Offer
if more than 50% of its shares are tendered.
As noted above, the Fund expects that ordinarily there will be no
secondary market for the Fund's stock. Nevertheless, if a secondary market
develops for the stock of the Fund, the market price of the shares may vary from
net asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the Fund. A
Tender Offer for shares of stock of the Fund at net asset value could reduce any
spread between net asset value and market price that may otherwise develop.
However, there can be no assurance that such action would result in the Fund's
stock trading at a price that equals or approximates net asset value.
Although the Board of Directors believes that the Tender Offers
generally would be beneficial to holders of the Fund's stock, the acquisition of
shares by the Fund will decrease the total assets of the Fund and therefore have
the likely effect of increasing the Fund's expense ratio (assuming such
acquisition is not offset by the issuance of additional shares). Furthermore, to
the extent the Fund borrows to finance the making of Tender Offers, interest on
such borrowings reduce the Fund's net investment income.
The Fund's non-fundamental 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."
LIQUIDATION
If the Board of Directors does not commence a Tender Offer by
December 31, 2003, the Fund will be liquidated as soon as practical thereafter
unless the Fund obtains unanimous approval from all shareholders of the Fund not
to liquidate the Fund. If unanimous shareholder approval is obtained, the Fund
will continue in existence for another three-year period. If no tender offer is
made within that three year period or in each of the two following three-year
periods, the Fund will be liquidated as soon as practical thereafter, unless
during any three-year period, the Fund obtains unanimous approval from all
shareholders not to liquidate the Fund. In all cases, the Fund shall cease to
exist at the close of business on December 31, 2009.
The 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
--------------------------------------
21
<PAGE>
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 500 Grant Street, Suite 2226, Pittsburgh, Pennsylvania 15219.
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE REGISTRANT DURING PAST 5 YEARS
---------------------- ---------------- ---------------------
<S> <C> <C>
William S. Dietrich II*, 62 Director, President and Chief Chairman of the Board, Dietrich Industries,
Investment Officer Inc. since January 1998; Director and
President, Dietrich Industries, Inc., 1967 to
1998; Director, Worthington Industries Inc.;
Director, Carpenter Technologies Corp.
Jennings R. Lambeth, ___ Director Business Consultant - Self-employed;
2 Gateway Center, Suite 680 Director, J&L Specialty Steel, Inc.
Pittsburgh, Pennsylvania 15222
--------------------------------------
22
<PAGE>
POSITION(S) WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE REGISTRANT DURING PAST 5 YEARS
---------------------- ---------------- ---------------------
Evans Rose, Jr., ___ Director Lawyer, Cohen & Grigsby, P.C.
2900 CNG Tower
Pittsburgh, Pennsylvania 15222
Thomas Marshall, ___ Director Director, UCAR International Inc. since
_____; Director, Baron Enterprises
since_____; Director, The National Flag
Foundation since _____. Chairman and Chief
Executive Officer of Aristech Chemical
Corporation from 1986 to 1995.
Richard F. Berdik, ___ 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.
Pauline M. Short, 62 Assistant Secretary Assistant to the Chairman of the Board of
Dietrich Industries, Inc. since January 1998;
Assistant to the President of Dietrich
Industries, Inc., 1979 to 1997.
</TABLE>
* Mr. Dietrich is an "interested person" of the Fund as defined in Section
2(a)(19) of the 1940 Act.
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
Thomas Marshall 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, 2001, Messrs. Lambeth, Marshall
and Rose are expected to receive $5,000 each from the Fund. The Directors
and officers own none of the stock of the Fund.
--------------------------------------
23
<PAGE>
(2) Compensation paid by the Fund contains no accrued or payable pension or
retirement benefits.
INVESTMENT ADVISORY AND OTHER SERVICES. William S. Dietrich II,
President and Chief Investment Officer of the Fund, is responsible of the day to
day management of the Fund's portfolio.
The Fund may hire consultants who will provide research services
similar to the services described below under soft dollar arrangements.
