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Rule 497(c)
File Nos. 33-29180
811-05823
PROSPECTUS
November 26, 1997
DOMINI SOCIAL EQUITY FUND
The investment objective of the Domini Social Equity Fund (the "Fund") is to
provide its shareholders with long-term total return which corresponds to the
total return performance of the Domini 400 Social IndexSM, an index comprised of
stocks selected according to social criteria. The Fund seeks to achieve its
investment objective by investing all of its investable assets in the Domini
Social Index Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the Fund. The
Portfolio invests in the common stocks included in the Domini 400 Social
IndexSM.
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TABLE OF CONTENTS PAGE
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Investment in the Fund................................................................... 2
The Fund................................................................................. 2
Expense Summary.......................................................................... 3
Financial Highlights..................................................................... 5
Performance Information.................................................................. 6
Investment Objective and Policies........................................................ 6
Management............................................................................... 12
Purchases and Redemptions of Shares...................................................... 13
Tax Matters.............................................................................. 17
Other Information Concerning Shares of the Fund.......................................... 17
Service Organizations, Transfer Agent and Custodian...................................... 21
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The manager of the Portfolio is Domini Social Investments, LLC. The
investment submanager of the Portfolio is Mellon Equity Associates. The sponsor
of the Fund is Domini Social Investments LLC and the distributor of the Fund is
Signature Broker-Dealer Services, Inc. INVESTMENTS IN THE FUND ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. SHARES OF THE FUND ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK, AND THE SHARES ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL, STATE
OR OTHER GOVERNMENTAL AGENCY.
"DominiSM" and "Domini 400 Social IndexSM" are service marks of Kinder,
Lydenberg, Domini & Co., Inc.
This Prospectus sets forth concisely the information concerning the Fund
that a prospective investor ought to know before investing. The Fund has filed
with the Securities and Exchange Commission ("SEC") a Statement of Additional
Information, dated November 26, 1997, as amended from time to time, which
contains more detailed information about the Fund and is incorporated into this
Prospectus by reference. An investor may obtain a copy of the Statement of
Additional Information ("SAI") without charge by contacting the distributor (see
back cover for address and phone number).
THE SEC MAINTAINS A WEBSITE (HTTP://WWW.SEC.GOV) THAT CONTAINS THE SAI,
MATERIAL INCORPORATED BY REFERENCE, AND OTHER INFORMATION REGARDING THE FUND AND
THE PORTFOLIO.
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UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIO OF SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN THE PORTFOLIO. THE FUND INVESTS IN THE
PORTFOLIO THROUGH A TWO-TIER MASTER-FEEDER INVESTMENT FUND STRUCTURE. SEE
"SPECIAL INFORMATION CONCERNING THE MASTER-FEEDER INVESTMENT FUND STRUCTURE"
HEREIN.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
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INVESTMENT IN THE FUND
The Fund seeks to provide its shareholders with long-term total return which
corresponds to the total return performance of the Domini 400 Social IndexSM, an
index comprised of stocks selected according to social criteria. The Fund may be
appropriate, therefore, for investors who are willing to ride out stock market
fluctuations in pursuit of long-term returns. Because the Fund seeks to track,
rather than exceed, the performance of a particular index, the Fund is not
managed in the same way as other mutual funds. In particular, the manager
generally does not judge the merits of any particular stock as an investment.
Therefore, investors should not expect to achieve the potentially greater
results that could be obtained by a fund that aggressively seeks growth.
The value of an investment in the Fund varies from day to day, generally
reflecting changes in the financial condition of the companies in which the
Portfolio invests, general market conditions and political and economic factors.
Stock prices can fluctuate dramatically in response to these and other factors
or speculation about these factors. Over the long term, stocks have generally
shown greater growth potential than other types of securities. However, when you
sell your Fund shares, they may be worth more or less than what you paid for
them.
Potential investors should note that because the Portfolio seeks to be fully
invested in the stocks comprising the Domini 400 Social IndexSM, the Fund is not
a balanced investment plan. Potential investors should also note that the
manager of the Portfolio, Domini Social Investments LLC, has no prior experience
in managing or advising a mutual fund. You should carefully consider your
investment objectives and risk tolerance before making a decision to invest in
the Fund.
THE FUND
Domini Social Equity Fund (the "Fund") is a no-load, diversified, open-end
management investment company which was organized as a business trust under the
laws of the Commonwealth of Massachusetts on June 7, 1989. Although shares of
the Fund are sold without a sales load, Signature Broker-Dealer Services, Inc.
("Signature" or the "Distributor") receives a distribution fee from the Fund
pursuant to a Distribution Plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers to
buy back (redeem) its shares from its shareholders at any time at net asset
value.
Shares of the Fund are sold continuously by the Distributor. The minimum
initial investment is $1,000, except that the minimum initial investment for an
investor investing through an automatic investment plan is $500 and the minimum
initial investment for an Individual Retirement Account ("IRA") is $250. An
investor should obtain from the Distributor, and should read in conjunction with
this prospectus, the materials describing the procedures under which Fund shares
may be purchased and redeemed. See "Purchases and Redemptions of Shares" herein.
Proceeds from the sale of shares of the Fund are invested in the Portfolio
which then purchases securities in accordance with its investment objective and
policies. Domini Social Investments LLC ("DSIL") is the Portfolio's manager (the
"Manager") and provides investment supervisory and administrative services to
the Portfolio. Mellon Equity Associates ("Mellon Equity") is the Portfolio's
investment submanager (the "Submanager"). DSIL is also the sponsor ("Sponsor")
of the Fund and provides administrative services to the Fund. The Boards of
Trustees of the Fund and of the Portfolio provide broad supervision over the
affairs of the Fund and of the Portfolio, respectively. The Trustees who are not
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"interested persons" as defined in the 1940 Act (the "Independent Trustees") of
the Fund, are the same as the Independent Trustees of the Portfolio. A majority
of the Fund's Trustees are not affiliated with the Manager or the Submanager.
For further information about the Trustees of the Fund and the Portfolio, see
"Management of the Fund and the Portfolio" in the Statement of Additional
Information.
Kinder, Lydenberg, Domini & Co., Inc. ("KLD"), the former investment adviser
of the Portfolio and an affiliate of DSIL, determines the composition of the
Domini 400 Social IndexSM (which determines the composition of the Portfolio's
securities). The following persons are primarily responsible for the development
and maintenance of the Domini 400 Social IndexSM: Steven D. Lydenberg, Director
of Research, KLD, since 1990; and Peter D. Kinder, President, KLD, since 1988.
The Submanager manages the investments of the Portfolio from day to day in
accordance with the Portfolio's investment objective and policies.
EXPENSE SUMMARY
The following table provides (i) a summary of expenses relating to purchases
and sales of shares of the Fund, and the aggregate annual operating expenses for
the Fund and the Portfolio, as a percentage of average net assets of the Fund,
and (ii) an example illustrating the dollar cost of such expenses on a $1,000
investment in the Fund.
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SHAREHOLDER TRANSACTION EXPENSES................................ 0%
ANNUAL OPERATING EXPENSES:
Advisory and Management Fees................................ 0.154%(1)
12b-1 Fees.................................................. 0.120%(2)
Other Expenses
-- Administrative Services and Sponsorship Fees........... 0.423%(3)
-- Other Expenses......................................... 0.283%
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Total Operating Expenses.................................... 0.980%(4)(5)
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(1) Under the Management Agreement between the Portfolio and DSIL, DSIL's fee
for advisory and administrative services to the Portfolio is 0.20% of the
average daily net assets of the Portfolio but will be reduced to the extent
necessary to keep the aggregate annual operating expenses of the Portfolio
(excluding brokerage fees and commissions, interest, taxes and other
extraordinary expenses) at no greater than 0.20% of the average daily net
assets of the Portfolio, through October 22, 1998. If this fee reduction
were not in effect, advisory and management fees for the Portfolio would be
0.20% of the average daily net assets of the Portfolio.
(2) The percentage represents actual expenditures, expressed as a percentage of
average daily net assets, under the Fund's Distribution Plan during the
fiscal year ended July 31, 1997. The Distribution Plan permits reimbursement
for expenses incurred by the Distributor of up to 0.25% of the Fund's
average daily net assets. See "Other Information Concerning Shares of the
Fund -- Distribution Plan and Agreement.
(3) Under the Sponsorship Agreement between DSIL and the Fund, DSIL's fee for
administrative and sponsorship services is 0.50% of the average daily net
assets of the Fund but will be reduced to the extent necessary to keep the
aggregate annual operating expenses of the Fund (including the Fund's share
of the Portfolio's expenses but excluding brokerage fees and commissions,
interest,
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taxes and other extraordinary expenses) at no greater than 0.98% of the
average daily net assets of the Fund through October 22, 1998. If this fee
reduction were not in effect, administrative services and sponsorship fees
for the Fund would be 0.50% of the average daily net assets of the Fund.
(4) Other Expenses and Total Operating Expenses do not reflect either the
payment to Signature by the Fund of $550,000 in connection with termination
of the expense payment arrangements with Signature or other expenses
incurred by the Fund in connection with the termination of such
arrangements. Had such nonrecurring expenses been included, Other Expenses
and Total Operating Expenses would be 0.793% and 1.49%, respectively.
(5) Without the automatic fee reductions, which expire October 22, 1998, it is
estimated that the aggregate annual operating expenses of the Fund
(including the Fund's share of the Portfolio's expenses) would be 1.103% of
the average daily net assets of the Fund assuming the same level of assets
and expenses of the Fund as existed during the fiscal year ended July 31,
1997.
The expense information in the expense table provided above has been
restated to reflect fees currently in effect. The purpose of the expense table
is to help investors understand the various costs and expenses that a
shareholder will bear directly or indirectly. Without the expense payment plan,
historical operating expenses expressed as a ratio of the Fund's average net
assets would have been 0.84% for the fiscal year ended July 31, 1997. See
"Management" and "Other Information Concerning Shares of the Fund--Expenses" for
more information with respect to the expenses of the Fund and the Portfolio.
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EXAMPLE:
A shareholder of the Fund would pay the following expenses on a
$1,000 investment in the Fund, assuming (1) 5% annual return and (2)
redemption at the end of:
1 year.......................................................... $ 10
3 years......................................................... $ 31
5 years......................................................... $ 54
10 years......................................................... $ 120
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The Fund pays a distribution fee at an annual rate of up to 0.25% of the
Fund's average daily net assets in reimbursement of, or in anticipation of,
expenses incurred by the Distributor in connection with the sale of shares of
the Fund. Long-term shareholders may pay more than the economic equivalent of
the maximum distribution charges permitted by the National Association of
Securities Dealers, Inc. The Fund may pay fees to Service Organizations (as
defined below) in amounts up to an annual rate of 0.25% of the daily net asset
value of shares of the Fund owned by shareholders with whom the Service
Organization has a servicing relationship. See "Other Information Concerning
Shares of the Fund -- Distribution Plan and Agreement" and "Service
Organizations, Transfer Agent and Custodian".
THE "EXAMPLE" SET FORTH ABOVE IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE FUND. ACTUAL EXPENSES AND
RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund's Trustees believe that the aggregate per share expenses of the
Fund and the Portfolio will be less than or approximately equal to the expenses
which the Fund would incur if it retained the services of an investment manager
and an investment submanager and invested directly in the types of securities
being held by the Portfolio.
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FINANCIAL HIGHLIGHTS
The following selected data for a share outstanding for the indicated
periods has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon is incorporated by reference in the Statement of Additional
Information. This information should be read in conjunction with the financial
statements incorporated by reference in the Statement of Additional Information.
The Fund's Annual Report includes a discussion of those factors, strategies
and techniques that materially affected the Fund's performance during the fiscal
year ended July 31, 1997, as well as certain related information. A copy of the
Annual Report will be made available without charge upon request.
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FOR THE FISCAL YEARS ENDED JULY 31
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1997 1996 1995 1994
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Net asset value, beginning of period.............. $ 16.70 $ 14.85 $ 12.13 $ 12.00
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Income from investment operations:
Net investment income........................... 0.11 0.16 0.17 0.17
Net realized and unrealized gain (loss) on
investments.................................... 8.85 1.93 2.83 0.18
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Total from investment operations.................. 8.96 2.09 3.00 0.35
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Less distributions and dividends:
Dividends to shareholders from net investment
income......................................... (0.11) (0.16) (0.20) (0.15)
Distributions to shareholders from net realized
gain........................................... (0.12) (0.08) (0.08) (0.07)
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Total distributions............................... (0.23) (0.24) (0.28) (0.22)
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Net asset value, end of period.................... $ 25.43 $ 16.70 $ 14.85 $ 12.13
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Ratios/supplemental data:
Total return.................................... 54.01% 14.11% 25.10% 2.90%
Net assets, end of period (in 000's)............ $212,310 $80,915 $54,638 $31,369
Ratio of expenses to average net assets......... 0.98%(1) 0.98%(1) 0.90%(2) 0.75%(2)
Ratio of net investment income to average net
assets......................................... 0.62%(1) 1.01%(1) 1.38%(2) 1.67%(2)
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FOR THE PERIOD
AUGUST 10, 1990
TO JULY 31,
1993 1992 1991
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Net asset value, beginning of period.............. $ 11.06 $ 9.95 $ 10.00
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Income from investment operations:
Net investment income........................... 0.14 0.12 0.02
Net realized and unrealized gain (loss) on
investments.................................... 0.97 1.10 (0.07)
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Total from investment operations.................. 1.11 1.22 (0.05)
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Less distributions and dividends:
Dividends to shareholders from net investment
income......................................... (0.15) (0.11) --
Distributions to shareholders from net realized
gain........................................... (0.02) -- --
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Total distributions............................... (0.17) (0.11) --
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Net asset value, end of period.................... $ 12.00 $ 11.06 $ 9.95
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Ratios/supplemental data:
Total return.................................... 10.00% 12.30% (0.50)%
Net assets, end of period (in 000's)............ $17,229 $ 7,174 $1,740
Ratio of expenses to average net assets......... 0.75%(2) 0.75%(2) 0.75%(3)
Ratio of net investment income to average net
assets......................................... 1.41%(2) 1.53%(2) 1.49%(3)
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(1) Had the expense payment agreement not been in place the ratio of net
investment income and expenses to average net assets for the years ended
July 31, 1997 and 1996, would have been 0.76% and 0.84%, and 0.92% and
1.07%, respectively.
