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[LOGO]
(R)
An Investment For Your Future.
PROSPECTUS
OCTOBER 28, 1998
29 Temple Place, Boston, Massachusetts 02111
1-800-93-GREEN
FOR INFORMATION ON THE GREEN CENTURY FUNDS(R), CALL
1-800-93-GREEN. FOR INFORMATION ON HOW to OPEN AN ACCOUNT AND ACCOUNT SERVICES,
CALL 1-800-221-5519 9:00 AM TO 5:00 PM EASTERN TIME MONDAY THROUGH FRIDAY. FOR
SHARE PRICE INFORMATION, CALL 1-800-221-5519, TWENTY-FOUR HOURS A DAY.
The Green Century Funds ("Green Century") are an open-end, diversified,
no-load family of mutual funds. This prospectus describes the Green Century
Balanced Fund and the Green Century Equity Fund (the "Green Century Funds" or
the "Funds"). Green Century endeavors to make a contribution to a safer, lasting
environment by promoting corporate environmental responsibility. Green Century
provides people who care about a clean, healthy planet the opportunity to use
the clout of their investment dollars to encourage environmentally responsible
corporate behavior.
THE GREEN CENTURY FUNDS
The Green Century Balanced Fund
The investment objective of the Green Century Balanced Fund
(the "Balanced Fund") is to provide capital growth and income from a diversified
portfolio of stocks and bonds which meet Green Century's standards for corporate
environmental responsibility.
The Green Century Equity Fund
The investment objective of the Green Century Equity Fund (the
"Equity Fund") is to achieve long-term total return from a diversified portfolio
of stocks which corresponds to the performance of an index consisting of
approximately 400 companies; the companies in the index are screened to exclude
corporations with poor records for environmental and social
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corporate responsibility ("Social Index"). Unlike other mutual funds which
directly acquire and manage their own portfolios of securities, the Equity Fund
invests all of its investable assets in a diversified open-end management
investment company having the same investment objective as the Fund (the "Index
Portfolio"), through a master-feeder investment fund structure. See "Investment
Objectives, Policies and Risk Factors--The Green Century Equity Fund and the
Master Feeder Investment Fund Structure."
There can be, of course, no assurance that a Fund will achieve its investment
objective. This Prospectus sets forth basic information about the Funds that a
prospective investor should know before investing and should be read and
retained for future reference. A Statement of Additional Information about the
Funds, dated October 28, 1998 and incorporated herein by reference, has been
filed with the Securities and Exchange Commission and may be obtained free of
charge by writing the Funds at the address listed above or by calling
1-800-93-GREEN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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[LOGO]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Introduction.......................................................................... 1
Fee Information....................................................................... 5
Financial Highlights.................................................................. 7
Performance Information............................................................... 9
The Green Century Funds' Environmental Standards...................................... 11
The Green Century Funds Advocate for Corporate Environmental Responsibility........... 12
The Green Century Funds Support Not-For-Profit Environmental Organizations............ 12
Investment Objectives, Policies and Risk Factors...................................... 13
The Green Century Balanced Fund Investments........................................... 13
The Green Century Balanced Fund Environmental Criteria................................ 13
The Green Century Equity Fund Investments............................................. 14
The Green Century Equity Fund Environmental and Social Criteria....................... 15
The Green Century Equity Fund and the Master Feeder Investment Fund Structure......... 16
Additional Investment Policies and Restrictions
The Green Century Balanced Fund............................................. 18
The Green Century Balanced Fund and The Green Century Equity Fund...........
20
Organization and Management of the Funds.............................................. 21
</TABLE>
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<TABLE>
<S> <C>
Your Account.......................................................................... 27
How to Purchase Shares................................................................ 27
How to Sell Shares.................................................................... 29
Shareholder and Account Policies...................................................... 30
Transaction Information............................................................... 30
Shareholder Account Statements........................................................ 31
Dividends and Taxes................................................................... 32
Valuation of Shares................................................................... 32
Description of Shares, Voting Rights and Liabilities.................................. 33
Financial Intermediaries.............................................................. 33
</TABLE>
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FEE INFORMATION
Expense Table
The following information, provided by all mutual funds in this
standardized format, is designed to assist you in understanding the various
direct and indirect costs and expenses you will bear as a shareholder of the
Green Century Funds and enable you to compare these costs and expenses with
those of other mutual funds. Unlike many mutual funds, the Green Century Funds
do not charge a sales fee or "load" when you purchase or redeem shares. One
hundred percent of your investment is credited to your account. The information
in the table is based on the actual expenses incurred by the Balanced Fund for
the one year ended June 30, 1998 and the one month period ended July 31, 1998.