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 for the fiscal years
ended March 31, 1999 and March 31, 2000 was 26.98% and 64.92%, respectively, 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
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 ____________________________, 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 _________________________
_____________ 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 continue to qualify for the special tax treatment
afforded RICs under the Code. To qualify for that treatment, the Fund must
distribute to its stockholders for each taxable year at least 90% of its
--------------------------------------
25
<PAGE>
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; and (2) 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.
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, 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. The
Fund annually will provide its stockholders with a written notice designating
the amounts of any capital gain distributions.
Dividends and other distributions declared by the Fund in, and
payable to stockholders of record as of a date in, October, November, or
December of any year will be deemed to have been paid by the Fund and received
by the stockholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will be
taxed to any stockholders that are subject to income taxes for the year in which
that December 31 falls.
The Fund must withhold 31% from dividends, capital gain
distributions, and proceeds from sales of stock pursuant to a Tender Offer, if
any, payable to any taxable organization or trust that has not furnished to the
Fund a correct taxpayer identification number ("TIN") or a properly completed
claim for exemption on Form W-8 or W-9 ("backup withholding"). Withholding at
that rate also is required from dividends and capital gain distributions payable
to such stockholders who otherwise are subject to backup withholding.
IRS LETTER RULING
Organizations that qualify as Eligible Investors (SEE "Eligible
Investors"), although they are not generally subject to federal taxes on income
or capital gains, may be subject to federal tax on certain unrelated business
income, which includes income from property with respect to which an Eligible
Investor, or any partnership in which the Eligible Investor has a direct
--------------------------------------
26
<PAGE>
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) 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
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.
--------------------------------------
27
<PAGE>
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.
A large percentage of the Fund's portfolio consists of assets for
which market quotations are not available. Such 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. Such values may also depend
significantly upon the determination of the adviser or general partner of the
Underlying Private Fund who may use cost to fair value the Underlying Private
Fund's investments. Fair value represents a good faith approximation of the
value of an asset and will be used where there is no public market or possibly
no market at all for a company's securities. The fair values of one or more
assets may not, in retrospect, be the prices at which those assets could have
been sold during the period in which the particular fair values were used in
determining the Fund's net asset value. As a result, the Fund's issuance or
repurchase of its shares at net asset value at a time when it owns securities
that are valued at fair value may have the effect of diluting or increasing the
economic interest of existing shareholders. The Board of Directors has
established general guidelines for calculating fair value of non-publicly traded
securities. The Board of Trustees will be responsible for ensuring that the
valuation policies utilized are fair to the Fund and consistent with applicable
regulatory guidelines. 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. The Fund has
11,926,553 shares issued and outstanding. Although it has no current intention
of doing so, the Board of Directors of the Fund is authorized to classify and
reclassify any unissued shares of capital stock from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or terms and conditions of redemption
of such shares by the Fund. The description of the capital stock are subject to
the provisions contained in the Fund's Articles of Incorporation and By-Laws.
Shares of the stock have no preemptive, conversion, exchange, or
redemption rights. Each share has equal voting, dividend, distribution and
liquidation rights. The outstanding shares of stock are, and those offered
hereby, when issued, will be, fully paid and nonassessable. Stockholders are
entitled to one vote per share. All voting rights for the election of directors
are noncumulative, which means that the holders of more than 50% of the shares
can elect 100% of the directors then nominated for election if they choose to do
so and, in such event, the holders of the remaining shares will not be able to
elect any directors.
Shares of stock of the Fund cannot be transferred without the
approval of the Fund. Transferees must meet certain eligibility criteria. The
Fund has the right to reject any transfer. See "Restrictions on
Transferability."
Any additional offerings of the Fund's stock, if made, will require
approval of its Board of Directors and will be subject to the requirement of the
1940 Act that shares may not be sold at a price below the then-current net asset
value, exclusive of underwriting discounts and commissions, except, among other
things, in connection with an offering to existing stockholders or with the
consent of a majority of the holders of the Fund's outstanding voting
securities.
--------------------------------------
28
<PAGE>
As of the date of this registration statement, the Dietrich CRAT, the
Dietrich CRUT and the Dietrich CRUT II 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 Fund's stock outstanding as of
September 30, 2000.