(2) Reflects a voluntary waiver of fees by Signature and KLD due to limitations
set forth in an expense payment agreement. Had Signature and KLD not waived
their fees, the ratios of net investment income and expenses to average net
assets for the years ended July 31, 1995, 1994 and 1993 would have been
1.13% and 1.15%, 1.39% and 1.03% and 1.26% and 0.90%, respectively.
(3) Annualized.
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PERFORMANCE INFORMATION
Performance information concerning the Fund may from time to time be used in
advertisements, shareholder reports or other communications to shareholders. The
Fund may provide period and average annualized "total rates of return" with
respect to the Fund. The "total rate of return" of the Fund refers to the change
in the value of an investment in a Fund over a stated period based on any change
in net asset value per share and includes the value of any shares purchasable
with any dividends or capital gains distributions declared during such period.
Period total rates of return may be annualized. An annualized total rate of
return is a compounded total rate of return which assumes that the period total
rate of return is generated over a 52-week period, and that all dividends and
capital gains distributions are reinvested. An annualized total rate of return
will be slightly higher than a period total rate of return if the period is
shorter than one year, because of the effect of compounding.
The table that follows sets forth average annual total return information
for the periods indicated
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7/31/97 9/30/97
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1 Year:.................................................................... 54.01% 40.16%
5 Years:................................................................... 20.01% 19.80%
Commencement of Investment in the Portfolio* to date....................... 18.16% 17.46%
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* The Fund commenced investment in the Portfolio on June 3, 1991.
The Fund may provide "yield" quotations with respect to the Fund. The
"yield" of the Fund refers to the income generated by an investment in the Fund
over a 30-day or one-month period (which period shall be stated in any
advertisement or communications with a shareholder). This income is then
"annualized", that is, the amount of income generated by the investment over the
period is assumed to be generated over a 52-week period and is shown as a
percentage of investment. A "yield" quotation, unlike a total rate of return
quotation, does not reflect changes in net asset value.
From time to time the Fund may also quote fund rankings from various
sources, such as Lipper Analytical Services, Inc. and Morningstar, Inc. and may
compare its performance to that of the Domini 400 Social IndexSM and various
other unmanaged securities indices, such as the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500") and the Dow Jones Industrial Average.
"Standard & Poor-Registered Trademark-", "S&P-Registered Trademark-" and
"Standard & Poor's 500-Registered Trademark-" are trademarks of Standard &
Poor's Corporation.
See the Statement of Additional Information for further information
concerning the calculation of yield and any total rate of return quotations.
SINCE THE FUND'S YIELD AND TOTAL RATE OF RETURN QUOTATIONS ARE BASED ON
HISTORICAL EARNINGS AND SINCE SUCH YIELD AND RATES OF RETURN FLUCTUATE OVER
TIME, SUCH QUOTATIONS SHOULD NOT BE CONSIDERED AS AN INDICATION OR
REPRESENTATION OF THE FUTURE PERFORMANCE OF THE FUND.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to provide
its shareholders with long-term total return (reflecting both dividend and price
performance of the Fund) which corresponds to the total return performance of
the Domini 400 Social IndexSM (referred to herein as the "Index" or the "Domini
Social Index"). There can, of course, be no assurance that the Fund will achieve
its investment objective. The investment objective of the Fund may be changed
without approval by the Fund's shareholders.
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INVESTMENT POLICIES -- The Fund seeks to achieve its investment objective by
investing all of its investable assets in the Portfolio, which has the same
investment objective as the Fund. The Portfolio seeks to achieve its investment
objective by investing substantially all of its assets in the common stocks
comprising the Domini Social Index. The Portfolio will approximate the
weightings of securities held by the Portfolio to the weightings of the stocks
in the Index, except as described below, and will seek a correlation between the
weightings of securities held by the Portfolio and the weightings of the stocks
in the Index of 0.95 or better. A figure of 1.0 would indicate a perfect
correlation. As of September 30, 1997, the correlation between the weightings of
securities held by the Portfolio and the weightings of the stocks in the Index
was .99. To the extent practicable, the Portfolio will attempt to be fully
invested. The ability of the Fund to duplicate the performance of the Index by
investing in the Portfolio will depend to some extent on the size and timing of
cash flows into and out of the Fund and the Portfolio as well as the Fund's and
the Portfolio's expenses. Adjustments in the securities holdings of the
Portfolio to accommodate cash flows will track the Index to the extent
practicable, but this will result in brokerage expenses.
SOCIAL CRITERIA -- The Domini Social Index was developed and is currently
maintained by KLD. The Index is a common stock index comprised of the stocks of
approximately 400 companies which meet certain social criteria. The weightings
of the stocks compromising the Index are based upon market capitalization. The
criteria used in developing and maintaining the Index involve the subjective
judgment of KLD. KLD, based on available data, seeks to exclude the following
types of companies: firms that derive more than 2% of their gross revenues from
the sale of military weapons; firms that derive any revenues from the
manufacture of tobacco products or alcoholic beverages; firms that derive any
revenues from gambling enterprises; and firms that have an ownership share in,
or operate, nuclear power plants, or participate in businesses related to the
nuclear fuel cycle. KLD also considers criteria such as corporate citizenship,
employee relations, environmental performance, and product-related issues when
evaluating stocks for inclusion in the Index. The corporate citizenship criteria
include a company's record with regard to its philanthropic activities and its
community relations in general. The employee relations criteria include a
company's record with regard to labor matters, workplace safety, equal
employment opportunity, employee benefit programs, and meaningful participation
in company profits either through stock purchase or profit sharing plans. The
environmental performance criteria include a company's record with regard to
fines or penalties, waste disposal, toxic emissions, efforts in waste reduction
and emissions reduction, recycling, and environmentally beneficial fuels,
products and services. The product-related criteria include a company's record
with regard to product safety, marketing practices, and commitment to quality.
The Manager intends to vote proxies of companies included in the Portfolio
consistent with the social criteria used in developing and maintaining the
Domini Social Index.
INDEX MANAGEMENT -- The Portfolio is not managed in the traditional
investment sense, since changes in the composition of its securities holdings
are made in order to track the changes in the composition of securities included
in the Domini Social Index. Moreover, inclusion of a stock in the Index does not
imply an opinion by KLD or the Manager as to the merits of that specific stock
as an investment. However, KLD and the Manager believe that enterprises which
exhibit a social awareness, based on the criteria described above, should be
better prepared to meet future societal needs for goods and services and may
also be less likely to incur certain legal liabilities that may be incurred when
a product or service is determined to be harmful, and that such enterprises
should over the longer term be able to provide a positive return to investors.
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In selecting stocks for inclusion in the Domini Social Index:
1. KLD evaluated, in accordance with the social criteria described
above, each of the companies the stocks of which comprise the S&P 500. If a
company whose stock was included in the S&P 500 met KLD's social criteria
and met KLD's further criteria for industry diversification, financial
solvency, market capitalization, and minimal portfolio turnover, it was
included in the Domini Social Index. As of July 31, 1997, of the 500
companies whose stocks comprised the S&P 500, approximately 50% were
included in the Index.
2. The remaining stocks comprising the Domini Social Index (I.E., those
which are not included in the S&P 500) were selected based upon KLD's
evaluation of the social criteria described above, as well as upon KLD's
criteria for industry diversification, financial solvency, market
capitalization, and minimal portfolio turnover. Because of the social
criteria applied in the selection of stocks comprising the Index, industry
sector weighting in the Index may vary materially from the industry
weightings in other stock indices, including the S&P 500, and certain
industry sectors will be excluded altogether.
The component stocks of the S&P 500 are chosen by Standard & Poor's
Corporation ("S&P") solely with the aim of achieving a distribution by broad
industry groupings that approximates the distribution of these groupings in the
New York Stock Exchange common stock population, taken as the assumed model for
the composition of the total market. Construction of the S&P 500 by S&P proceeds
from industry groups to the whole. Since some industries are characterized by
companies of relatively small stock capitalization, the S&P 500 does not
comprise the 500 largest companies listed on the New York Stock Exchange. Not
all stocks included in the S&P 500 are listed on the New York Stock Exchange.
However, the total market value of the S&P 500 as of July 31, 1997 represented
79.6% of the aggregate market value of common stocks traded on the New York
Stock Exchange.
Inclusion of a stock in the S&P 500 in no way implies an opinion by S&P as
to its attractiveness as an investment, nor is S&P a sponsor of or otherwise
affiliated with the Fund or the Portfolio.
Some of the stocks included in the Domini Social Index may be stocks of
foreign issuers (provided that the stocks are traded in the United States in the
form of American Depositary Receipts or similar instruments the market for which
is denominated in United States dollars). Securities of foreign issuers may
represent a greater degree of risk (I.E., as a result of exchange rate
fluctuation, tax provisions, war or expropriation) than do securities of
domestic issuers.
The weightings of stocks in the Domini Social Index are based on each
stock's relative total market capitalization, (I.E., market price per share
times the number of shares outstanding). Because of this weighting, as of July
31, 1997 approximately 43% of the Index was comprised of the 20% largest
companies in the Index.
KLD may exclude from the Domini Social Index stocks issued by companies
which are in bankruptcy or whose bankruptcy KLD believes may be imminent.
The Portfolio intends to readjust its securities holdings periodically such
that those holdings will correspond, to the extent reasonably practicable, to
the Domini Social Index both in terms of composition and weighting. The timing
and extent of adjustments in the holdings of the Portfolio, and the extent of
the correlation of the holdings of the Portfolio with the Index, will reflect
the Submanager's judgment as
8
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to the appropriate balance between the goal of correlating the holdings of the
Portfolio with the composition of the Index, and the goals of minimizing
transaction costs and keeping sufficient reserves available for anticipated
redemptions of Fund shares. To the extent practicable, the Portfolio will seek a
correlation between the weightings of securities held by the Portfolio to the
weightings of the securities in the Index and will seek to match, before
expenses, a correlation between the performance of the Fund and the performance
of the Index of 0.95 or better. The Board of Trustees of the Portfolio will
receive and review, at least quarterly, a report prepared by the Submanager
comparing the performance of the Fund and the Portfolio with that of the Index,
and comparing the composition and weighting of the Portfolio's holdings with
those of the Index, and will consider what action, if any, should be taken in
the event of a significant variation between the performance of the Fund or the
Portfolio, as the case may be, and that of the Index, or between the composition
and weighting of the Portfolio's securities holdings with those of the stocks
comprising the Index. If the correlation between the weightings of securities
held by the Portfolio and the weightings of the stocks in the Index or the
correlation between the performance of the Fund, before expenses, and the
performance of the Index falls below 0.95, the Board of Trustees will review
with the Submanager methods for increasing such correlation, such as through
adjustments in securities holdings of the Portfolio.
The Portfolio may invest cash reserves in short-term debt securities (I.E.,
securities having a remaining maturity of one year or less) issued by agencies
or instrumentalities of the United States Government, bankers' acceptances,
commercial paper or certificates of deposit, provided that the issuer satisfies
certain social criteria. The Portfolio does not currently intend to invest in
direct obligations of the United States Government. Short-term debt securities
purchased by the Portfolio will be rated at least Prime-1 by Moody's Investors
Service, Inc. or A-1+ or A-1 by S&P or, if not rated, determined to be of
comparable quality by the Portfolio's Board of Trustees. The Portfolio's policy
is to hold its assets in such securities pending readjustment of its portfolio
holdings of stocks comprising the Domini Social Index and in order to meet
anticipated redemption requests. Such investments are not intended to be used
for defensive purposes in periods of anticipated market decline.
The annual portfolio turnover rates of the Portfolio for the fiscal years
ended July 31, 1996 and July 31, 1997 were 5% and 1%, respectively. The
Portfolio's average brokerage commission rates paid per share for the fiscal
years ended July 31, 1996 and July 31, 1997 were $0.05 and $0.05, respectively.
The Portfolio's primary consideration in placing securities transactions
with broker-dealers for execution is to obtain, and maintain the availability
of, execution at the most favorable prices and in the most effective manner
possible. Neither the Portfolio nor the Fund will engage in brokerage
transactions with the Manager, the Submanager or the Sponsor or any of their
respective affiliates or any affiliate of the Fund or the Portfolio. For further
discussion regarding securities trading by the Portfolio, see the Statement of
Additional Information.
Consistent with applicable regulatory policies, including those of the Board
of Governors of the Federal Reserve System and the Securities and Exchange
Commission, the Portfolio may make loans of its securities to member banks of
the Federal Reserve System and to broker-dealers. Such loans would be required
to be secured continuously by collateral consisting of securities, cash or cash
equivalents maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The Portfolio would have the right to
call a loan and obtain the securities loaned at any time on three days' notice.
During the existence of a loan, the Portfolio would continue to collect the
equivalent of the dividends paid by the issuer on the securities loaned and
would also receive interest on investment of
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cash collateral. The Portfolio may pay finder's and other fees in connection
with securities loans. Loans of securities involve a risk that the borrower may
fail to return the securities or may fail to provide additional collateral.
Although it has no current intention to do so, the Portfolio may make short
sales of securities or maintain a short position, if at all times when a short
position is open the Portfolio owns an equal amount of such securities, or
securities convertible into such securities.
SPECIAL INFORMATION CONCERNING THE MASTER FEEDER INVESTMENT FUND STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Fund seeks to achieve its investment objective by
investing all of its investable assets in the Portfolio, a separate registered
investment company with the same investment objective as the Fund. In addition
to selling a beneficial interest to the Fund, the Portfolio may sell beneficial
interests to other mutual funds or institutional investors. Such investors will
invest in the Portfolio on the same terms and conditions as the Fund and will
pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the Fund due to variations in sales
commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the different funds that invest in the Portfolio.
Such differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is available
from the Manager at 212-352-9200.