The information for the Equity Fund, which summarizes the expenses of the Equity
Fund and the Index Portfolio, reflect fees currently in effect.
<TABLE>
<CAPTION>
BALANCED FUND EQUITY FUND
Shareholder Transaction Expenses
<S> <C> <C>
Sales Load on Purchases................................... None None
Sales Load on Reinvested Dividends........................ None None
Deferred Sales Load....................................... None None
Redemption Fees (1)....................................... None None
Exchange Fee.............................................. None None
Annual Operating Expenses (as a percentage of average
net assets)
Advisory and Management Fees.............................. 0.75% 0.20%(2)
Rule 12b-1 (Distribution) Fees (3)........................ 0.25% 0.00%
Administrative Services Fees (4).......................... 1.50% 1.30%
----- -----
Total Operating Expenses.................................. 2.50% 1.50%
===== =====
</TABLE>
(1) A fee of $10.00 is charged for redemptions by wire. There is no charge for
redemptions paid by check.
(2) Under the Management Agreement between the Index Portfolio and Domini Social
Investments LLC ("DSI"), DSI's fee for advisory and management services to
the Index Portfolio is 0.20% of the average daily net assets of the Index
Portfolio. DSI is waiving its fee to the extent necessary to keep the
aggregate annual operating expenses of the Index 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. This fee waiver is voluntary and may be reduced or eliminated at
any time. If this fee reduction were not in effect, advisory and management
fees for the Index Portfolio would be 0.20% of the average daily net assets
of the Index Portfolio. See "Organization and Management of the Funds--The
Green Century Equity Fund and the Index Portfolio."
(3) The Balanced Fund's Distribution fee will not exceed 0.25% per annum of the
Balanced Fund's average daily net assets. See "Organization and Management
of the Funds." Because of the distribution fee, long-term shareholders in
the Balanced Fund may pay more than the equivalent of the maximum permitted
front-end sales charge.
(4) Green Century Capital Management, Inc. ("Green Century Capital Management"),
the investment adviser of the Balanced Fund (the "Adviser") and
administrator (the "Administrator") of each Fund, has agreed to pay the
total operating expenses of the Funds, excluding interest, taxes, brokerage
costs and other capital expenses and any extraordinary expenses, which
exceed (i) 1.50% of the Equity Fund's average net assets, and (ii) 2.50% of
the Balanced Fund's average net assets up to $30 million, 2.25% on its
average net assets from $30 million to $100 million, and 1.75% on the
Balanced Fund's average net assets in excess of $100 million.
Example
The purpose of the example below is to assist investors in understanding
the expenses they will bear on a sample $1,000 investment in each Fund. The
example is based on the Annual Operating Expenses in the Expense Table.
<TABLE>
<CAPTION>
You would pay the following expenses
on a $1,000 investment, assuming (1)
5% annual return and (2) redemption
at the end of each time period: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced Fund...................... $ 25 $ 78 $ 133 $ 284
Equity Fund........................ $ 15 $ 47 $ 82 $ 179
</TABLE>
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This Example should not be considered representations of past or future
expenses or rates of return. Actual operating expenses and investment return may
be greater or less than those shown.
The Trustees of Green Century believe that the aggregate per share expenses
of the Equity Fund and the Index Portfolio will be less than the expenses which
the Equity Fund would incur if it retained the services of an investment manager
and sub-manager and invested directly in the types of securities being held by
the Index Portfolio. See "Organization and Management of the Funds" for further
discussion of the expenses of the Equity Fund and Index Portfolio.
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FINANCIAL HIGHLIGHTS
The following information for the years ended June 30, 1996, 1997 and 1998
and the one month period ended July 31, 1998 for the Balanced Fund and for the
years ended July 31, 1996, 1997 and 1998 for the Equity Fund has been audited by
KPMG Peat Marwick LLP, independent auditors, whose report thereon appears in the
Annual Report which is incorporated by reference in the Statement of Additional
Information and which may be obtained free of charge by calling 1-800-93-GREEN.
Information for the Balanced Fund prior to July 1, 1995, was audited by other
independent auditors. This information should be read in conjunction with the
financial statements and related notes included in the Annual Report.