<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 - 11,926,553
</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 total return does not reflect the amount of any
stockholder's tax liability.
From time to time, quotations of the Fund's average annual total
return ("Standardized Return") may be included in advertisements, sales
literature or shareholder reports. Standardized Return shows percentage rates
reflecting the average annual change in the value of an assumed initial
investment of $1,000 assuming the investment has been held for periods of one
year, five years and ten years as of a stated ending date. If a five- and/or
ten-year period has not yet elapsed, data will be provided as of the end of a
period corresponding to the life of the Fund. Standardized Return assumes that
all dividends and capital gain distributions were reinvested in shares of the
Fund.
In addition, other total return performance data ("Non-Standardized
Return") regarding the Fund may be included in advertisements, sales, literature
or shareholder reports. Non-Standardized Return shows a percentage rate of
return encompassing all elements of return (i.e., income and capital
appreciation or depreciation); and it assumes reinvestment of all dividends and
capital gain distributions. Non-Standardized Return may be quoted for the same
or different periods as those for which Standardized Return is quoted.
Non-Standardized Return may consist of cumulative total returns, average annual
total returns, year-by-year rates or any combination thereof. Cumulative total
return represents the cumulative change in value of an investment in the Fund
for various periods. Average annual total return refers to the annual compound
rate of return of an investment in the Fund. Total return figures are based on
historical performance of the Fund, show the performance of a hypothetical
investment and are not intended to indicate future performance.
--------------------------------------
29
<PAGE>
ADMINISTRATOR, TRANSFER AND DIVIDEND DISBURSING AGENT, CUSTODIAN
Arthur Andersen serves as administrator for the Fund. As
administrator, Arthur Andersen provides office facilities, 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. Arthur Andersen also performs certain accounting services,
financial reporting, and compliance monitoring activities. For the services
provided as Administrator, Arthur Andersen receives an annual fee equal to
$70,000 from the Fund. Arthur Andersen does not serve as independent accountants
for the Fund.
[ ] serves as the Fund's Transfer Agent and Dividend
Disbursing Agent. Mellon Bank, N.A. ("Mellon") serves as custodian of the Fund's
assets.
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 conducts an annual audit of the
Fund.
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, 2000 are incorporated herein by reference to the
semi-annual report to shareholders filed with the Securities and Exchange
Commission on December 7, 2000.
The financial statement included in this Prospectus has been included
in reliance on the report of ____________________, independent accountants,
given on the authority of that firm as experts in auditing and accounting. The
audited financial statements of the Fund as of _______________ appear on the
following pages.
--------------------------------------
30
<PAGE>
FINANCIAL STATEMENTS
TO BE FILED.
<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
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
<PAGE>
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
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;
--------------------------------------
A-2
<PAGE>
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.
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.
--------------------------------------
A-3
<PAGE>
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
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).
--------------------------------------
A-4
<PAGE>
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
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.
--------------------------------------
A-5
<PAGE>
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
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
--------------------------------------
A-6
<PAGE>
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
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
--------------------------------------
A-7
<PAGE>
are required to contain an amount of cash, and other liquid, securities equal in
value to the current value of the underlying instrument less the margin deposit.
OPTIONS ON FUTURES CONTRACTS
An Underlying Investment Vehicle may also purchase and sell listed put and call
options on futures contracts. An option on a futures contract gives the
purchaser the right in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), at a specified exercise price at any time during the
option period. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Underlying Investment Vehicle also may purchase put options on
futures contracts in lieu of, and for the same purpose as, a sale of a futures
contract. An Underlying Investment Vehicle may also purchase such put options in
order to hedge a long position in the underlying futures contract in the same
manner as it purchases "protective puts" on securities.
The holder of an option may terminate the position by selling an option of the
same series. There is, however, no guarantee that such a closing transaction can
be effected. An Underlying Investment Vehicle is required to deposit initial and
maintenance margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those applicable to
futures contracts described above and, in addition, net option premiums received
will be included as initial margin deposits.