The investment objective of the Fund may be changed without the approval of
the Fund's shareholders, but not without written notice thereof to shareholders
thirty days prior to implementing the change. If there were a change in the
Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then-current financial
positions and needs. The investment objective of the Portfolio may also be
changed without the approval of the investors in the Portfolio, but not without
written notice thereof to the investors in the Portfolio (and notice by the Fund
to its shareholders) 30 days prior to implementing the change. There can, of
course, be no assurance that the investment objective of either the Fund or the
Portfolio will be achieved. See "Investment Restrictions" in the Statement of
Additional Information for a description of the fundamental policies of the Fund
and of the Portfolio that cannot be changed without approval by the holders of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Fund or the Portfolio, respectively. Except as stated otherwise, all
investment guidelines, policies and restrictions described herein and in the
Statement of Additional Information are non-fundamental.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns. Additionally, the Portfolio
may become less diverse, resulting in increased portfolio risk. (However, this
possibility exists as well for traditionally structured funds which have large
or institutional investors.) Also, funds with a greater pro rata ownership in
the Portfolio could have effective voting control of the operations of the
Portfolio. Subject to exceptions that are not inconsistent with applicable rules
or policies of the Securities and Exchange Commission, whenever the Fund is
requested to vote on matters pertaining to the Portfolio, the Fund will hold a
meeting of shareholders of the Fund and will cast all of its votes in the same
proportion as the votes of the Fund's shareholders. Fund shareholders who do not
vote will not affect the
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Fund's votes at the Portfolio meeting. The percentage of the Fund's votes
representing Fund shareholders not voting will be voted by the Trustees of the
Fund in the same proportion as the Fund shareholders who do, in fact, vote.
Certain changes in the Portfolio's investment objective, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of portfolio securities
(as opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
shareholder redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Fund determines that it is in the best interests of the
Fund to do so. Upon any such withdrawal, the Board of Trustees would consider
what action might be taken, including the investment of all the assets of the
Fund in another pooled investment entity having the same investment objective as
the Fund or the retention of an investment adviser to manage the Fund's assets
in accordance with the investment policies described above with respect to the
Portfolio. In the event the Trustees of the Fund were unable to find a
substitute investment company in which to invest the Fund's assets and were
unable to secure directly the services of an investment manager and investment
submanager, the Trustees will seek to determine the best course of action.
For more information about the Portfolio's policies, management and expenses
see "Investment Objective and Policies", "Management" and "Other Information
Concerning Shares of the Fund -- Expenses". For information about the
Portfolio's investment restrictions see the Statement of Additional Information.
------------------------
As a matter of fundamental policy, the Fund will invest all of its
investable assets (either directly or through the Portfolio) in one or more of:
(i) stocks comprising an index of securities selected applying social criteria,
which initially will be the Domini Social Index, (ii) short-term debt securities
of issuers which meet social criteria, (iii) cash, and (iv) options on equity
securities. This fundamental policy cannot be changed without the approval of
the holders of a majority of the Fund's shares (which, as used in this
Prospectus, means the lesser of (a) more than 50% of the outstanding shares of
the Fund, or (b) 67% or more of the outstanding shares of the Fund present at a
meeting at which holders of more than 50% of the Fund's outstanding shares are
represented in person or by proxy). Except for this fundamental policy, investor
approval is not required to change the Fund's or the Portfolio's investment
objective or any of the investment policies described above.
The Statement of Additional Information includes a discussion of other
investment policies and a listing of specific investment restrictions which
govern the Portfolio's and the Fund's investment policies. Certain of the
investment restrictions listed in the Statement of Additional Information may
not be changed by the Portfolio without the approval of the Fund and the other
investors in the Portfolio or by the Fund without the approval of the
shareholders of the Fund. If a percentage or rating restriction on investment or
utilization of assets is adhered to at the time an investment is made or assets
are so utilized, a later change in percentage resulting from changes in the
Portfolio's total assets or the value of the Portfolio's securities or a later
change in the rating of a security held by the Portfolio will not be considered
a violation of policy.
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Expenses of the Portfolio with respect to investment management and
administrative services, investment submanagement services and sponsorship
services are described herein under "Management -- Manager, -- Submanager, and
- -- Sponsor", respectively.
MANAGEMENT
The Boards of Trustees of the Fund and the Portfolio provide broad
supervision over the affairs of the Fund and the Portfolio, respectively. The
Fund has retained the services of DSIL as Sponsor, but has not retained the
services of an investment manager or investment submanager since the Fund seeks
to achieve its investment objective by investing all of its investable assets in
the Portfolio. The Portfolio has retained the services of DSIL as investment
manager and Mellon Equity as investment submanager.
MANAGER
DSIL, a Massachusetts limited liability company, provides investment
management and administrative services to the Portfolio pursuant to a Management
Agreement. DSIL has been registered as an investment adviser under the
Investment Advisers Act of 1940 since 1997. The services provided by the Manager
consist of investment supervisory services, overall operational support and
administrative services. The administrative services include the provision of
general office facilities and supervising the overall administration of the
Portfolio. For its services under the Management Agreement, the Manager receives
from the Portfolio a fee accrued daily and paid monthly at an annual rate equal
to 0.20% of the Portfolio's average daily net assets, on an annualized basis for
the Portfolio's then-current fiscal year, subject to reduction. See "Expenses"
for a description of this fee reduction pursuant to the Management Agreement.
Prior to October 22, 1997, KLD, as the Portfolio's former investment
adviser, received from the Portfolio a fee accrued daily and paid monthly at an
annual rate equal to 0.025% of the Portfolio's average daily net assets, on an
annualized basis for the Portfolio's then-current fiscal year. Additionally,
prior to October 22, 1997, KLD received from the Portfolio a fee accrued daily
and paid monthly at an annual rate equal to 0.025% of the average daily net
assets of the Portfolio for its then current fiscal year for administrative
services.
"DominiSM" and "Domini 400 Social IndexSM" are service marks of KLD which
are licensed to DSIL with the consent of Amy L. Domini. Pursuant to agreements
among DSIL, Amy L. Domini, and each of the Fund and the Portfolio, the Portfolio
may be required to discontinue use of these service marks if DSIL ceases to be
the Manager of the Portfolio or Ms. Domini withdraws her consent, and the Fund
may be required to discontinue the use of these service marks if either DSIL
ceases to be the Sponsor of the Fund or Ms. Domini withdraws her consent or if
either DSIL ceases to be the Manager of the Portfolio or the Fund ceases to
invest all of its assets in the Portfolio.
SUBMANAGER
Mellon Equity provides investment submanagement services to the Portfolio on
a day-to-day basis pursuant to a Submanagement Agreement with DSIL. Mellon
Equity does not determine the composition of the Domini Social Index.
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Under the Submanagement Agreement, DSIL pays Mellon Equity an investment
submanagement fee equal on an annual basis to 0.10% of the average daily net
assets of the Portfolio. Prior to October 22, 1997, the Portfolio paid Mellon
Equity an investment management fee equal on an annual basis to 0.10% of the
average daily net assets of the Portfolio.
Mellon Equity is a Pennsylvania business trust founded in 1987 whose
beneficial owners are Mellon Bank N.A. and MMIP, Inc (a wholly owned subsidiary
of Mellon Bank Corporation ("Mellon Bank")), and with its principal offices at
500 Grant Street, Pittsburgh, PA 15258-0001. Mellon Equity has been registered
as an investment adviser under the Investment Advisers Act of 1940 since 1986.
Prior to 1987, the Submanager was part of the Equity Management Group of Mellon
Bank's Trust and Investment Department, which managed domestic equity,
tax-exempt and institutional pension assets since 1947. As of December 31, 1996,
the Submanager had approximately $11.3 billion in assets under management.
John R. O'Toole (a senior vice president of Mellon Equity, CFA and a member
of AIMR), has been primarily responsible for the day-to-day portfolio management
of the Portfolio since November 1994. He has been employed by Mellon Equity
and/or Mellon Bank as a portfolio manager for over five years.
SPONSOR
Pursuant to a Sponsorship Agreement, DSIL provides the Fund with the
administrative personnel and services necessary to operate the Fund. In addition
to general administrative services and facilities for the Fund similar to those
provided by DSIL to the Portfolio under the Management Agreement, DSIL answers
questions from the general public and the media regarding the composition of the
Domini Social Index and the securities holdings of the Portfolio. For these
services and facilities, DSIL receives fees computed and paid monthly from the
Fund at an annual rate equal to 0.50% of the average daily net assets of the
Fund for the Fund's then-current fiscal year, subject to reduction. See
"Expenses" for a description of this fee reduction pursuant to the Sponsorship
Agreement.
PURCHASES AND REDEMPTIONS OF SHARES
PURCHASES
Shares of the Fund may be purchased without a sales load at the net asset
value next determined after an order for shares is received in good order by the
Fund provided such order is received on any day the New York Stock Exchange is
open for trading (a "Fund Business Day"). The minimum initial investment in the
Fund is $1,000, except that the minimum initial investment for an investor who
invests through an automatic investment plan is $500 and the minimum initial
investment for an IRA is $250. Except as noted below, there is a $50 minimum on
additional investments.
The Fund reserves the right to cease offering its shares for sale at any
time or to reject any order for the purchase of its shares.
For each shareholder of record, the Fund establishes an open account to
which all shares purchased are credited together with any dividends and capital
gains distributions which are paid in additional shares. See "Other Information
Concerning Shares of the Fund -- Dividends and Capital Gains Distributions".
Although most shareholders elect not to receive share certificates, certificates
for full shares can be obtained on specific written request to the Fund. No
certificates are issued for fractional shares.
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<PAGE>
Shares may be purchased directly from the Distributor or through Service
Organizations (see "Service Organizations" below) by clients of those Service
Organizations. If an investor purchases shares through a Service Organization,
the Service Organization must promptly transmit such order to the Fund so that
the order receives the net asset value next determined following receipt of the
order. Service Organizations may impose minimum customer account and other
requirements in addition to those imposed by the Fund. Investors wishing to
purchase shares through a Service Organization should contact that organization
directly for appropriate instructions. Other investors may purchase Fund shares
in the manner described below.
Payment by Check: Investors desiring to purchase shares of the Fund by mail
should complete an Account Application and mail the Application and a check (in
U.S. dollars), payable to "Domini Social Equity Fund", to the Fund at the
following address:
Domini Social Equity Fund
P.O. Box 959
New York, New York 10159-0959
Payment by Wire: An investor desiring to purchase shares by a wire transfer
of funds should request its bank to transmit immediately available funds. The
information transmitted with the funds must include the investor's name and
address and a statement indicating whether a new account is being established by
such wire transfer or whether such wire transfer is being made by a shareholder
with an account with the Fund. If the initial purchase by an investor is by a
wire transfer of funds, an account number will be assigned to such investor and
an Account Application must subsequently be completed and mailed to the Fund.
For purchases by wire transfer, please call Fundamental Shareholder Services,
Inc., the Fund's transfer agent (the "Transfer Agent"), at 1-800-782-4165 to
obtain wire transfer instructions.
Shares of the Fund may be purchased by exchanging securities acceptable to
the Fund for shares of the Fund. The Fund will not accept a security in exchange
for Fund shares unless (a) the security is consistent with the investment
objective and policies of the Fund and the Portfolio, and (b) the security is
deemed acceptable by the Manager and the Submanager. Securities offered in
exchange for shares of the Fund will be valued in accordance with the usual
valuation procedure for the Fund. See "Net Asset Value."
Investors making purchases through a Service Organization should be aware
that it is the responsibility of the Service Organization to transmit orders for
purchases of shares by its customers to the Transfer Agent and to deliver
required funds on a timely basis, in accordance with the procedures stated
above.
For further information on how to purchase shares of the Fund, an investor
should call 1-800-762-6814.
AUTOMATIC INVESTMENT PLAN
The Fund offers a plan for regularly investing specified dollar amounts
($25.00 minimum in monthly, quarterly, semi-annual or annual intervals) in the
Fund. The minimum initial investment for an investor investing through an
automatic investment plan is $500. If an Automatic Investment Plan is selected,
subsequent investments will be automatic and will continue until such time as
the Fund and the
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<PAGE>
investor's bank are notified to discontinue further investments. Due to the
varying procedures to prepare, process and to forward the bank withdrawal
information to the Fund, there may be a delay between the time of the bank
withdrawal and the time the money reaches the Fund. The investment in the Fund
will be made at the public offering price per share determined on the day that
both the check and bank withdrawal data are received in the form required by the
Fund. Further information about the plan and form may be obtained from the
Transfer Agent or the Distributor at the telephone numbers listed on the back
cover of the prospectus.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Fund may be used as a funding medium for an Individual
Retirement Account ("IRA"). An Internal Revenue Service-approved IRA plan is
available from the Distributor naming Investors Bank & Trust Company as
custodian. The minimum initial investment for an IRA is $250; the minimum
subsequent investment is $50. IRAs are available to individuals who receive
compensation or earned income and their spouses whether or not they are active
participants in a tax-qualified or Government-approved retirement plan. An IRA
contribution by an individual who participates, or whose spouse participates, in
a tax-qualified or Government-approved retirement plan may not be deductible
depending upon various factors, including the individual's income. Individuals
also may establish an IRA to receive a "rollover" contribution of distributions
from another IRA or a qualified plan. Tax advice should be obtained before
planning a rollover.
REDEMPTIONS
A shareholder may redeem all or any portion of the shares in its account at
any time at the net asset value next determined after a redemption request in
proper form is furnished by the shareholder to the Fund. Redemptions will
therefore be effected on the same day the redemption order is received in good
order by the Fund provided such order is received on a Fund Business Day prior
to the time at which the net asset value of the Fund is determined. The proceeds
of a redemption will be paid by the Fund in federal funds normally on the next
Fund Business Day, but in any event within seven days if all checks in payment
for the purchase of shares to be redeemed have been cleared by the Fund (which
may take up to 15 days). Redemptions may be paid by the Fund by check or by wire
transfer if the appropriate box on the Account Application has been completed.
Instructions for wire redemptions are set forth in the Account Application. The
Fund's Transfer Agent reserves the right to charge for wires. If shares to be
redeemed are held in certificate form, the certificates must be mailed to the
Fund at the address noted below. Do not sign the certificates and, for
protection, use registered mail.