GREEN CENTURY BALANCED FUND
<TABLE>
<CAPTION>
FOR THE ONE
MONTH ENDED FOR THE YEARS ENDED JUNE 30,
JULY 31, 1998 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ......... $ 13.79 $ 13.53 $ 13.34 $ 11.03 $ 9.68 $ 10.14
------------- ----------- ----------- ----------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................... -- 0.02 0.12 0.10 0.10 0.07
Net realized and unrealized gain (loss) on
investments ............................ (1.11) 1.68 1.77 2.31 1.35 (0.46)
------------- ----------- ----------- ----------- ---------- ---------
Total increase (decrease) from investment
operations ............................. (1.11) 1.70 1.89 2.41 1.45 (0.39)
------------- ----------- ----------- ----------- ---------- ---------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income ..... -- (0.09) (0.10) (0.10) (0.10) (0.07)
Distributions from net realized gains .... -- (1.35) (1.60) -- -- --
------------- ----------- ----------- ----------- ---------- ---------
Total decrease from dividends and
distributions........................... -- (1.44) (1.70) (0.10) (0.10) (0.07)
------------- ----------- ----------- ----------- ---------- ---------
Net Asset Value, end of period ............... $ 12.68 $ 13.79 $ 13.53 $ 13.34 $ 11.03 $ 9.68
============= =========== =========== =========== ========== =========
Total return (a) ............................. (8.05)%(b) 13.13% 15.22% 21.98% 15.00% (3.83)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ..... $ 15,212 $ 16,286 $ 11,022 $ 8,215 $ 3,291 $ 3,151
Ratio of expenses to average net assets .. 2.50%(c) 2.50% 2.50% 2.50% 2.50% 2.50%
Ratio of net investment income to average
net assets.............................. 0.22%(c) 0.12% 0.94% 0.85% 0.97% 0.74%
Portfolio turnover ........................... 4%(b) 96% 109% 136% 16% 14%
</TABLE>
(a) Total Return for the years ended June 30, 1996, 1997 and 1998 and the one
month period ended July 31, 1998 reflects performance achieved by Winslow
Management Company as investment subadviser to the Balanced Fund. Total
Return through June 30, 1995 for the Fund reflects performance achieved by
Scudder, Stevens & Clark as investment subadviser to the Balanced Fund. On
July 1, 1995, Winslow Management Company became the investment subadviser to
the Balanced Fund. See "Organization and Management of the Funds" for more
information on Winslow Management Company.
(b) Not annualized.
(c) Annualized.
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1993 FOR THE PERIOD MARCH 18, 1992
(COMMENCEMENT OF OPERATIONS) TO
JUNE 30, 1992
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 9.84 $10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.06 0.02
Net realized and unrealized gain (loss) on
investments............................ 0.30 (0.16)
------ ------
Total increase (decrease) from investment
operations............................. 0.36 (0.14)
------ ------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income..... (0.06) (0.02)
Distributions from net realized gains.... -
------ ------
Total decrease from dividends and
distributions................................ (0.06) (0.02)
------ ------
Net Asset Value, end of period............... $10.14 $ 9.84
------ ------
Total return (a)............................. 3.69% (1.45)%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)..... $2,821 $547
Ratio of expenses to average net assets.. 2.50% 2.50%(c)
Ratio of net investment income to average
net assets............................... 0.85% 1.13%(c)
Portfolio turnover........................... 11% 2%
</TABLE>
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GREEN CENTURY EQUITY FUND
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 13, 1995
(COMMENCEMENT OF
OPERATIONS) TO
FOR THE YEARS ENDED JULY 31 JULY 31, 1996
1998 1997
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............. $ 16.86 $ 11.04 $ 10.00
---------- --------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........................ (0.03) 0.02 0.02
Net realized and unrealized gain on investment 3.62 5.84 1.04
---------- --------- -------
Total increase from investment operations .... 3.59 5.86 1.06
---------- --------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income ......... -- (0.03) (0.02)
Distributions from net realized gains ........ (0.01) (0.01) --
---------- --------- -------
Total decrease from dividends and
distributions .............................. (0.01) (0.04) (0.02)
---------- --------- -------
Net Asset Value, end of period ................... $ 20.44 $ 16.86 $ 11.04
========== ======== =======
Total return ..................................... 21.32% 53.14% 10.64%(a)
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period (in 000's) ......... $ 15,476 $ 5,275 $ 880
Ratio of expenses to average net assets ...... 1.50% 1.50% 1.50%(b)
Ratio of net investment income to average net
assets...................................... (0.26)% 0.07% 0.49%(b)
Portfolio Turnover (c) ........................... 5% 1% 5%
</TABLE>
(a) Not annualized.
(b) Annualized.
(c) Represents portfolio turnover for the Index Portfolio for the years ended
July 31, 1998, 1997 and 1996.
PERFORMANCE INFORMATION
From time to time, a Green Century Fund through its distributor may
advertise various types of yield and total return performance. All performance
figures are based on historical earnings and are not intended to indicate future
performance. An investor's shares, when redeemed, may be worth more or less than
their original cost.