In addition to the risks which apply to all options transactions, there are
several risks relating to options on futures contracts. The ability to establish
and close out positions on such options is subject to the development and
maintenance of a liquid secondary market. It is not certain that this market
will develop. In comparison with the use of futures contracts, the purchase of
options on futures contracts involves less potential risk to a fund because the
maximum amount of risk is the premium paid for the option (plus transaction
costs). There may, however, be circumstances when the use of an option on a
futures contract would result in a loss to an Underlying Investment Vehicle when
the use of a futures contract would not, such as when there is no movement in
the prices of the underlying securities. Writing an option on a futures contract
involves risks similar to those arising in the sale of futures contracts, as
described above.
HEDGING
An Underlying Investment Vehicle may employ many of the investment techniques
described for investment and hedging purposes. For example, an Underlying
Investment Vehicle may purchase or sell put and call options on common stocks to
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.
--------------------------------------
A-8
<PAGE>
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 at times subject to substantial volatility.
An economic downturn or increase in interest rates may have a more significant
effect on the high yield, high risk securities in an Underlying Investment
Vehicle's portfolio and their markets, as well as on the ability of securities'
issuers to repay principal and interest. Issuers of high yield, high risk
securities may be of low credit worthiness and the high yield, high risk
securities may be subordinated to the claims of senior lenders. During periods
of economic downturn or rising interest rates, the issuers of high yield, high
risk securities may have greater potential for insolvency and a higher incidence
of high yield, high risk bond defaults may be experienced.
SENSITIVITY OF INTEREST RATE AND ECONOMIC CHANGES
The prices of high yield, high risk securities have been found to be less
sensitive to interest rate changes than higher-rated investments but are more
sensitive to adverse economic changes or individual corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress that would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a high yield, high risk security owned by an
Underlying Investment Vehicle defaults, the fund may incur additional expenses
in seeking recovery. Periods of economic uncertainty and changes can be expected
to result in increased volatility of market prices of high yield, high risk
securities and the Fund's net asset value. Yields on high yield, high risk
securities will fluctuate over time. Furthermore, in the case of high yield,
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
--------------------------------------
A-9
<PAGE>
security's value will decrease in a rising interest rate market, as will the
value of the Underlying Investment Vehicle's assets.
LIQUIDITY AND VALUATION
The secondary market may at times become less liquid or respond to adverse
publicity or investor perceptions, making it more difficult for an Underlying
Investment Vehicle to accurately value high yield, high risk securities or
dispose of them. To the extent such fund owns or may acquire illiquid or
restricted high yield, high risk securities, these securities may involve
special registration responsibilities, liabilities and costs, and liquidity
difficulties, and judgment will play a greater role in valuation because there
is less reliable and objective data available.
TAXATION
Special tax considerations are associated with investing in high yield bonds
structured as zero coupon or pay-in-kind securities. An Underlying Investment
Vehicle will report the interest on these securities as income even though it
receives no cash interest until the security's maturity or payment date.
Further, an Underlying Investment Vehicle organized as a regulated investment
company must distribute substantially all of its income to you to qualify for
pass-through treatment under the tax law. Accordingly, such a fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash or may have to leverage itself by borrowing the cash to satisfy
distribution requirements.
CREDIT RATINGS
Credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield, high risk securities. Since credit rating
agencies may fail to change the credit ratings in a timely manner to reflect
subsequent events, the investment adviser to an Underlying Fund that is a mutual
fund should monitor the issuers of high yield, high risk securities in the
fund's portfolio to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments, and to attempt to
assure the securities' liquidity so the fund can meet redemption requests. To
the extent that an Underlying Investment Vehicle invests in high yield, high
risk securities, the achievement of the fund's investment objective may be more
dependent on the Underlying Investment Vehicle's own credit analysis than is the
case for higher quality bonds. An Underlying Investment Vehicle may retain a
portfolio security whose rating has been changed.
ASSET-BACKED SECURITIES
An Underlying Investment Vehicle may invest in mortgage pass-through securities,
which are securities representing interest in pools of mortgage loans secured by
residential or commercial real property in which payments of both interest and
principal on the securities are generally made monthly, in effect passing
through monthly payments made by individual borrowers on mortgage loans which
underlie the securities (net of fees paid to the issuer or guarantor of the
securities). Early repayment of principal on some mortgage-related securities
(arising from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose an Underlying Investment Vehicle to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost.