Redemptions may be made by letter to the Fund specifying the dollar amount
or number of shares to be redeemed and the account number. The letter must be
signed in exactly the same way the account is registered. To protect you and the
Fund against fraud, redemptions exceeding $50,000 (and for all written
redemptions, regardless of amount, made within 30 days following any changes in
account registration), must be signature guaranteed. You can obtain a signature
guarantee from most banks, savings institutions, credit unions, broker-dealers,
and other guarantors acceptable to the Fund and its transfer agent. The Fund and
its transfer agent cannot accept guarantors from notaries public or
organizations that do not provide reimbursement in the case of fraud. The Fund
and its transfer agent may, at its option, request further documentation from
corporations, executors, administrators, trustees, or guardians. In some cases
the Fund may require the furnishing of additional documents.
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<PAGE>
Written requests should be mailed to the Fund at the following address:
Domini Social Equity Fund
P.O. Box 959
New York, New York 10159-0959
For overnight deliveries, please use the following address:
Domini Social Equity Fund
11 W. 25th Street, 7th Floor
New York, New York 10010-2001
212-352-9200
An investor may also redeem shares by telephone by calling the Transfer
Agent, at 1-800-782-4165, if the appropriate box on the Account Application has
been completed. The Fund, Transfer Agent and Distributor will not be liable for
any loss, liability, cost or expense for acting upon telephone instructions
believed to be genuine. Accordingly, shareholders will bear the risk of loss.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, including, without limitation, recording
telephone instructions and/or requiring the caller to provide some form of
personal identification. Failure to employ reasonable procedures may make the
Fund liable for any losses due to unauthorized or fraudulent telephone
instructions. The following information must be supplied by the shareholder or
broker at the time a request for a telephone redemption is made: (1) the
shareholder's account number; (2) the shareholder's social security number; and
(3) the name and account number of the shareholder's designated securities
dealer or bank.
The Fund, Transfer Agent and Distributor reserve the right to refuse wire or
telephone redemptions. Procedures for redeeming shares by wire or telephone may
be modified or terminated at any time by the Fund or the Distributor. A Service
Organization may request a wire redemption provided a Wire Authorization Form is
on file with the Fund. The proceeds of a wire redemption will be sent to an
account with a Service Organization designated on the appropriate form. The Fund
reserves the right to restrict or terminate wire redemption privileges. Proceeds
of wire redemptions will be transferred within seven days after receipt of the
request.
The value of shares redeemed may be more or less than the shareholder's
cost, depending on the Fund's performance during the period the shareholder
owned its shares. Redemptions of shares are taxable events on which the
shareholder may recognize a gain or a loss.
The right of any shareholder to receive payment with respect to any
redemption may be suspended or the payment of the redemption proceeds postponed
during any period in which the New York Stock Exchange is closed (other than
weekends or holidays) or trading on such Exchange is restricted, or, to the
extent otherwise permitted by the 1940 Act, if an emergency exists.
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns shares of the Fund with an aggregate value of
$10,000 or more may establish a Systematic Withdrawal Plan under which he or she
redeems at net asset value the number of full and fractional shares which will
produce the monthly, quarterly, semi-annual or annual payments
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<PAGE>
specified (minimum $50.00 per payment). Depending on the amounts withdrawn,
systematic withdrawals may deplete the investor's principal. Investors
contemplating participation in this Plan should consult their tax advisers. No
additional charge to the shareholder is made for this service.
TAX MATTERS
Each year the Fund intends to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). Provided the Fund qualifies as a "regulated investment company" under
the Code, and distributes all of its net investment income and realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, the Fund will not be required to pay any federal income or excise taxes.
The Portfolio will also not be required to pay any federal income or excise
taxes. However, shareholders of the Fund normally will have to pay federal
income taxes, and any state or local taxes, on distributions of net investment
income and net realized capital gains from the Fund. After the end of each
calendar year, each shareholder receives information, as required by the
Internal Revenue Service, for tax purposes on the distributions received during
that calendar year including the portion taxable as ordinary income, the portion
taxable as long-term capital gains, the portion, if any, representing a return
of capital (which is generally treated as a reduction in basis rather than
taxable income) and the amount of dividends eligible for the corporate dividends
received deduction.
Dividends and distributions to shareholders will be treated in the same
manner for federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund. Distributions of net capital gains (I.E., the
excess of net long-term capital gains over net short-term capital losses) will
cause any short-term capital loss realized on the disposition by a Fund's
shareholder of Fund shares held for six or fewer months to be recharacterized,
to the extent of those distributions, as long-term capital loss. Under the
back-up withholding rules of the Code, certain shareholders may be subject to
31% withholding of federal income tax on distributions and payments made by the
Fund. Generally, shareholders are subject to back-up withholding if they have
not provided the Fund with a correct taxpayer identification number and certain
other certifications.
The Fund is organized as a Massachusetts business trust and, under current
law, is not liable for any income or franchise tax in the Commonwealth of
Massachusetts as long as it qualifies as a regulated investment company under
the Code.
The foregoing discussion is intended for general information only. A
prospective shareholder should consult with its own tax advisor as to the tax
consequences of an investment in the Fund including the status of distributions
from the Fund under applicable state or local law.
OTHER INFORMATION CONCERNING SHARES OF THE FUND
NET ASSET VALUE
The Fund determines the net asset value of each of its shares on each Fund
Business Day. This determination is made once during each such day as of the
close of regular trading on the New York Stock Exchange by deducting the amount
of the Fund's liabilities from the value of its assets and dividing the
difference by the number of shares of the Fund outstanding.
Since the Fund will invest all of its assets in the Portfolio, the value of
the Fund's assets will be equal to the value of its beneficial interest in the
Portfolio. The net asset value of the Portfolio is determined as of
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<PAGE>
the close of regular trading on the New York Stock Exchange on each Fund
Business Day, by deducting the amount of the Portfolio's liabilities from the
value of its assets. The value of the Fund's beneficial interest in the
Portfolio will be determined by multiplying the net asset value of the Portfolio
by the percentage, effective for that day, which represents the Fund's share of
the aggregate beneficial interests in the Portfolio. (See "Description of
Shares, Voting Rights and Liabilities" below.)
Equity securities held by the Portfolio are valued at the last sale price on
the exchange on which they are primarily traded or on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for securities
in which there were no sales during the day or for unlisted securities not
reported on the NASDAQ system. If the Portfolio purchases option contracts, such
option contracts which are traded on commodities or securities exchanges are
normally valued at the settlement price on the exchange on which they are
traded. Short-term obligations with remaining maturities of less than sixty days
are valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees of the Portfolio. Portfolio securities (other than short-term
obligations with remaining maturities of less than sixty days) for which there
are no such quotations or valuations are valued at fair value as determined in
good faith by or at the direction of the Portfolio's Board of Trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Substantially all of the Fund's net income from dividends and interest is
paid to the Fund's shareholders semi-annually (usually in the months of June and
December) as a dividend. For this purpose, the Fund's "net income from dividends
and interest" consists of all income from dividends and interest accrued on the
assets of the Fund (I.E., the Fund's share of the Portfolio's net income from
dividends and interest), less all actual and accrued expenses of the Fund
determined in accordance with generally accepted accounting principles.
The Fund also declares a long-term capital gains distribution to its
shareholders on an annual basis, usually in December, if the Fund's share of the
Portfolio's profits during the year from the sale of securities held for longer
than the applicable long-term capital gains holding period exceeds the Fund's
share of the Portfolio's losses during such year from the sale of securities
together with the Fund's share of the Portfolio's net capital losses carried
forward from prior years (to the extent not used to offset short-term capital
gains). The Fund's share of the Portfolio's net short-term capital gains
realized during each fiscal year will also be distributed at that time.
The Fund will also make additional distributions to its shareholders to the
extent necessary to avoid application of the 4% nondeductible excise tax created
by the Tax Reform Act of 1986 on certain undistributed income and net capital
gains of mutual funds.
A shareholder of the Fund may elect to receive dividends and capital gains
distributions in either cash or additional shares. Unless otherwise specified in
writing by a shareholder, all dividends and capital gains distributions will be
reinvested in additional shares.
EXPENSES
The Fund and the Portfolio each are responsible for all of their respective
expenses, including the compensation of their respective Trustees who are not
interested persons of the Fund or the Portfolio; governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable to
the Fund or the Portfolio; fees and expenses of independent auditors, of legal
counsel and of
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<PAGE>
any transfer agent, custodian, registrar or dividend disbursing agent of the
Fund or the Portfolio; insurance premiums; and expenses of calculating the net
asset value of the Portfolio and of shares of the Fund.
The Fund will also pay sponsorship fees payable to the Sponsor; all expenses
of distributing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, reports, notices,
proxy statements and reports to shareholders and to governmental offices and
commissions; expenses of shareholder meetings; and expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses for such purposes.
Under the Sponsorship Agreement, DSIL's fee will be reduced to the extent
necessary to keep the aggregate annual operating expenses of the Fund (including
the Fund's share of the Portfolio's expenses but excluding brokerage fees and
commissions, interest, taxes and other extraordinary expenses) at no greater
than 0.98% of the average daily net assets of the Fund through October 22, 1998.
The Portfolio will also pay the expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Portfolio's custodian for all services to the Portfolio, including safekeeping
of funds and securities and maintaining required books and accounts; expenses of
preparing and mailing reports to investors and to governmental offices and
commissions; expenses of meetings of investors; and the investment management
fees payable to the Manager.
Under the Management Agreement, DSIL's fee will be reduced to the extent
necessary to keep the aggregate annual operating expenses of the Portfolio
(excluding brokerage fees and commissions, interest, taxes and other
extraordinary expenses) at no greater than 0.20% of the average daily net assets
of the Portfolio through October 22, 1998.
There is no assurance that DSIL will maintain the fee reductions pursuant to
the Management Agreement or the Sponsorship Agreement beyond the specified date.
DISTRIBUTION PLAN AND AGREEMENT
The Trustees of the Fund have adopted a Distribution Plan in accordance with
Rule 12b-1 under the 1940 Act after having concluded that there is a reasonable
likelihood that the Distribution Plan will benefit the Fund and its
shareholders. As contemplated by the Distribution Plan, the Distributor, as the
Distributor, acts as agent of the Fund in connection with the offering of shares
of the Fund pursuant to a Distribution Agreement. The Distributor, as the
Distributor, acts as the principal underwriter of shares of the Fund and bears
the compensation of personnel necessary to provide such services and all costs
of travel, office expenses (including rent and overhead) and equipment.
Under the Distribution Plan, the Distributor may receive a fee from the Fund
at an annual rate not to exceed 0.25% of the Fund's average daily net assets in
anticipation of, or as reimbursement for, costs and expenses incurred in
connection with the sale of shares of the Fund, such as payments to broker-
dealers who advise shareholders regarding the purchase, sale or retention of
shares of the Fund, payments to employees of the Distributor, advertising
expenses and the expenses of printing and distributing prospectuses and reports
used for sales purposes, expenses of preparing and printing sales literature and
other distribution-related expenses. The Distributor will provide to the
Trustees of the Fund a quarterly written report of amounts expended by it under
the Distribution Plan and the purposes for which such expenditures were made.
19
<PAGE>
DSIL has informed the Fund's Board of Trustees that it, or an affiliate,
intends to become qualified as a broker-dealer and transfer agent within the
next year. In that event, the Trustees would consider appointing DSIL, or such
affiliate, the distributor and/or transfer agent for the Fund.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
and to divide or combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interests in the Fund.
Each share represents an equal proportionate interest in the Fund with each
other share. Shares have no pre-emptive or conversion rights. Shares when issued
are fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held. The Fund is not required to hold
annual meetings of shareholders but the Fund will hold special meetings of
shareholders when in the judgment of the Trustees it is necessary or desirable
to submit matters for a shareholder vote. Upon liquidation of the Fund,
shareholders would be entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders. Shareholders have under certain
circumstances the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Shareholders also have under certain circumstances the right to
remove one or more Trustees without a meeting.
The Fund reserves the right to create and issue any number of series of
shares, in which case the shares of each series would participate equally in the
earnings, dividends and assets of the particular series (except for differences
among any classes of shares of any series). Currently, the Fund has only one
series of shares, all of which are of the same class. The Fund may establish
additional classes of any series of shares. For example, the Fund may offer
another class of shares that has lower annual distribution fees or shareholder
servicing fees. Prior to offering another class of shares, the Fund would either
issue a new prospectus and statement of additional information or amend this
Prospectus and the Statement of Additional Information to reflect such issuance.
The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Fund itself was unable to meet its
obligations.
The Portfolio, in which all of the investable assets of the Fund are
invested, is organized as a trust under the laws of the State of New York. The
Portfolio's Declaration of Trust provides that the Fund and other entities
investing in the Portfolio (I.E., other investment companies, insurance company
separate accounts and common and commingled trust funds) will each be liable for
all obligations of the Portfolio. However, the risk of the Fund incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations. Accordingly, the Fund's Trustees believe that neither the Fund
nor its shareholders will be adversely affected by reason of the Fund's
investing in the Portfolio. In addition, whenever the Fund is requested to vote
on a fundamental policy of the Portfolio, the Fund will hold a meeting of its
shareholders and will cast its vote as instructed by its shareholders.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each Fund Business Day. At the close of each such
Fund Business Day, the value of each
20
<PAGE>
investor's beneficial interest in the Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be re-computed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of the close of business on the following Fund Business Day.
SERVICE ORGANIZATIONS, TRANSFER AGENT AND CUSTODIAN
SERVICE ORGANIZATIONS
The Fund may also contract with various banks, trust companies (other than
Mellon Equity), broker-dealers (other than the Distributor) or other financial
organizations (collectively, "Service Organizations") to provide services for
the Fund, such as maintaining shareholder accounts and records. The Fund may pay
fees to Service Organizations (which may vary depending upon the services
provided) in amounts up to an annual rate of 0.25% of the daily net asset value
of the shares of the Fund owned by shareholders with whom the Service
Organization has a servicing relationship.
Some Service Organizations may impose additional or different conditions on
their clients such as requiring their clients to invest more than the minimum
initial investment specified by the Fund or charging a direct fee for servicing.
If imposed, these fees would be in addition to any amounts which might be paid
to the Service Organization by the Fund. Each Service Organization has agreed to
transmit to its clients a schedule of any such fees. Shareholders using Service
Organizations are urged to consult them regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There is currently no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, could prevent a bank Service Organization from
continuing to perform all or a part of its servicing activities. If a bank were
prohibited from so acting, its shareholder clients would be permitted to remain
shareholders of the Fund and alternative means for continuing the servicing of
such shareholders would be sought. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.