Total return refers to the total change in value of an investment in a Fund
over a specified period. It differs from yield in that yield figures measure
only the income component of a Fund's investments, while total return also
reflects any change in net asset value. Total return assumes all of a Fund's
dividends and capital gain distributions are reinvested. A cumulative total
return reflects a Fund's performance over a period of time. An average annual
total return reflects the hypothetical annual compounded return that would have
produced the same cumulative total return if the Fund's performance had been
constant over the entire period.
The tables that follow set forth average annual total return information
for the periods indicated:
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GREEN CENTURY BALANCED FUND
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Inception
(as of 7/31/98) (as of 7/31/98) (as of 7/31/98) to 7/31/98(1)
<S> <C> <C> <C> <C>
Average Annual Total Return 2.07% 12.55% 10.37% 8.20%
</TABLE>
GREEN CENTURY EQUITY FUND
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Inception
(as of 7/31/98) (as of 7/31/98) (as of 7/31/98) to 7/31/98(2)
<S> <C> <C> <C> <C>
Average Annual Total Return (3).... 21.32% 28.48% 21.90% 18.01%
</TABLE>
(1) The Balanced Fund commenced operations on March 18, 1992.
(2) The Index Portfolio commenced investment operations on June 3, 1991.
(3) The Equity Fund, which commenced investment operations in September 1995,
invests all of its assets in an existing separate registered investment
company which has the same investment objective as the Fund (the "Index
Portfolio"). Consistent with regulatory guidance, performance for the
period prior to the Equity Fund's inception reflects the performance of
the Index Portfolio adjusted to reflect the deduction of the charges and
expenses of the Equity Fund.
A Fund's performance may also be used from time to time in shareholder
reports or other communications to shareholders or prospective investors.
Performance information may include a Fund's investment results and/or
comparisons of its investment results to other investments or relevant indices,
including data from Lipper Analytical Services, Morningstar Inc., Standard &
Poor's 500 Composite Stock Price Index, Franklin's Insight and other industry
publications. The Annual Report of the Funds contains additional performance
information and is available to investors upon request and without charge by
writing to the Green Century Funds at 29 Temple Place, Boston, MA 02111 or by
calling 1-800-93-GREEN.
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THE GREEN CENTURY FUNDS' ENVIRONMENTAL STANDARDS
Green Century endeavors to make a contribution to a safer, lasting
environment by promoting corporate environmental responsibility. Green Century
provides people who care about a clean, healthy planet the opportunity to use
the clout of their investment dollars to encourage environmentally responsible
corporate behavior.
While all of Green Century's investments are selected with a concern for
the environment, the two Green Century Funds each employ a different strategy to
promote environmentally responsible corporate behavior.
The Green Century Balanced Fund strives to invest in companies whose
business is to protect the environment, and companies that have taken steps to
minimize their environmental impact. The Fund seeks to invest in businesses
committed to actively promoting a healthier environmental future. Such
commitments might include producing renewable energy, recycling waste, providing
appropriate technology for sustainable agriculture and offering effective
remedies for existing environmental problems. The Fund also invests in companies
whose primary business is not solving environmental problems but which conduct
their business in an environmentally responsible manner. The Adviser believes
that well-managed environmentally responsible companies minimize their
environmental risks, allowing them to enjoy competitive advantages from cost
reductions, quality improvements, profitability enhancements and access to
expanding and new growth markets. Thus, for both environmental and financial
reasons, the Adviser for the Green Century Balanced Fund applies rigorous
selection criteria concerning the environmental behavior of the issuers of their
investments.
The Green Century Equity Fund invests, through its investment in the Index
Portfolio, in a diversified portfolio of approximately 400 companies which seeks
to exclude those companies with the worst environmental records. Green Century
believes that directing environmentally concerned investors' dollars away from
companies that flout basic standards for environmental responsibility creates an
incentive for companies to become better environmental citizens. We also believe
that those companies which pursue the least environmentally sound practices are
at the greatest long term risk of negative economic consequences, while those
which strive to be more environmentally responsible may benefit financially as a
result.
Neither the Green Century Balanced Fund nor the Green Century Equity Fund
will knowingly invest in an issuer primarily engaged in the production of
nuclear energy or the manufacture of nuclear equipment to produce nuclear energy
or nuclear weapons, in the belief that these products are unacceptably
threatening to a sustainable global environment. The Funds will not knowingly
invest in an issuer primarily engaged in the manufacture of tobacco products, a
major contributor to indoor air pollution and environmental health problems.
The Green Century Funds invest under normal conditions in many sectors of
the economy, such as retail, finance, and consumer products. The Funds are not
environmental sector funds which invest exclusively in companies whose business
derives from environmental problems (such as waste-management or incinerator
manufacturers), some of which have consistently negative environmental records.