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.
--------------------------------------
A-10
<PAGE>
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:
To be filed.
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)
a.3. Article of Amendment to the Articles of Incorporation dated
November 27, 2000 - To be filed.
b. By-Laws.(1)
c. None.
d. Instruments defining the rights of holders of Registrant's
shares of beneficial interest are incorporated by reference
from Articles VI, IX, X and XII of Registrant's Articles of
Incorporation and from Articles II, VI and X of Registrant's
By-Laws filed as part of Registrant's Registration Statement
on Form N-2 under the Securities Act of 1933 (File No.
333-26791) on May 9, 1997.
e. None.
f. None.
g. None.
h. Form of Underwriting Agreement between Registrant and Mellon
Financial Markets LLC - to be filed.
i. None.
j. Custodian Agreement.(2)
k. Administration and Accounting Services Agreement between
Registrant and Arthur Andersen LLP - Filed herewith.
l. Opinion and Consent of Counsel - to be filed.
m. None.
n. Consent of Independent Auditors - to be filed.
o. None.
p. None.
q. None.
----------------
(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 to Registrant's Registration Statements on Form
N-2 under the Securities Act of 1933 and Investment Company Act of 1940 (File
Nos. 333-26791, 811-7861) on December 17, 1997.
<PAGE>
r. Code of Ethics of Registrant - Filed herewith.
ITEM 25. MARKETING ARRANGEMENTS
None.
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 ...................... $2,640
Printing .............................. $
Fees and Expenses of Qualification under
State Securities Laws (including fees of
counsel) .............................. $
Legal Fees and Expenses ............... $
Accounting Fees $
Miscellaneous ......................... $
Total......................... $
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 SEPTEMBER 30, 2000
-------------- ------------------
Common Stock, par value $0.001 3
per share
ITEM 29. INDEMNIFICATION
Article Eleventh of the Articles of Incorporation of the Registrant
states:
A. To the maximum extent permitted by applicable law (including
Maryland law and the Investment Company Act of 1940, as amended)
as currently in effect or as may hereafter be amended:
1. No director or officer of the [Registrant] shall be
liable to the [Registrant] or its stockholders for money
damages; and
2. The [Registrant] shall indemnify and advance expenses as
provided in the By-Laws of the [Registrant] to its
present and past directors, officers, employees and
agents, and persons who are serving or have served at the
request of the [Registrant] in similar capacities for
other entities.
B. No amendment, alteration or repeal of this Article or the
adoption, alteration or amendment of any other provision of these
Articles of Incorporation or the By-Laws of the [Registrant]
inconsistent with this Article, shall adversely affect any
limitation on liability or indemnification of any person under
<PAGE>
this Article with respect to any act or failure to act which
occurred prior to such amendment, alteration, repeal or adoption.
Article IX, Section 1 of the Registrant's By-Laws states:
The [Registrant] shall indemnify its present and past directors,
officers, employees and agents, and any persons who are serving or
have served at the request of the [Registrant] as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust, or enterprise, to the full extent provided and
allowed by Section 2-418 of the Annotated Code of Maryland
(Corporations and Associations), as amended from time to time or any
other applicable provisions of law. Notwithstanding anything herein
to the contrary, no director, officer, investment adviser or
principal underwriter of the [Registrant] shall be indemnified in
violation of Sections 17(h) and (i) of the Investment Company Act of
1940, as amended. Expenses incurred by any such person in defending
any proceeding to which he is a party by reason of service in the
above-referenced capacities shall be paid in advance or reimbursed
by the [Registrant] to the full extent permitted by law, including
Sections 17(h) and (i) of the Investment Company Act of 1940, as
amended.