TRANSFER AGENT AND CUSTODIAN
The Fund has entered into a Transfer Agency Agreement with Fundamental
Shareholder Services, Inc. ("FSSI"), 11 West 25th Street, 7th Floor, New York,
NY 10010, pursuant to which FSSI acts as Transfer Agent for the Fund. The
Transfer Agent maintains an account for each shareholder of the Fund,
21
<PAGE>
performs other transfer agency functions and acts as dividend disbursing agent
for the Fund. Pursuant to Custodian Agreements, Investors Bank & Trust Company
("IBT"), 200 Clarendon Street, Boston, MA 02116, acts as the custodian of the
Fund's assets (I.E., cash and the Fund's interest in the Portfolio) and as the
custodian of the Portfolio's assets (the "Custodian"). The Custodian's
responsibilities include safeguarding and controlling the Portfolio's cash and
securities, handling the receipt and delivery of securities, determining income
and collecting interest on the Portfolio's investments, maintaining books of
original entry for portfolio and fund accounting and other required books and
accounts, and calculating the daily net asset value of the Portfolio and the
daily net asset value of shares of the Fund. Securities held by the Portfolio
may be deposited into certain securities depositaries. The Custodian does not
determine the investment policies of the Portfolio or decide which securities
the Portfolio will buy or sell. The Portfolio may, however, invest in securities
of the Custodian and may deal with the Custodian as principal in securities
transactions. IBT also serves as transfer agent for the Portfolio. For their
services, FSSI and IBT will receive such compensation as may from time to time
be agreed upon by each of them and the Fund or the Portfolio.
------------------------
The Fund's Statement of Additional Information contains more detailed
information about the Fund and the Portfolio, including information related to
(i) investment policies and restrictions of the Fund and the Portfolio, (ii) the
Trustees, officers, Manager of the Portfolio and Sponsor of the Fund, (iii)
portfolio transactions, (iv) the Fund's shares, including rights and liabilities
of shareholders, (v) additional performance information, including the method
used to calculate yield and total rate of return quotations of the Fund, (vi)
determination of the net asset value of shares of the Fund, and (vii) the
audited financial statements of the Fund and the Portfolio at July 31, 1997.
22
<PAGE>
[DOMINI LOGO]
P.O. BOX 959
NEW YORK, NY 10159-0959
800-782-4165
HTTP://WWW.DOMINI.COM
<TABLE>
<S> <C> <C>
PORTFOLIO INVESTMENT MANAGER CUSTODIAN:
AND FUND SPONSOR: Investors Bank &
Domini Social Trust Company
Investments, LLC Boston, MA
11 West 25th Street, 7th INDEPENDENT AUDITORS:
Floor KPMG Peat Marwick LLP
New York, NY 10010 Boston, MA
PORTFOLIO INVESTMENT
SUBMANAGER: LEGAL COUNSEL:
Mellon Equity Associates Bingham Dana LLP
Pittsburgh, PA Boston, MA
DISTRIBUTOR: TRANSFER AGENT:
Signature Broker-Dealer FSSI
Services, Inc. New York, NY
6 St. James Avenue
Boston, MA 02116
800-762-6814
</TABLE>
- --------------------------------------------------------
DOMINI SOCIAL EQUITY FUND
PROSPECTUS
---------------------------------------
November 26, 1997
INVESTING FOR GOOD SM
M PRINTED ON RECYCLED PAPER WITH SOY INK
Cusip: 257132100
<PAGE>
Rule 497(c)
File Nos. 33-29180
811-05823
STATEMENT OF ADDITIONAL INFORMATION
November 26, 1997
DOMINI SOCIAL EQUITY FUND
TABLE OF CONTENTS PAGE
1. The Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2. Investment Objective, Policies and Restrictions . . . . . . . . . . . . . .2
3. Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . .8
4. Determination of Net Asset Value; Valuation of Portfolio Securities . . . .9
5. Management of the Fund and the Portfolio. . . . . . . . . . . . . . . . . 10
6. Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7. Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8. Portfolio Transactions and Brokerage Commissions. . . . . . . . . . . . . 21
9. Description of Shares, Voting Rights and Liabilities . . . . . . . . . . 23
10. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 25
DOMINI SOCIAL EQUITY FUND
11 West 25th Street, 7th Floor, New York, New York 10010
(800) 782-4165
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the Fund's
Prospectus dated November 26, 1997, as amended from time to time. This
Statement of Additional Information should be read in conjunction with the
Prospectus, a copy of which may be obtained by an investor without charge by
contacting Signature Broker-Dealer Services, Inc., the Fund's distributor, at
(800) 762-6814.
This Statement of Additional Information is NOT a prospectus and is
authorized for distribution to prospective investors only if preceded or
accompanied by an effective prospectus and should be read only in conjunction
with such prospectus.
<PAGE>
1. THE FUND
Domini Social Equity Fund (the "Fund") is a no-load diversified open-end
management investment company which was organized as a business trust under
the laws of the Commonwealth of Massachusetts on June 7, 1989. The Fund
offers to buy back (redeem) its shares from its shareholders at any time at
net asset value. References in this Statement of Additional Information to
the "Prospectus" are to the current Prospectus of the Fund, as amended or
supplemented from time to time.
Domini Social Investments LLC ("DSIL") the Fund's sponsor (the
"Sponsor"), supervises the overall administration of the Fund. The Board of
Trustees provides broad supervision over the affairs of the Fund. Shares of
the Fund are continuously sold by Signature Broker-Dealer Services, Inc.
("Signature"), the Fund's distributor (the "Distributor"). The minimum
initial investment is $1,000, except that the minimum initial investment for
an Individual Retirement Account is $250 and the minimum initial investment
for investors who invest through an automatic investment plan is $500. An
investor should obtain from the Distributor, and should read in conjunction
with the Prospectus, the materials describing the procedures under which Fund
shares may be purchased and redeemed.
The Fund seeks to achieve its investment objective by investing all its
assets in the Domini Social Index Portfolio (the "Portfolio"), a diversified
open-end management investment company having the same investment objective
as the Fund. DSIL is the Portfolio's investment manager (the "Manager").
Mellon Equity Associates ("Mellon Equity") is the Portfolio's investment
submanager (the "Submanager"). Kinder, Lydenberg, Domini & Co., Inc. ("KLD")
determines the composition of the Domini 400 Social IndexSM. The Submanager
manages the investments of the Portfolio from day to day in accordance with
the Portfolio's investment objective and policies. "DominiSM" and "Domini
400 Social IndexSM" are service marks of KLD.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide its shareholders with
long-term total return (reflecting both dividend and price performance of the
Fund) which corresponds to the performance of the Domini 400 Social IndexSM
(referred to herein as the "Index" or the "Domini Social Index"). There can,
of course, be no assurance that the Fund will achieve its investment
objective. The investment objective of the Fund may be changed without
approval by the Fund's shareholders.
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing all its
assets in the Portfolio, which has the same investment objective as the Fund.
The Fund may withdraw its investment in the Portfolio at any time if the
Board of Trustees of the Fund determines that it is in the best interests of
the Fund to do so. Upon any such withdrawal, the Board of Trustees would
consider what action might be taken, including the investment of all the
investable assets of the Fund in another pooled investment entity having the
same investment objective as the Fund, or the retaining of an investment
adviser to manage the Fund's assets in accordance with the investment
policies described below with respect to the Portfolio. The approval of the
Fund's shareholders would not be required to change any of the Fund's
investment policies.
The following supplements the information concerning the Portfolio's
investment policies contained in the Prospectus and should only be read in
conjunction therewith.
2
<PAGE>
A company which is not included in the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500") may be included in the Domini Social Index
primarily in order to afford representation to an industrial sector which
would otherwise be under-represented in the Index. Because of the social
criteria applied in the selection of stocks comprising the Index, industry
sector weighting in the Index may vary materially from the industry
weightings in other stock indices, including the S&P 500.
With respect to stocks of foreign issuers, the Portfolio does not
purchase securities which the Portfolio believes, at the time of purchase,
will be subject to exchange controls or foreign withholding taxes; however,
there can be no assurance that such laws may not become applicable to certain
of the Portfolio's investments. In the event unforeseen exchange controls or
foreign withholding taxes are imposed with respect to any of the Portfolio's
investments, the effect may be to reduce the income received by the Portfolio
on such investments.
Although neither the Fund nor the Portfolio has any current intention to
do so, the Fund and the Portfolio may invest in securities which may be
resold pursuant to Rule 144A under the Securities Act of 1933 (the "1933
Act").
It is a fundamental policy of the Portfolio and the Fund that neither
the Portfolio nor the Fund may invest more than 25% of the total assets of
the Portfolio or the Fund, respectively, in any one industry, although the
Fund will invest all of its assets in the Portfolio, and the Portfolio may
and would invest more than 25% of its assets in an industry if stocks in that
industry were to comprise more than 25% of the Domini Social Index. Based on
the current composition of the Index, this is considered highly unlikely. If
the Portfolio were to concentrate its investments in a single industry, the
Portfolio and the Fund would be more susceptible to any single economic,
political or regulatory occurrence than would be another investment company
which was not so concentrated.
LOANS OF SECURITIES: The Portfolio may lend its securities to brokers,
dealers and financial institutions, provided that (1) the loan is secured
continuously by collateral, consisting of U.S. Government securities or cash
or letters of credit, which is marked to the market daily to ensure that each
loan is fully collateralized at all times; (2) the Portfolio may at any time
call the loan and obtain the return of the securities loaned within three
business days; (3) the Portfolio will receive any interest or dividends paid
on the securities loaned; and (4) the aggregate market value of securities
loaned will not at any time exceed 30% of the total assets of the Portfolio.
The Portfolio will earn income for lending its securities either in the
form of fees received from the borrower of the securities or in connection
with the investment of cash collateral in short-term money market
instruments. Loans of securities involve a risk that the borrower may fail
to return the securities or may fail to provide additional collateral.
In connection with lending securities, the Portfolio may pay reasonable
finders, administrative and custodial fees. No such fees will be paid to any
person if it or any of its affiliates is affiliated with the Portfolio, the
Manager or the Submanager.
Although the Portfolio reserves the right to lend its securities, it has
no current intention of doing so in the foreseeable future.
RISK FACTORS INVOLVED IN OPTION CONTRACTS: Although it has no current
intention to do so, the Portfolio may in the future enter into certain
transactions in stock options for the purpose of hedging against possible
increases in the value of securities which are expected to be purchased by
the Portfolio or possible declines
3
<PAGE>
in the value of securities which are expected to be sold by the Portfolio.
Generally, the Portfolio would only enter into such transactions on a
short-term basis pending readjustment of its holdings of underlying stocks.
The purchase of an option on an equity security provides the holder with
the right, but not the obligation, to purchase the underlying security, in
the case of a call option, or to sell the underlying security, in the case of
a put option, for a fixed price at any time up to a stated expiration date.
The holder is required to pay a non-refundable premium, which represents the
purchase price of the option. The holder of an option can lose the entire
amount of the premium, plus related transaction costs, but not more. Upon
exercise of the option, the holder is required to pay the purchase price of
the underlying security in the case of a call option, or deliver the security
in return for the purchase price in the case of a put option.
Prior to exercise or expiration, an option position may be terminated
only by entering into a closing purchase or sale transaction. This requires
a secondary market on the exchange on which the position was originally
established. While the Portfolio would establish an option position only if
there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular option contract at
any specific time. In that event, it may not be possible to close out a
position held by the Portfolio, and the Portfolio could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. The inability to
close out option positions also could have an adverse impact on the
Portfolio's ability effectively to hedge its portfolio.
Each exchange on which option contracts are traded has established a
number of limitations governing the maximum number of positions which may be
held by a trader, whether acting alone or in concert with others. The
Manager does not believe that these trading and position limits would have an
adverse impact on the possible use of hedging strategies by the Portfolio.
------------
The approval of the Fund and of the other investors in the Portfolio is
not required to change the investment objective or any of the non-fundamental
investment policies discussed above, including those concerning security
transactions.
INVESTMENT RESTRICTIONS
The Fund and the Portfolio have each adopted the following policies
which may not be changed without approval by holders of a "majority of the
outstanding voting securities" of the Fund or the Portfolio, respectively,
which as used in this Statement of Additional Information means the vote of
the lesser of (i) 67% or more of the outstanding "voting securities" of the
Fund or the Portfolio, respectively, present at a meeting, if the holders of
more than 50% of the outstanding "voting securities" of the Fund or the
Portfolio, respectively, are present or represented by proxy, or (ii) more
than 50% of the outstanding "voting securities" of the Fund or the Portfolio,
respectively. The term "voting securities" as used in this paragraph has the
same meaning as in the Investment Company Act of 1940, as amended (the "1940
Act").
Except as described below, whenever the Fund is requested to vote on a
change in the investment restrictions of the Portfolio, the Fund will hold a
meeting of its shareholders and will cast its vote proportionately as
instructed by its shareholders. However, subject to applicable statutory and
regulatory requirements, the Fund would not request a vote of its
shareholders with respect to (a) any proposal relating to the Portfolio,
which proposal, if made with respect to the Fund, would not require the vote
of the shareholders of the Fund, or (b) any proposal with respect to the
Portfolio that is identical in all material respects to a proposal that has
previously been approved by shareholders of the Fund. Any proposal submitted
to holders in the Portfolio, and that is not required to be voted on by
shareholders of the Fund,
4
<PAGE>
would nevertheless be voted on by the Trustees of the Fund.