The Funds' environmental criteria limit the available investments compared
with funds with no such criteria. Each Fund may not invest, or invest to a
lesser extent than a fund with similar investment objectives but with no
environmental criteria, in certain industries, such as the steel,
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oil and automotive industries. Under certain economic conditions, this could
cause each Fund's investment performance to be better or worse than similar
funds with no environmental criteria.
The selection of an investment by the Green Century Funds does not
constitute an endorsement or validation by the Funds, nor does the exclusion of
a company necessarily reflect failure to satisfy the Funds' environmental
criteria. The Board of Trustees of Green Century will have the authority,
without the vote of shareholders, to determine the manner in which the Funds
implement their stated commitment to environmentally responsible investing.
THE GREEN CENTURY FUNDS ADVOCATE FOR CORPORATE
ENVIRONMENTAL RESPONSIBILITY
Green Century is actively involved in advocating that the companies held in
the Funds' portfolios improve their environmental performance.
Green Century uses its collective leverage, as shareholders, to advocate
for more environmentally responsible policies at the companies in which they
invest. Green Century has worked with other environmentally conscious investors
to file shareholder resolutions to demand more aggressive recycling programs;
more responsible environmental, health and safety policies; and more
environmentally friendly production and purchasing policies. Green Century is
committed to pursuing demands for improved corporate environmental
responsibility. As part of this strategy, the Green Century Balanced Fund may
hold small positions in companies which do not meet the Fund's environmental
criteria for the express purpose of enabling the Fund to advocate for changes in
irresponsible corporate behavior.
Green Century also communicates with the chief executive officers of
corporations to promote additional improvements in their environmental behavior
and works with the Coalition for Environmentally Responsible Economies (CERES)
to encourage greater corporate environmental accountability.
The Trustees of Green Century monitor all Green Century's advocacy
activities to ensure the activities are consistent with the fiduciary duties
owed investors in the Green Century Funds. Expenses incurred in advocating for
greater corporate environmental responsibility are paid by the Funds'
Administrator, Green Century Capital Management, and not by the shareholders of
the Funds.
THE GREEN CENTURY FUNDS SUPPORT NOT-FOR-PROFIT
ENVIRONMENTAL ORGANIZATIONS
Unlike other investment advisers and administrators that are privately
owned for the benefit of individuals or for-profit corporations, Green Century
Capital Management is owned by Paradigm Partners, a California general
partnership, the partners of which are all not-for-profit environmental advocacy
organizations. This means that 100% of the net profits, when realized, earned by
Green Century Capital Management on fees for its role as Adviser and
Administrator will be distributed in partnership distributions to these
not-for-profit environmental advocacy organizations. These revenues will be used
to further efforts to preserve and protect the environment--efforts that include
filing lawsuits against companies that illegally pollute our air and waterways,
campaigning to increase recycling and reduce wasteful packaging, and researching
and advocating to reduce the use of toxic chemicals. The Massachusetts Public
Interest Research Group (MASSPIRG) holds approximately 46% of the partnership.
You may
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receive a complete list of the environmental organizations which founded
and own Green Century Capital Management by calling 1-800-93-GREEN.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The Green Century Funds offer two different investment options to help you
reach your investment goals. The Funds are designed for long-term investment and
are not designed to meet investors' short-term financial goals. An investment in
each Fund represents an investment in securities with fluctuating market prices;
thus the value of an investment in each Fund will vary as the aggregate value of
a Fund's portfolio securities increases or decreases. Neither a single Fund nor
a combination of the Funds is intended to provide a complete or balanced
investment program. There is no guarantee a Fund will achieve its investment
objective, and a potential investor should carefully consider his or her
investment objectives and risk tolerance before investing in a Fund.
The descriptions that follow are designed to help you select the Fund that
best fits your investment objectives. Please see the Statement of Additional
Information for more information regarding the investment objectives, policies
and risk factors of the Funds.
The Green Century Balanced Fund
The Green Century Balanced Fund Investments
The investment objective of the Balanced Fund is to provide capital growth
and income from a diversified portfolio of stocks and bonds. The Fund may be
appropriate for those investors seeking income from bond investments and who
also want to be invested in the stock market for its long-term growth potential
and who are willing to accept the associated risks. The Balanced Fund's assets
may be invested in: common stock, preferred stock and other equity securities,
bonds and other fixed income securities, floating rate obligations, and money
market instruments, in each case, compatible with the Fund's commitment to
environmental responsibility. The other fixed income securities in which the
Fund may invest include: U.S. Government securities, mortgage-backed securities,
and zero coupon securities. The Fund may also engage in writing and purchasing
options on portfolio securities.