Section 9 of the Underwriting Agreement between the Registrant and Mellon
Financial Markets, Inc. states:
A. The Company agrees to indemnify and hold harmless the Underwriter and
each person, if any, who controls an Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of the Shares), to which such
Underwriter or any such controlling person may become subject, under the
Federal Securities Acts or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereof or supplement thereto,
(ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (iii) any untrue statement or alleged untrue statement of
a material fact contained in the Prospectus, or any amendment thereof or
supplement thereto, or (iv) the omission or alleged omission to state
therein af material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading and shall reimburse such Underwriter and
each such controlling person promptly upon demand for any legal or other
expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement
or alleged untrue statement or omission or alleged omission made in the
Prospectus, or any amendment thereof or supplement thereto, or the
Registration Statement, or any amendment thereof or supplement thereto, in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such Underwriter specifically for inclusion
therein. The foregoing indemnity agreement is in addition to any liability
which the Company may otherwise have to any Underwriter or any controlling
person of any of such Underwriter. The only information furnished by or on
behalf of the Underwriter for use in connection with the preparation of
the Registration Statement or the Prospectus is described in Section 9(E)
hereof.
B. The Underwriter agrees to indemnify and hold harmless the Company, each
of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act against any and all loss,
claim, damage or liability, or any action in respect thereof, to which the
Company or any such director, officer or controlling person may become
subject, under the Federal Securities Acts or otherwise, insofar as such
loss, claim, damage, liability or action arises out of, or is based upon,
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, or any amendment thereof or
supplement thereto, (ii) the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, (iii) any untrue statement or alleged
untrue statement of a material fact contained in the Prospectus, or any
amendment thereof or supplement thereto, or (iv) the omission or alleged
<PAGE>
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, but in each case
only to the extent that the untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of such Underwriter specifically for inclusion therein, and shall
reimburse the Company and any such director, officer or controlling person
for any legal or other expenses reasonably incurred by the Company or any
director, officer or controlling person in connection with investigating
or defending or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred. The foregoing indemnity
agreement is in addition to any liability which any Underwriter may
otherwise have to the Company or any such director, officer or controlling
person. The only information furnished by or on behalf of the Underwriter
for use in connection with the preparation of the Registration Statement
or the Prospectus is described in Section 9(E) hereof.
C. Promptly after receipt by any indemnified party under this Section 9 of
notice of any claim or the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 9, notify the indemnifying party in
writing of the claim or the commencement of that action; provided,
however, that the failure to notify an indemnifying party shall not
relieve it from any liability which it may have under this Section 9
except to the extent it has been materially prejudiced by such failure
and, provided further, that the failure to notify any indemnifying party
shall not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 9.
If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein an, to the
extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. After notice from the indemnifying
party to the indemnified party of its election to assume the defense of
such claim or action, except to the extent provided in the next following
paragraph, the indemnifying party shall not be liable to the indemnified
party under this Section 9 for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense thereof
other than reasonable costs of investigation.
Any indemnified party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party unless: (i) the employment thereof has been specifically
authorized by the indemnifying party in writing; (ii) such indemnified
party shall have been advised by such counsel that there may be one or
more legal defenses available to it which are different from or additional
to those available to the indemnifying party and in the reasonable
judgment of such counsel it is advisable for such indemnified party to
employ separate counsel; or (iii) the indemnifying party has failed to
assume the defense of such action and employ counsel reasonably
satisfactory to the indemnified party, in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party, it being understood, however,
the indemnifying party shall not, in connection with any one such action
or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate
firm of attorneys (in addition to local counsel) at any time for all such
indemnified parties, which firm shall be designated in writing, if the
indemnified parties under Section 9 is the Underwriter or any of its or
their controlling persons, or the Company, if the indemnified parties
under Section 9 consist of the Company or any of the Company's directors,
officers or controlling persons.
Each indemnified party, as a condition of the indemnity agreements
contained in Section 9(A) and (B), shall use its best efforts to cooperate
with the indemnifying party in the defense of any such action or claim. No
indemnifying party shall be liable for any settlement of any such action
effected without its written consent (which consent shall not be
unreasonably withheld), but if settled with its written consent or if
there be a final judgment for the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified
<PAGE>
party from and against any loss or liability by reason of such settlement
or judgment.