Neither the Fund nor the Portfolio may:
(1) borrow money, except that as a temporary measure for extraordinary
or emergency purposes either the Fund or the Portfolio may borrow an amount
not to exceed 1/3 of the current value of the net assets of the Fund or the
Portfolio, respectively, including the amount borrowed (moreover, neither the
Fund nor the Portfolio may purchase any securities at any time at which
borrowings exceed 5% of the total assets of the Fund or the Portfolio,
respectively, taken in each case at market value) (it is intended that the
Portfolio would borrow money only from banks and only to accommodate requests
for the withdrawal of all or a portion of a beneficial interest in the
Portfolio while effecting an orderly liquidation of securities);
(2) purchase any security or evidence of interest therein on margin,
except that either the Fund or the Portfolio may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
securities and except that either the Fund or the Portfolio may make deposits
of initial deposit and variation margin in connection with the purchase,
ownership, holding or sale of options;
(3) write any put or call option or any combination thereof, provided
that this shall not prevent (i) the purchase, ownership, holding or sale of
warrants where the grantor of the warrants is the issuer of the underlying
securities, or (ii) the purchase, ownership, holding or sale of options on
securities;
(4) underwrite securities issued by other persons, except that the Fund
may invest all or any portion of its assets in the Portfolio and except
insofar as either the Fund or the Portfolio may technically be deemed an
underwriter under the 1933 Act in selling a security;
(5) make loans to other persons except (a) through the lending of
securities held by either the Fund or the Portfolio and provided that any
such loans not exceed 30% of its total assets (taken in each case at market
value), or (b) through the use of repurchase agreements or the purchase of
short-term obligations and provided that not more than 10% of its net assets
will be invested in repurchase agreements maturing in more than seven days;
for additional related restrictions, see paragraph (6) immediately following;
(6) invest in securities which are subject to legal or contractual
restrictions on resale (other than repurchase agreements maturing in not more
than seven days and other than securities which may be resold pursuant to
Rule 144A under the 1933 Act if the Board of Trustees determines that a
liquid market exists for such securities) if, as a result thereof, more than
10% of its net assets (taken at market value) would be so invested (including
repurchase agreements maturing in more than seven days), except that the Fund
may invest all or any portion of its assets in the Portfolio;
(7) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or commodity
contracts in the ordinary course of business (the Fund and Portfolio reserve
the freedom of action to hold and to sell real estate acquired as a result of
the ownership of securities by the Fund or the Portfolio);
(8) make short sales of securities or maintain a short position, unless
at all times when a short position is open the Fund or the Portfolio, as
applicable, owns an equal amount of such securities or securities convertible
into or exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the securities sold
short, and unless not more than 5% of the Fund's or the Portfolio's, as
applicable, net assets (taken in each case at market value) is held as
collateral for such sales at any one time;
5
<PAGE>
(9) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, except as appropriate to evidence a debt
incurred without violating paragraph (1) above;
(10) as to 75% of its assets, purchase securities of any issuer if such
purchase at the time thereof would cause more than 5% of the Portfolio's or
the Fund's, as applicable, assets (taken at market value) to be invested in
the securities of such issuer (other than securities or obligations issued or
guaranteed by the United States or any agency or instrumentality of the
United States), except that for purposes of this restriction the issuer of an
option shall not be deemed to be the issuer of the security or securities
underlying such contract and except that the Fund may invest all or any
portion of its assets in the Portfolio; or
(11) invest more than 25% of its assets in any one industry unless the
stocks in a single industry were to comprise more than 25% of the Domini
Social Index, in which case the Portfolio or the Fund, as applicable, will
invest more than 25% of its assets in that industry, and except that the Fund
may invest all of its assets in the Portfolio.
NON-FUNDAMENTAL RESTRICTIONS: In order to comply with certain federal
statutes and regulatory policies, neither the Fund nor the Portfolio will as
a matter of operating policy:
(i) purchase the securities of any registered investment company (except for
the Fund's investment in the Portfolio) if such purchase at the time thereof
would cause more than 10% of the total assets of the Fund or the Portfolio,
respectively (taken at the greater of cost or market value) to be invested in
the securities of such issuers or would cause more than 3% of the outstanding
voting securities of the Fund or the Portfolio, respectively; and provided,
further, that (except for the Fund's investment in the Portfolio) the Fund
and the Portfolio shall not purchase securities issued by any open-end
investment company; or
6
<PAGE>
(ii) purchase puts, calls, straddles, spreads and any combination thereof
if the value of its aggregate investment in such securities will exceed 5% of
the Fund's or the Portfolio's total assets at the time of such purchase.
Restrictions (i) and (ii) are not fundamental and may be changed
with respect to the Fund by the Fund without approval by the Fund's
shareholders or with respect to the Portfolio by the Portfolio without the
approval of the Fund or its other investors. The Fund will comply with the
state securities laws and regulations of all states in which it is
registered.
7
<PAGE>
PERCENTAGE RESTRICTIONS: If a percentage restriction or rating
restriction on investment or utilization of assets set forth above or
referred to in the Prospectus is adhered to at the time an investment is made
or assets are so utilized, a later change in percentage resulting from
changes in the value of the securities held by the Fund or the Portfolio or a
later change in the rating of a security held by the Fund or the Portfolio
will not be considered a violation of policy; provided that if at any time
the ratio of borrowings of the Fund or the Portfolio to the net asset value
of the Fund or the Portfolio, respectively, exceeds the ratio permitted by
Section 18(f) of the 1940 Act, the Fund or the Portfolio as the case may be,
will take the corrective action required by Section 18(f).
3. PERFORMANCE INFORMATION
The Fund will calculate its total rate of return for any period by (a)
dividing (i) the sum of the net asset value per share on the last day of the
period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains declared during such
period with respect to a share held at the beginning of such period and with
respect to shares purchased with such dividends and capital gains
distributions, by (ii) the public offering price per share (i.e., net asset
value) on the first day of such period, and (b) subtracting 1 from the
result. Any annualized total rate of return quotation will be calculated by
(x) adding 1 to the period total rate of return quotation calculated above,
(y) raising such sum to a power which is equal to 365 divided by the number
of days in such period, and (z) subtracting 1 from the result.
Any current "yield" quotation of the Fund shall consist of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a thirty calendar day period and shall be calculated by (a) raising
to the sixth power the sum of 1 plus the quotient obtained by dividing the
Fund's net investment income earned during the period by the product of the
average daily number of shares outstanding during the period that were
entitled to receive dividends and the maximum offering price per share on the
last day of the period, (b) subtracting 1 from the result, and (c)
multiplying the result by 2.
Total rate of return and yield information with respect to the Domini
Social Index will be computed in the same fashion as set forth above with
respect to the Fund, except that for purposes of this computation an
investment will be assumed to have been made in a portfolio consisting of all
of the stocks comprising the Index weighted in accordance with the weightings
of the stocks comprising the Index. Performance information with respect to
the Index will not take into account brokerage commission and other
transaction costs which will be incurred by the Portfolio.
4. DETERMINATION OF NET ASSET VALUE;
VALUATION OF PORTFOLIO SECURITIES
The net asset value of each share of the Fund is determined each day on
which the NYSE is open for trading ("Fund Business Day"). (As of the date of
this Statement of Additional Information, the NYSE is open for trading every
weekday except for the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day). This determination of net
asset value of shares of the Fund is made once during each such day as of the
close of the NYSE by dividing the value of the Fund's net assets (i.e., the
value of its investment in the Portfolio and any other assets less its
liabilities, including expenses payable or accrued) by the number of shares
outstanding at the time the determination is made. Purchases and redemptions
will be effected at the time of determination of net asset value next
following the receipt of any purchase or redemption order deemed to be in
good order. See "Purchases and Redemptions of Shares" in the Prospectus.
The value of the Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities,
8
<PAGE>
including expenses payable or accrued) is determined at the same time and on
the same day as the Fund determines its net asset value per share. The net
asset value of the Fund's investment in the Portfolio is equal to the Fund's
pro rata share of the total investment of the Fund and of other investors in
the Portfolio less the Fund's pro rata share of the Portfolio's liabilities.
Equity securities held by the Portfolio are valued at the last sale price on
the exchange on which they are primarily traded or on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for
securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. If the Portfolio purchases
option contracts, such option contracts which are traded on commodities or
securities exchanges are normally valued at the settlement price on the
exchange on which they are traded. Short-term obligations with remaining
maturities of less than sixty days are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees of the
Portfolio. Portfolio securities (other than short-term obligations with
remaining maturities of less than sixty days) for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Portfolio's Board of Trustees.
A determination of value used in calculating net asset value must be a
fair value determination made in good faith utilizing procedures approved by
the Portfolio's Board of Trustees. While no single standard for determining
fair value exists, as a general rule, the current fair value of a security
would appear to be the amount which the Portfolio could expect to receive
upon its current sale. Some, but not necessarily all, of the general factors
which may be considered in determining fair value include: (i) the
fundamental analytical data relating to the investment; (ii) the nature and
duration of restrictions on disposition of the securities; and (iii) an
evaluation of the forces which influence the market in which these securities
are purchased and sold. Without limiting or including all of the specific
factors which may be considered in determining fair value, some of the
specific factors include: type of security, financial statements of the
issuer, cost at date of purchase, size of holding, discount from market
value, value of unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the security, price and extent of public
trading in similar securities of the issuer or comparable companies, and
other relevant matters.
Interest income on short-term obligations held by the Portfolio is
determined on the basis of interest accrued less amortization of premium.
5. MANAGEMENT OF THE FUND AND THE PORTFOLIO
The Trustees and officers of the Fund and the Portfolio and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act)
of the Fund. Unless otherwise indicated below, the address of each officer is
11 West 25th Street, New York, New York 10010.
TRUSTEES OF THE FUND AND THE PORTFOLIO
EMILY W. CARD -- 1223 Wilshire Boulevard, No. 334, Santa Monica, California
90403; Attorney; President, The Card Group, Inc; Trustee, Domini
Institutional Trust. Her date of birth is May 8, 1942.
AMY L. DOMINI* -- 230 Congress Street, Boston, Massachusetts 02110; Chair,
President and Trustee of the Fund, Portfolio and Domini Institutional Trust;
Manager of DSIL; Officer of Kinder, Lydenberg, Domini & Co., Inc.; Private
Trustee, Loring, Wolcott & Coolidge; Trustee, Episcopal Church Pension Fund;
Former Member, Governing Board, Interfaith Center on Corporate Responsibility,
Former Trustee, National Association Community Loan Funds. Her date of birth
is January 15, 1950.
9
<PAGE>
ALLEN M. MAYES -- P.O. Box 21222, Beaumont, Texas 77720; Trustee, Domini
Institutional Trust; Retired Senior Associate General Secretary of the General
Board of Pensions of the United Methodist Church, Director of Ministerial
Services, Texas Annual Conference, The United Methodist Church; Former Member of
the Board of Directors of Investor Responsibility Research Center; Member of
Board of Trustees of Wiley College. His date of birth is September 20, 1920.
WILLIAM C. OSBORN -- 115 Buckminster Road, Brookline, Massachusetts 02146;
Manager, Venture Investment Management Company LLC; Trustee, Domini
Institutional Trust; Vice President and General Manager, TravElectric
Services Corp (prior to 1995); President, Environmental Technologies
[Packaging] (prior to 1993); Director, Evergreen Solar, Inc; Director,
Conservation Services Group. His date of birth is July 7, 1944.
KAREN PAUL -- 4050 Park Avenue, Miami, Florida 33133; Associate Dean and
Professor of Business Environment, Florida International University; Trustee,
Domini Institutional Trust. Her date of birth is September 23, 1944.
TIMOTHY SMITH -- 475 Riverside Drive, New York, New York 10115; Executive
Director, Interfaith Center on Corporate Responsibility; Trustee, Calvert New
Africa Fund; Trustee, Domini Institutional Trust. His date of birth is
September 15, 1943.
FREDERICK C. WILLIAMSON -- Five Roger Williams Green, Providence, Rhode
Island 02904; Treasurer and Trustee, RIGHA (charitable foundation supporting
health care needs); Chairman, Rhode Island Historical Preservation and
Heritage Commission; Trustee, National Parks and Conservation Commission;
Trustee, Domini Institutional Trust. His date of birth is September 20, 1914.
Beginning with the current fiscal year, each Trustee who is not an
"interested person" as defined in the 1940 Act ("Disinterested Trustee")
receives an annual retainer for serving as a Trustee of the Fund, the
Portfolio and the Domini Institutional Trust of $4,000, and in addition,
receives $500 for attendance at each joint meeting of the Boards of the Fund,
the Portfolio and the Domini Institutional Trust (reduced to $250 in the
event that a Trustee participates at an in-person meeting by telephone), such
retainer and fees in no event to exceed in the aggregate $6,000 per year. In
addition, each Disinterested Trustee receives reimbursement for reasonable
expenses incurred in attending meetings. The compensation paid to the
Trustees for the fiscal year ended July 31, 1997 is set forth below. The
Trustees may hold various other directorships unrelated to the Fund or
Portfolio.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL
AGGREGATE ACCRUED AS COMPENSATION
COMPENSATION PART OF FROM THE
FROM THE FUND ANNUAL BENEFITS FUND, PORTFOLIO AND
FUND EXPENSES UPON RETIREMENT DOMINI INSTITUTIONAL TRUST
<S> <C> <C> <C> <C>
Amy L. Domini*, None None None None
Chair, President
and Trustee
Emily W. Card, $1,600 None None $1,805
Trustee
Karen Paul, $1,800 None None $2,005
Trustee
William C. Osborn, $1,800 None None $2,005
Trustee
Allen M. Mayes, None None None $2,400
Trustee
Timothy Smith, $55 None None $2,455
Trustee
Frederick C. Williamson, Sr., $55 None None $2,455
Trustee
</TABLE>
OFFICERS
PETER D. KINDER* -- Vice President of the Fund and the Portfolio;
President of Kinder, Lydenberg, Domini & Co., Inc.; Member, Domini Social
Investments LLC (since 1997).
10
<PAGE>
STEVEN D. LYDENBERG* -- Vice President of the Fund and the Portfolio;
Director of Research of Kinder, Lydenberg, Domini & Co., Inc.; Member, Domini
Social Investments LLC (since 1997).
DAVID P. WIEDER* -- Vice President of the Fund and the Portfolio (since
1997); Chief Executive Officer and Member, Domini Social Investments LLC
(since 1997); President of Fundamental Shareholder Services, Inc.;
Vice-President of investment companies within Fundamental Family of Funds
(1989-1997); Vice-President of Fundamental Portfolio Advisors (1991-1997).
SIGWARD M. MOSER* -- Vice President of the Fund and the Portfolio (since
1997); President of Communications House International, Inc.; Director of
Financial Communications Society; President and Member, Domini Social
Investments LLC (since 1997).