There is no predetermined percentage of assets allocated to either stocks
or bonds, although the Balanced Fund will, under normal circumstances, invest at
least 25% of its net assets in fixed income senior securities (bonds). The Fund
may not invest more than 75% of its net assets in equity securities (stocks),
including warrants, preferred stock and securities convertible into equity
securities. For temporary defensive purposes, the Fund may invest up to 100% of
its assets in cash and other money market and short-term instruments. Any such
temporary defensive investing will also comply with the Fund's environmental
criteria.
The Green Century Balanced Fund Environmental Criteria
The Balanced Fund invests primarily in the stocks and bonds of companies in
the following categories: (i) environmental companies whose major business is
products, processes or services that offer solutions to environmental problems;
and (ii) environmentally responsible companies whose primary business is not
solving environmental problems, but that integrate the principles of waste
minimization, pollution prevention, efficient use of natural resources and
sustainable development in their business practices.
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Environmental companies develop products or processes that solve
environmental problems in areas such as: alternative energy production,
bio-technology, energy efficiency, water treatment and conservation, air
pollution control, resource recovery, and pollution prevention. Included in this
category are companies whose primary business is related to improving the
environment as well as companies whose primary business may not be environmental
improvement, but which have nonetheless developed important environmental
products or services as a significant component of their business.
Companies in the portfolio may also include environmentally benign
companies whose overall impact on the environment, as measured by their
consumption of natural resources, toxic emissions, environmental liabilities,
solid waste generation and compliance with environmental law, is minimal but not
necessarily nonexistent. Winslow Management Company ("Winslow"), a Division of
Eaton Vance Management ("Eaton Vance"), serves as the subadviser of the Balanced
Fund (the "Subadviser"). See "Organization and Management of the Funds."
Winslow, in cooperation with Green Century Capital Management, works with
companies that do not have an articulated proactive environmental strategy to
help them craft a comprehensive and proactive environmental program.
The Balanced Fund also invests in what Green Century Capital Management and
Winslow perceive as "best in its class" companies that have implemented an
environmental program that sets a standard for their industry group. These
companies are recognized leaders in their sectors, contribute to meaningful
reductions in pollutant emissions or waste generation, and demonstrate Green
Century's belief that every company can be environmentally responsible.
Finally, environmentally responsible companies include environmental
turnaround companies that may have a history of environmental problems, but have
minimized their impact on the environment because they have taken substantive
steps to address and in some way solve the problems by, for example, abandoning
certain products or processes that have been proven harmful to the environment,
significantly reducing toxic emissions, or adopting broadscale pollution
prevention and waste minimization programs.
The Green Century Equity Fund
The Green Century Equity Fund Investments
The investment objective of the Equity Fund is to achieve long-term total
return by investing substantially all of its investable assets in the Domini
Social Index Portfolio (the "Index Portfolio"), a diversified portfolio of
stocks. The Index Portfolio seeks long-term total return which corresponds to
the total return performance of the Domini Social Index (the "Social Index" or
the "Index") by investing substantially all of its assets in the common stocks
comprising the Social Index. The Equity Fund may be an appropriate investment
vehicle for long term investors who want the potential for growth offered by the
stock market and who are willing to accept the associated risks. The Fund seeks
to temper the risks inherent in investing in the stock market by investing in a
diversified portfolio of approximately 400 companies. By not concentrating on a
specific security or market sector, the Equity Fund may be less volatile than
narrowly focused equity funds or individual stock investments. Since the
investment characteristics of the Equity Fund will correspond to those of the
Index Portfolio, the following is a description of the Index Portfolio's
investment policies. See "The Green Century Equity Fund and the Master Feeder
Investment Fund Structure."
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The Index Portfolio invests in the common stocks comprising the Social
Index. The Social Index is a common stock index developed and maintained by
Kinder, Lydenberg, Domini & Co., Inc. ("KLD"), an affiliate of the Index
Portfolio's investment manager. The Index Portfolio is comprised of the common
stocks of approximately 400 companies and seeks to exclude corporations with
poor environmental and social records. The weightings of the stocks comprising
the Social Index are based upon market capitalization. The criteria used in
developing and maintaining the Social Index involve subjective judgment by KLD.
The Index 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 Social Index.
The Index 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 KLD's social criteria. The Index Portfolio does not currently
intend to invest in direct obligations of the United States Government.
Short-term debt securities purchased by the Index Portfolio will be rated at
least Prime-1 by Moody's Investors Service, Inc. ("Moody's") or A-1+ or A-1 by
Standard & Poor's Ratings Group ("S&P") or, if not rated, determined to be of
comparable quality by the Index Portfolio's Board of Trustees. The Index
Portfolio's policy is to hold its assets in such securities pending readjustment
of its holdings of stocks comprising the 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. Because the
Index Portfolio seeks to be fully invested in the stocks comprising the Social
Index, the Equity Fund is not intended to be a balanced investment plan.