Notwithstanding the foregoing paragraph, if at any time an
indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, the indemnifying
party agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered
into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to
the date of such settlement.
D. If the indemnification provided in this Section 9 is unavailable to or
insufficient to hold harmless an indemnified party under Section 9(A) or
9(B) in respect of any losses, claims, damages, expenses or liabilities
(or actions in respect thereof) referred to therein, then each
indemnifying party shall in lieu of indemnifying such indemnified party
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) in such proportion as is appropriate to
reflect the relative fault of the Company and the Underwriter in
connection with the statements or omissions which resulted in such losses,
claims, damages, expenses or liabilities (or actions in respect thereof),
as well as any other relevant equitable considerations. The relative fault
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the Company or the Underwriter and their relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Company and the Underwriter agree that it would not be
just and equitable if contribution pursuant to this Section 9(D) were
determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to
above in this Section 9(D). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities
(or actions in respect thereof) referred to above in this Section 9(D)
shall be deemed to include any legal or other expenses to which such
indemnified party would be entitled if this Section 9 was applied.
Notwithstanding the provisions of this Section 9(D), the Underwriter shall
not be required to contribute any amount in excess of the amount by which
the total price which the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which the Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission plus the Underwriter's
proportionate share of such legal or other expenses; and any punitive or
exemplary damages if the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by or statements made by the Underwriter. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11
of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
E. The Underwriter confirms that the information regarding such
Underwriter set forth on the cover page of the Prospectus and the
information regarding such Underwriter set forth under the caption
"Purchase of Shares" in the Prospectus furnished by such Underwriter is
correct, and the parties hereto acknowledge that such information
constitutes the only information furnished in writing by or on behalf of
the Underwriter for use in connection with the preparation of the
Registration Statement or the Prospectus.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
None.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The account and records of the Registrant are maintained at the
Registrant's office at 500 Grant Street, Suite 2226, Pittsburgh, PA 15219, at
the office of the Registrant's custodian Mellon Bank, N.A., 3 Mellon Bank
Center, Pittsburgh, PA 15259 and at the office of the Registrant's
administrator, Arthur Andersen LLP, 2100 One PPG Place, Pittsburgh, PA 15222
<PAGE>
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
(a) Registrant undertakes to suspend offering of the shares until the
prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than ten percent from
its net asset value per share as of the effective date of the registration
statement, or (2) the net asset value increases to an amount greater than its
net proceeds as stated in the prospectus.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, The Mallard Fund, Inc., has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh and State of
Pennsylvania on the 18th day of December 2000.
THE MALLARD FUND, INC.
By: /s/ William S. Dietrich II
---------------------------------
William S. Dietrich II
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. The undersigned hereby severally
constitute and appoint William S. Dietrich II, Richard F. Berdik, and Arthur J.
Brown, our true and lawful attorneys-in-fact, with full power to sign for each
of us, and in each of our names, and in the capacities indicated below, any and
all amendments to The Mallard Fund's Registration Statement on Form N-2 and all
instruments necessary or desirable in connection therewith, filed with the
Securities and Exchanges Commission, hereby ratifying and confirming our
signatures as they may be signed by said attorneys-in-fact to any and all
amendments to said Registration Statement.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ William S. Dietrich II Director, President and Chief
------------------------------
William S. Dietrich II Executive Officer December 18, 2000
/s/Evans Rose, Jr. Director December 18, 2000
------------------------------
Evans Rose, Jr.
/s/ Jennings R. Lambeth Director December 18, 2000
------------------------------
Jennings R. Lambeth
/s/ Thomas Marshall Director December 18, 2000
------------------------------
Thomas Marshall
/s/ Richard F. Berdik Secretary, Treasurer and Chief December 18, 2000
------------------------------
Richard F. Berdik Financial Officer
</TABLE>
<PAGE>
THE MALLARD FUND, INC.
EXHIBIT INDEX
EXHIBIT DOCUMENT DESCRIPTION
a.3. Articles of Amendment to the Articles of Incorporation dated
November 27, 2000.
k. Accounting and Administrative Services Agreement.
r.1. Code of Ethics of Registrant.