CAROLE M. LAIBLE* -- Secretary and Treasurer of the Fund and the Portfolio
(since 1997); Financial Compliance Officer of Domini Social Investments LLC
(since 1997); Financial Compliance Officer, Fundamental Shareholder Services,
Inc. (1994-1997); Financial Compliance Officer and Secretary of investment
companies within Fundamental Family of Funds (1994-1997); General Service
Manager, McGladrey & Pullen LLP (certified public accountants) prior to 1994.
As of November 20, 1997, all Trustees and officers of the Fund and
the Portfolio as a group owned less than 1% of the Fund's outstanding shares.
As of the same date, the following shareholders of record owned 5% or more
of the outstanding shares of the Fund: Charles Schwab & Co., Inc. 101
Montgomery Street, San Francisco, CA 94104 (as a nominee on behalf of its
customers), 2,808,900.843 shares (27.2%); WEA Tax Sheltered Annuity Trust, 45
Nob Hill Road, Madison, WI 53713, 783,570.940 shares (7.6%) (the Fund has no
knowledge as to the beneficial ownership of these shares). The Fund has no
knowledge of any other owners of record or beneficial owners of 5% or more of
the outstanding shares of the Fund. Shareholders owning 25% or more of the
outstanding shares of the Fund may take actions without the approval of any
other investor in the Fund.
The Disinterested Trustees of the Fund are the same as the Disinterested
Trustees of the Portfolio. A majority of the Disinterested Trustees have
adopted written procedures reasonably appropriate to deal with potential
conflicts of interest arising from the fact that the same individuals are
Trustees of the Fund and the Portfolio, up to and including creating a
separate board of Trustees. Any conflict of interest between the Fund and
the Portfolio will be resolved by the Trustees in accordance with their
fiduciary obligations and in accordance with the 1940 Act. The Fund's
Declaration of Trust provides that it will indemnify its Trustees and
officers (the "Indemnified Parties") against liabilities and expenses
incurred in connection with litigation in which they may be involved because
of their offices with the Fund, unless, as to liability to the Fund or its
shareholders, it is finally adjudicated that the Indemnified Parties engaged
in wilful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in their offices, or unless with respect to any other
matter it is finally adjudicated that the Indemnified Parties did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Fund. In case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving
the settlement or other disposition, or by a reasonable determination, based
upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that
such Indemnified Parties have not engaged in wilful misfeasance, bad faith,
gross negligence or reckless disregard of their duties.
MANAGER AND SUBMANAGER
DSIL provides advice to the Portfolio pursuant to a Management Agreement
(the "Management Agreement"). The services provided by the Manager consist
of furnishing continuously an investment program for the Portfolio. DSIL will
have authority to determine from time to time what securities are purchased,
sold or exchanged, and what portion of assets of the Portfolio is held
uninvested. DSIL will also perform such administrative and management tasks
as may from time to time be reasonably requested, including: (i) maintaining
office facilities and furnishing clerical services necessary for maintaining
the organization of the Portfolio and for performing administrative and
management functions; (ii) supervising the overall administration of the
Portfolio, including negotiation of contracts and fees with and monitoring of
performance
11
<PAGE>
and billings of the Portfolio's transfer agent, shareholder servicing agents,
custodian and other independent contractors or agents; (iii) overseeing (with
the advice of Portfolio's counsel) the preparation of and, if applicable,
filing all documents required for compliance by the Portfolio with applicable
laws and regulations, including registration statements, prospectuses and
statements of additional information, semi-annual and annual reports to
shareholders, proxy statements and tax returns; (iv) preparing agendas and
supporting documents for and minutes of meetings of Trustees, committees of
Trustees and shareholders; and (v) arranging for maintenance of the books
and records of the Portfolio. The Manager furnishes at its own expense all
facilities and personnel necessary in connection with providing these
services. The Management Agreement will continue in effect if such
continuance is specifically approved at least annually by the Portfolio's
Board of Trustees or by a majority of the outstanding voting securities of
the Portfolio at a meeting called for the purpose of voting on the Management
Agreement (with the vote of each investor in the Portfolio being in
proportion to the amount of its investment), and, in either case, by a
majority of the Portfolio's Trustees who are not parties to the Management
Agreement or interested persons of any such party at a meeting called for the
purpose of voting on the Management Agreement.
The Management Agreement provides that the Manager may render services to
others. DSIL may employ, at its own expense, or may request that the Portfolio
employ (subject to the requirements of the 1940 Act) one or more subadvisers or
submanagers, subject to DSIL's supervision. The Management Agreement is
terminable without penalty on not more than 60 days' nor less than 30 days'
written notice by the Portfolio when authorized either by majority vote of the
outstanding voting securities in the Portfolio (with the vote of each investor
in the Portfolio being in proportion to the amount of its investment) or by a
vote of a majority of its Board of Trustees, or by the Manager, and will
automatically terminate in the event of its assignment. The Management
Agreement provides that neither the Manager nor its personnel shall be liable
for any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in its services to the Portfolio, except
for wilful misfeasance, bad faith or gross negligence or reckless disregard of
its or their obligations and duties under the Management Agreement.
The Fund's Prospectus contains a description of fees payable to the Manager
for services under the Management Agreement.
DSIL is a newly formed Massachusetts limited liability company with
offices at 11 West 25th Street, 7th Floor, New York, New York 10010, and is
registered as an investment adviser under the Investment Advisers Act of 1940
(the "Advisers Act"). The names of the principal owners of DSIL, their
relationship to the Fund and their percentage ownership of DSIL follows: Amy
L. Domini, Chairman of the Board and President of the Fund, is the Manager
and a 21.55% owner of DSIL. Ms. Domini is also Chief Executive Officer,
Secretary, Treasurer and 51% owner of KLD which licenses the Domini Social
Index to DSIL. Peter D. Kinder, Vice President of the Fund, is a 21.25%
owner of DSIL. Mr. Kinder is also President and 19% owner of KLD. Sigward M.
Moser, Vice President of the Fund, is a 21.25% owner of DSIL. David P.
Wieder, Vice President of the Fund is a 21.25% owner of DSIL. Mr. Wieder is
also President and an owner of Fundamental Shareholder Services, Inc.
("FSSI"), a registered transfer agent which has served as the Fund's transfer
agent since 1995.
Mellon Equity manages the assets of the Portfolio pursuant to an Investment
Submanagement Agreement (the "Submanagement Agreement"). The Submanager
furnishes at its own expense all services, facilities and personnel necessary in
connection with managing the Portfolio's investments and effecting securities
transactions for the Portfolio. The Submanagement Agreement will continue in
effect if such continuance is specifically approved at least annually by the
Portfolio's Board of Trustees or by a majority vote of the outstanding voting
securities in the Portfolio at a meeting called for the purpose of voting on the
Submanagement Agreement (with the vote of each being in proportion to the amount
of its investment), and,
12
<PAGE>
in either case, by a majority of the Portfolio's Trustees who are not parties
to the Submanagement Agreement or interested persons of any such party at a
meeting called for the purpose of voting on the Submanagement Agreement.
The Submanagement Agreement provides that the Submanager may render
services to others. The Submanagement Agreement is terminable without penalty
upon not more than 60 days' nor less than 30 days' written notice by the
Portfolio when authorized either by majority vote of the outstanding voting
securities in the Portfolio (with the vote of each being in proportion to the
amount of their investment) or by a vote of the majority of its Board of
Trustees, or by the Manager with the consent of the Trustees and may be
terminated by the Submanager on not less than 90 days' written notice to the
Manager and the Trustees, and will automatically terminate in the event of its
assignment. The Submanagement Agreement provides that the Submanager shall not
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in its services to the
Portfolio, except for wilful misfeasance, bad faith or gross negligence or
reckless disregard for its or their obligations and duties under the
Submanagement Agreement.
Mellon Equity is a Pennsylvania business trust founded in 1987, which is
beneficially owned by Mellon Bank, N.A. (99% beneficial interest) and MMIP (1%
beneficial interest), a wholly owned subsidiary of Mellon Bank Corporation
("Mellon Bank"). Mellon Equity is a professional investment counseling firm
that provides investment management services to the equity and balanced pension,
public fund, and profit-sharing investment management markets, and is a
registered investment adviser under the Advisers Act. Mellon Bank's predecessor
organization managed domestic equity, tax-exempt and institutional pension
accounts since 1947. The address of Mellon Equity and each of the principal
executive officers and directors of Mellon Equity is 500 Grant Street, Suite
3700, Pittsburgh, Pennsylvania 15258.
The Fund's Prospectus contains a description of fees payable to the
Submanager for services under the Submanagement Agreement. Prior to October
22, 1997, pursuant to an investment advisory agreement (the "KLD Advisory
Agreement"), KLD served as investment adviser to the Portfolio and furnished
continuously an investment program by determining the stocks to be included
in the Index. Additionally, prior to October 22, 1997, pursuant to a
management agreement (the "Mellon Equity Management Agreement"), Mellon
Equity served as investment manager and managed the assets of the Portfolio
on a daily basis. Prior to November 21, 1994, pursuant to an investment
management agreement (the "State Street Management Agreement"), State Street
Bank and Trust Company served as investment manager to the Portfolio. Prior
to October 22, 1997, pursuant to a sponsorship agreement (the "KLD
Sponsorship Agreement"), KLD furnished administrative services for the
Portfolio. Prior to October 22, 1997, pursuant to an administrative services
agreement (the "Signature Administration Agreement"), Signature served as the
administrator of the Portfolio. Prior to October 22, 1997, the aggregate
investment management and administration fees under the prior agreements with
respect to the Portfolio were equal to 0.15% of the Portfolio's average daily
net assets for its then current fiscal year.
For the fiscal year ended July 31, 1997, the Portfolio incurred $46,528 in
advisory fees pursuant to the KLD Advisory Agreement, $46,528 in administration
fees pursuant to the KLD Sponsorship Agreement and $182,885 in management fees
pursuant to the Mellon Equity Management Agreement. For the fiscal year ended
July 31, 1996, the Portfolio incurred $38,150 in advisory fees pursuant to the
KLD Advisory Agreement, $38,150 in aggregate administration fees pursuant to the
Signature Administration Agreement and the KLD Sponsorship Agreement, and
$128,901 in management fees pursuant to the Mellon Equity Management Agreement.
For the fiscal year ended July 31, 1995, KLD waived all of its fees payable
pursuant to the KLD Advisory Agreement, Signature waived all of its fees payable
pursuant to the Signature Administration Agreement and the Portfolio incurred
$10,180 in management fees pursuant to the State
13
<PAGE>
Street Management Agreement and $29,409 in management fees pursuant to
the Mellon Equity Management Agreement.
SPONSOR
Pursuant to a Sponsorship Agreement, DSIL provides the Fund with oversight,
administrative and management services. DSIL provides the Fund with general
office facilities and supervises the overall administration of the Fund,
including, among other responsibilities, the negotiation of contracts and fees
with, and the monitoring of performance and billings of, the independent
contractors and agents of the Fund; the preparation and filing of all documents
required for compliance by the Fund with applicable laws and regulations,
including registration statements, prospectuses and statements of additional
information, semi-annual and annual reports to shareholders, proxy statements
and tax returns; preparing agendas and supporting documents for and minutes of
meetings of Trustees, committees of Trustees and shareholders; maintaining
telephone coverage to respond to shareholder inquiries; answering questions from
the general public, the media and investors in the Fund regarding the securities
holdings of the Portfolio, limits on investment and the Fund's proxy voting
philosophy and shareholder activism philosophy; and arranging for the
maintenance of books and records of the Fund. The Sponsor provides persons
satisfactory to the Board of Trustees of the Fund to serve as officers of the
Fund. Such officers, as well as certain other employees and Trustees of the
Fund, may be directors, officers or employees of the Sponsor or its affiliates.
The Fund's Prospectus contains a description of the fees payable to DSIL
by the Fund, as Sponsor of the Fund under the Sponsorship Agreement. Prior to
October 22, 1997, Signature served as administrator. For the fiscal year
ended July 31, 1995, Signature voluntarily waived all of its administrative
services fees from the Fund. For the fiscal years ended July 31, 1996 and 1997,
the Fund incurred $73,423 and $156,868, respectively, in administrative fees.
The Sponsorship Agreement with the Fund provides that DSI may render
administrative services to others. The Sponsorship Agreement with the Fund also
provides that neither the Sponsor nor its personnel shall be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Fund, except for wilful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the Fund's
Sponsorship Agreement.
DISTRIBUTOR
The Fund has adopted a Distribution Plan which provides that the Fund
may pay the Distributor a fee not to exceed 0.25% per annum of the Fund's
average daily net assets in anticipation of, or as reimbursement for,
expenses incurred in connection with the sale of shares of the Fund, such as
payments to broker-dealers who advise shareholders regarding the purchase,
sale or retention of shares of the Fund, payments to employees of the
Distributor, advertising expenses and the expenses of printing and
distributing prospectuses and reports used for sales purposes, expenses of
preparing and printing sales literature and other distribution-related
expenses. For the fiscal years ended July 31, 1995, 1996 and 1997, the Fund
accrued $36,641, $183,558, and $153,295, respectively, in distribution fees.
For the fiscal year ended July 31, 1997, payments pursuant to the
Distribution Plan were used for advertising ($56,707), printing and mailing of
prospectuses to other than current shareholders ($5,968), compensation to
dealers ($42,970), compensation to sales personnel ($29,283), and marketing
consulting ($14,656). In addition, $3,711 was paid to service organizations
for maintaining shareholder accounts and records.
The Distribution Plan will continue in effect indefinitely if such
continuance is specifically approved at
14
<PAGE>
least annually by a vote of both a majority of the Fund's Trustees and a
majority of the Fund's Trustees who are not "interested persons of the Fund"
and who have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to such Plan ("Qualified
Trustees"). The Distributor will provide to the Trustees of the Fund a
quarterly written report of amounts expended by it under the Distribution
Plan and the purposes for which such expenditures were made. The
Distribution Plan further provides that the selection and nomination of the
Fund's Qualified Trustees shall be committed to the discretion of the
disinterested Trustees of the Fund. The Distribution Plan may be terminated
at any time by a vote of a majority of the Fund's Qualified Trustees or by a
vote of the shareholders of the Fund. The Distribution Plan may not be
materially amended without a vote of the majority of both the Fund's Trustees
and the Fund's Qualified Trustees. The Distributor will preserve copies of
any plan, agreement or report made pursuant to the Distribution Plan for a
period of not less than six (6) years from the date of the Distribution Plan,
and for the first two (2) years the Distributor will preserve such copies in
an easily accessible place.