The Index Portfolio readjusts its securities holdings periodically such
that its holdings will correspond, to the extent reasonably practicable, to the
Social Index both in terms of composition and weighting. The timing and extent
of adjustments in the holdings of the Index Portfolio, and the extent of the
correlation of the holdings of the Portfolio with the Index, reflects the
judgment of the Index Portfolio's submanager as to the appropriate balance
between the goal of correlating the holdings of the Index Portfolio with the
composition of the Index, and the goals of minimizing transaction costs and
keeping sufficient reserves available for anticipated redemptions from the Index
Portfolio. The Index Portfolio's ability to duplicate the performance of the
Index will depend to some extent on the size and timing of cash flows into and
out of the Index Portfolio as well as the Index Portfolio's expenses.
Adjustments in the securities holdings of the Index Portfolio to accommodate
cash flows will track the Social Index to the extent practicable, but this will
result in brokerage expenses.
The Green Century Equity Fund Environmental and Social Criteria
The philosophy of the Equity Fund is that enterprises which exhibit a
social awareness should be better prepared to meet future societal needs for
goods and services and may be less likely to incur certain legal liabilities
that may be charged when a product or service is determined to be harmful. Green
Century Capital Management believes that such enterprises should over the long
term be able to provide investors with a return that is competitive with
enterprises that do not exhibit such social awareness. We also believe that
investing money in companies with better environmental and social records and
withholding investment dollars from
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<PAGE> 16
companies with poor records will encourage more corporations to improve their
environmental and social performance.
In evaluating stocks for inclusion in the Social Index, KLD considers a
company's environmental performance, particularly in taking positive initiatives
in environmental matters; its employee relations; its corporate citizenship;
product-related issues and its attitudes with regard to consumer issues; and
KLD's criteria for industry diversification, financial solvency, market
capitalization, and portfolio turnover. Environmental performance includes a
company's record on waste disposal, toxic emissions, fines or penalties, and
efforts in waste and emissions reductions, recycling, and use of environmentally
beneficial fuels, products and services. Corporate citizenship includes the
company's record on philanthropic activities and its interaction with the
communities it affects. Employee relations include a company's record with
regard to labor matters, its commitment to workplace safety, the breadth,
quality and innovation of its employee benefit programs, and its commitment to
provide employees with a meaningful participation in company profits either
through stock purchase or profit sharing plans. KLD seeks to exclude companies
which, based on data available to it, derive more than 2% of their gross
revenues from the sale of military weapons; derive any revenues from the
manufacture of tobacco products or alcoholic beverages; derive any revenues from
gambling enterprises; own directly or operate nuclear power plants or
participate in businesses related to the nuclear fuel cycle. The Manager of the
Index Portfolio intends to vote proxies of companies included in the Index
Portfolio consistent with the environmental and social criteria used in
developing and maintaining the Social Index. Inclusion of a stock in Social
Index does not imply an opinion by KLD or the Manager as to the merits of that
specific stock as an investment.
The Green Century Equity Fund and the Master-Feeder Investment Fund Structure
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Equity Fund seeks to achieve its investment objective
by investing all of its investable assets in the Index Portfolio, a separate
registered investment company with the same investment objective as the Equity
Fund. In addition to selling a beneficial interest to the Equity Fund, the Index
Portfolio may sell beneficial interests to other mutual funds or institutional
investors. Such investors will invest in the Index Portfolio on the same terms
and conditions as the Equity Fund and will pay a proportionate share of the
Index Portfolio's expenses. However, the other investors investing in the Index
Portfolio are not required to sell their shares at the same public offering
price as the Equity Fund due to variations in sales commissions and other
operating expenses. Therefore, investors in the Equity Fund should be aware that
these differences may result in differences in returns experienced by investors
in the different funds that invest in the Index Portfolio. Such differences in
returns are also present in other mutual fund structures. Information concerning
other holders of interests in the Index Portfolio is available from the Index
Portfolio's investment manager, at 212-352-9200.
Smaller funds investing in the Index Portfolio may be materially affected
by the actions of larger funds investing in the Index Portfolio. For example, if
a large fund withdraws from the Index Portfolio, the Index Portfolio may become
less diverse, resulting in increased portfolio risk. 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 Index Portfolio
could have effective voting control of the operations of the Index Portfolio.