The Fund has entered into a Distribution Agreement with the Distributor.
Under the Distribution Agreement, the Distributor acts as the agent of the Fund
in connection with the offering of shares of the Fund.
TRANSFER AGENT, CUSTODIAN AND SERVICE ORGANIZATIONS
The Fund has entered into a Transfer Agency Agreement with FSSI pursuant
to which FSSI acts as the transfer agent for the Fund. Mr. David P. Wieder,
Vice President of the Fund and a principal of DSIL, the Manager of the
Portfolio and Sponsor of the Fund, is a 60% owner of, and President of FSSI.
For its services to the Fund as transfer agent, FSSI receives compensation on
a per account basis plus out-of-pocket expenses. The Fund has entered into a
Custodian Agreement with Investors Bank & Trust Company ("IBT") pursuant to
which IBT acts as custodian for the Fund. The Portfolio has entered into a
Transfer Agency Agreement with IBT pursuant to which IBT acts as transfer
agent for the Portfolio. The Portfolio has entered into a Custodian
Agreement with IBT pursuant to which IBT acts as custodian for the Portfolio.
For additional information, see "Transfer Agent and Custodian" in the
Prospectus.
The Fund may from time to time enter into agreements with various banks,
trust companies (other than Mellon Equity), broker-dealers (other than the
Distributor) or other financial organizations to provide services for the
Fund, such as maintaining shareholder accounts and records. For the fiscal
year ended July 31, 1995, the Fund did not accrue any service organization
fees. For the fiscal years ended July 31, 1996 and 1997, the Fund accrued
$12,526 and $3,711, respectively, in service organization fees. For
additional information, see "Service Organizations, Transfer Agent and
Custodian--Service Organizations" in the Prospectus.
6. INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, MA 02110, are the
independent auditors for the Fund and for the Portfolio, providing audit
services, tax return preparation, and assistance and consultation with
respect to the preparation of filings with the Securities and Exchange
Commission.
7. TAXATION
Each year the Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). Provided the Fund qualifies as a "regulated investment company"
under the Code, and distributes all of its net investment income and net
realized capital gains to shareholders in accordance with the timing
requirements imposed by the Code, the Fund will not be required to pay any
federal income or excise taxes although the Fund's foreign-source income may
be subject to foreign withholding taxes. If the Fund should fail to qualify
as a "regulated investment company" in any year, the Fund would incur a
regular corporate federal income tax upon its
15
<PAGE>
taxable income and would be required to pay Massachusetts income and excise
taxes. Additionally, Fund distributions would generally be taxable as ordinary
dividend income to the shareholders.
It is assumed that, (1) the Portfolio will be treated for federal income
tax purposes as a partnership and (2) for purposes of determining whether the
Fund satisfies the income and diversification requirements to maintain its
status as a regulated investment company, the Fund, as an investor in the
Portfolio, will be deemed to own a proportionate share of the Portfolio's assets
and will be deemed to be entitled to the Portfolio's income or loss attributable
to that share. The Portfolio has advised the Fund that it intends to conduct its
operations so as to enable its investors, including the Fund, to satisfy those
requirements.
Shareholders of the Fund normally will have to pay federal income taxes,
and any state or local taxes, on distributions of net investment income and
net realized capital gains from the Fund. Dividends from ordinary income and
any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are paid in cash or reinvested in additional shares. A portion
of the Fund's distributions from net investment income is normally eligible
for the corporate dividends received if the recipient otherwise qualifies for
that deduction with respect to its holding of Fund shares. Availability of
the deduction for a particular corporate shareholder is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum
tax and result in certain basis adjustments. Distributions of net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses), whether paid in cash or reinvested in additional shares, are
taxable to shareholders as long-term capital gains for federal income tax
purposes without regard to the length of time the shareholders have held
their shares. Any Fund dividend that is declared in October, November, or
December of any calendar year, that is payable to shareholders of record in
such a month, and that is paid the following January will be treated as if
received by the shareholders on December 31 of the year in which the divided
is declared. The Fund will notify shareholders regarding the federal tax
status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares
of the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales.
Special tax considerations apply with respect to foreign investments of
the Fund. Foreign exchange gains and losses realized by the Fund will
generally be treated as ordinary income and losses.
Investment income received by the Fund from foreign securities may be
subject to foreign income taxes withheld at the source; the Fund does not
expect to be able to pass through to shareholders foreign tax credits with
respect to such foreign taxes. The United States has entered into tax
treaties with many foreign countries that may entitle the Fund to a reduced
rate of tax or an exemption from tax on such income; the Fund intends to
qualify for treaty reduced rates where available. It is not possible,
however, to determine the Fund's effective rate of foreign tax in advance
since the amount of the Fund's assets to be invested within various
countries is not known.
The Fund anticipates that the Portfolio will be treated as a partnership
for federal income tax purposes. As such, the Portfolio is not subject to
federal income taxation. Instead, the Fund must take into account, in computing
its federal income tax liability, its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions
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from the Portfolio. Withdrawals by the Fund from the Portfolio generally
will not result in the Fund recognizing any gain or loss for federal income
tax purposes, except that (1) gain will be recognized to the extent that any
cash distributed exceeds the basis of the Fund's interest in the Portfolio
prior to the distribution, (2) income or gain will be realized if the
withdrawal is in liquidation of the Fund's entire interest in the Portfolio
and includes a disproportionate share of any unrealized receivables held by
the Portfolio, and (3) loss will be recognized if the distribution is in
liquidation of that entire interest and consists solely of cash and/or
unrealized receivables. The basis of the Fund's interest in the Portfolio
generally equals the amount of cash and the basis of any property that the
Fund invests in the Portfolio, increased by the Fund's share of income from
the Portfolio and decreased by the Fund's share of losses from the Portfolio
and the amount of any cash distributions and the basis of any property
distributed from the Portfolio.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts. The investment by the Fund in the Portfolio does
not cause the Fund to be liable for any income or franchise tax in the State of
New York.
Fund shareholders may be subject to state and local taxes on Fund
distributions to them. Shareholders are advised to consult with their tax
advisers with respect to the particular tax consequences of an investment in the
Fund.
8. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Portfolio are
made by a portfolio manager who is an employee of the Submanager and who is
appointed and supervised by its senior officers. Changes in the Portfolio's
investments are reviewed by its Board of Trustees. The portfolio manager of the
Portfolio may serve other clients of the Submanager in a similar capacity.
The Portfolio's primary consideration in placing securities transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Submanager attempts to achieve this result by selecting
broker-dealers to execute transactions on behalf of the Portfolio and other
clients of the Submanager on the basis of their professional capability, the
value and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities traded in the over-the-counter market
(where no stated commissions are paid but the prices include a dealer's markup
or markdown), the Submanager normally seeks to deal directly with the primary
market makers, unless in its opinion, best execution is available elsewhere. In
the case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the Submanager on the tender of
the Portfolio's securities in so-called tender or exchange offers. Such
soliciting dealer fees are in effect recaptured for the Portfolio by the
Submanager. At present no other recapture arrangements are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers, Inc. and such other policies as the
Trustees of the Portfolio may determine, the Submanager may consider sales of
shares of the Fund and of securities of other investors in the Portfolio as a
factor in the selection of broker-dealers to execute the Portfolio's securities
transactions.
Under the Submanagement Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Submanager may cause the Portfolio to pay a
broker-dealer acting on an agency basis which provides brokerage and research
services to the Submanager or the Manager an amount of commission for effecting
a securities transaction for the Portfolio in excess of the amount other broker-
dealers would have charged for the transaction if the Submanager determines in
good faith that the greater commission is reasonable in relation to the value of
the brokerage and research services provided by the
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executing broker-dealer viewed in terms of either a particular transaction or
the Submanager's or the Manager's overall responsibilities to the Portfolio
or to its other clients. Not all of such services are useful or of value in
advising the Portfolio.
The term "brokerage and research services" includes advice as to the value
of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement. However, because of the
Portfolio's policy of investing in accordance with the Domini Social Index, the
Submanager and the Manager currently intend to make only a limited use of such
brokerage and research services.
Although commissions paid on every transaction will, in the judgment of the
Submanager, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Portfolio and the Submanager's or the Manager's other clients, in part for
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
Certain broker-dealers may be willing to furnish statistical, research and other
factual information or services to the Submanager or the Manager for no
consideration other than brokerage or underwriting commissions.
The Submanager and the Manager attempt to evaluate the quality of research
provided by brokers. The Submanager and the Manager sometimes use evaluations
resulting from this effort as a consideration in the selection of brokers to
execute portfolio transactions. However, neither the Submanager nor the Manager
is able to quantify the amount of commissions which are paid as a result of such
research because a substantial number of transactions are effected through
brokers which provide research but which are selected principally because of
their execution capabilities.
The fees that the Portfolio pays to the Submanager and the Manager will not
be reduced as a consequence of the Portfolio's receipt of brokerage and research
services. To the extent the Portfolio's securities transactions are used to
obtain brokerage and research services, the brokerage commissions paid by the
Portfolio will exceed those that might otherwise be paid for such portfolio
transactions and research, by an amount which cannot be presently determined.
Such services may be useful and of value to the Submanager or the Manager in
serving both the Portfolio and other clients and, conversely, such services
obtained by the placement of brokerage business of other clients may be useful
to the Submanager or the Manager in carrying out its obligations to the
Portfolio. While such services are not expected to reduce the expenses of the
Submanager or the Manager, the Submanager or the Manager would, through use of
the services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff. For the fiscal
years ended July 31, 1995,1996 and 1997, respectively, the Portfolio paid
brokerage commissions of $15,222, $45,017 and $101,639, respectively.
In certain instances there may be securities which are suitable for the
Portfolio as well as for one or more of the Submanager's or the Manager's other
clients. Investment decisions for the Portfolio and for the Submanager's or the
Manager's other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or
more clients
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are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the
Portfolio is concerned. However, it is believed that the ability of the
Portfolio to participate in volume transactions will produce better executions
for the Portfolio.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund's Declaration of Trust permits the Fund's Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial interest
(without par value) and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in the Fund. Each share represents an equal proportionate interest in the Fund
with each other share. Upon liquidation or dissolution of the Fund, the Fund's
shareholders are entitled to share pro rata in the Fund's net assets available
for distribution to its shareholders. The Fund reserves the right to create and
issue a number of series of shares, in which case the shares of each series
would participate equally in the earnings, dividends and assets of the
particular series (except for any differences among classes of shares of a
series). Shares of each series would be entitled to vote separately to approve
advisory agreements or changes in investment policy, but shares of all series
may vote together in the election or selection of Trustees, principal
underwriters and accountants for the Fund. Upon liquidation or dissolution of
the Fund, the shareholders of each series would be entitled to share pro rata in
the net assets of their respective series available for distribution to
shareholders.
Shareholders are entitled to one vote for each share held. Shareholders in
the Fund do not have cumulative voting rights, and shareholders owning more than
50% of the outstanding shares of the Fund may elect all of the Trustees of the
Fund if they choose to do so and in such event the other shareholders in the
Fund would not be able to elect any Trustee. The Fund is not required to hold
annual meetings of shareholders but the Fund will hold special meetings of
shareholders when in the judgment of the Fund's Trustees it is necessary or
desirable to submit matters for a shareholder vote. No material amendment may
be made to the Fund's Declaration of Trust without the affirmative vote of the
holders of a majority of its outstanding shares. Shares have no preference,
preemptive, conversion or similar rights. Shares, when issued, are fully paid
and non-assessable, except as set forth below. The Fund may enter into a merger
or consolidation, or sell all or substantially all of its assets, if approved by
the vote of the holders of two-thirds of its outstanding shares, except that if
the Trustees of the Fund recommend such sale of assets, the approval by vote of
the holders of a majority of the Fund's outstanding shares will be sufficient.
The Fund may also be terminated upon liquidation and distribution of its assets,
if approved by the vote of the holders of two-thirds of its outstanding shares.
If not so terminated, the Fund will continue indefinitely. Stock certificates
are issued only upon the written request of a shareholder.
The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the Fund
and provides for indemnification and reimbursement of expenses out of Fund
property for any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that the Fund shall maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Fund, its shareholders, Trustees, officers,
employees and agents covering possible tort and other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance existed
and the Fund itself was unable to meet its obligations.
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The Declaration of Trust further provides that obligations of the Fund are
not binding upon the Trustees individually but only upon the property of the
Fund and that the Trustees will not be liable for any action or failure to act,
but nothing in the Declaration of Fund protects a Trustee against any liability
to which he or she would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his or her office.
Each investor in the Portfolio, including the Fund, may add to or reduce
its investment in the Portfolio on each Fund Business Day. At the close of each
such business day, the value of each investor's interest in the Portfolio will
be determined by multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate beneficial
interests in the Portfolio effective for that day. Any additions or
withdrawals, which are to be effected as of the close of business on that day,
will then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be re-computed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio as of the close of business on such day plus or
minus, as the case may be, the amount of any additions to or withdrawals from
the investor's investment in the Portfolio effected as of the close of business
on such day, and (ii) the denominator of which is the aggregate net asset value
of the Portfolio as of the close of business on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Portfolio by all investors in the Portfolio. The
percentage so determined will then be applied to determine the value of the
investor's interest in the Portfolio as of the close of business on the
following Fund Business Day.
10. FINANCIAL STATEMENTS
The audited financial statements of the Fund and the Portfolio
(Statement of Assets and Liabilities at July 31, 1997, Statement of
Operations for the year ended July 31, 1997, Statement of Changes in Net
Assets for each of the years in the two-year period ended July 31, 1997,
Financial Highlights for each of the years in the five-year period ended
July 31, 1997, Notes to Financial Statements and Independent Auditors'
Report), each of which is included in the Annual Report to Shareholders of
the Fund which has been filed with the Securities and Exchange Commission
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder, are
hereby incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the reports of
KPMG Peat Marwick LLP, independent auditors, on behalf of the Fund and the
Portfolio. A copy of such report will be provided, without charge, to each
person receiving this Statement of Additional Information upon request by
calling (800) 782-4165.
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