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<PAGE> 17
The Trustees of Green Century have adopted the following policy with
respect to voting shares of the Index Portfolio held by the Equity Fund:
Whenever the Equity Fund is requested to vote on a matter pertaining to the
Index Portfolio, the Trustees will, in their discretion and in accordance with
applicable law, either seek instructions from shareholders of the Equity Fund
and vote the shares only in accordance with such instructions, or vote the
shares held by the Equity Fund in the same proportion as the vote of all other
holders of shares in the Index Portfolio. Whenever the Trustees determine to
seek the instructions of the Equity Fund shareholders, the Equity Fund will hold
a meeting of its shareholders and, at the meeting of investors in the Index
Portfolio, the Equity Fund will cast all of its votes in the same proportion as
the votes of the Equity Fund's shareholders. Equity Fund shareholders who do not
vote will not affect the Equity Fund's votes at the Index Portfolio meeting.
Shares of the Equity Fund for which no voting instructions have been received
will be voted by the Trustees in the same proportion as the shares for which it
receives voting instructions.
The investment objective of the Equity Fund may be changed without the
approval of the Equity 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 Equity Fund's investment objective, shareholders should
consider whether the Equity Fund remained an appropriate investment in light of
their then-current financial positions and needs. The investment objective of
the Index Portfolio may also be changed without the approval of the investors in
the Index Portfolio, but not without written notice thereof to the investors in
the Index Portfolio (and, in turn, notice by the Equity Fund to its
shareholders) thirty days prior to implementing the change.
Certain changes in the Index Portfolio's investment objective, policies or
restrictions may require the Equity Fund to withdraw its interest in the Index
Portfolio. Any such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the Index
Portfolio). If securities are distributed, the Equity 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 Equity Fund.
Notwithstanding the above, there are other means for meeting shareholder
redemption requests, such as borrowing.
The Equity Fund may withdraw its investment from the Index Portfolio at any
time, if the Board of Trustees of Green Century determines that it is in the
best interest of the Equity 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 Equity Fund in another pooled investment
entity having the same investment objective as the Equity Fund or the retention
of an investment adviser to manage the Equity Fund's assets in accordance with
the investment policies described above with respect to the Index Portfolio. In
the event the Trustees of Green Century were unable to find a substitute
investment company in which to invest the Equity Fund's assets and were unable
to secure directly the services of an investment adviser, the Trustees would
seek to determine the best course of action.
For more information about the Index Portfolio's policies, management and
expenses see "Fee Information," and "Organization and Management of the Funds."
For more information about the Index Portfolio's policies and investment
restrictions see the Statement of Additional Information.
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<PAGE> 18
Additional Investment Policies and Restrictions
The Green Century Balanced Fund
OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. For hedging purposes and to
increase income, the Balanced Fund may write (sell) covered (under Securities
and Exchange Commission regulations) call and put options on individual
securities and on stock indices and may engage in related closing transactions.
Options trading is a highly specialized activity that entails greater than
ordinary investment risks. Risks associated with writing covered options include
the possible inability to effect closing transactions at favorable prices; an
appreciation limit on the securities set aside for settlement; losses caused by
unanticipated market movements; and the Subadviser's ability to predict
correctly the direction of securities prices, interest rates, currency exchange
rates and other economic factors.
For bona fide hedging or other permissible risk management purposes, such
as protecting the price or interest rate of a security it intends to buy, the
Balanced Fund may enter into interest-rate, securities-index and currency
futures contracts and may purchase and write put and call options on these
futures contracts. Futures contracts obligate the Fund, at maturity, to take or
make delivery of certain securities, the cash value of a securities index or a
stated quantity of a foreign currency. The Fund may lose the expected benefit of
futures transactions if securities prices or interest rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. In addition, changes in the value of the Fund's futures and
options positions may not prove to be perfectly or even highly correlated with
changes in the value of its portfolio securities. This could limit the Fund's
ability to hedge effectively against interest-rate and/or market risk and give
rise to additional risks.
In an attempt to manage currency risk, the Balanced Fund may purchase and
sell forward foreign currency exchange contracts, options on currencies and
other currency instruments with respect to 5% of its assets.
CONVERTIBLE SECURITIES. The Balanced Fund may invest in debt and equity
convertible securities which generally offer lower interest or dividend yields
than nonconvertible debt securities of similar quality. A convertible security
may be converted either at a stated price or rate within a specified period of
time into a specified number of shares of common stock. By investing in
convertible securities, the Fund seeks the opportunity, through the conversion
feature, to participate in a portion of the capital appreciation of the common
stock into which the securities are convertible, while earning higher current
income than is available from common stock. The value of convertible securities
may reflect changes in the value of the underlying common stock. Convertible
securities entail less credit risk than the issuer's common stock because they
rank senior to common stock.
MORTGAGE-BACKED SECURITIES. The Balanced Fund may invest in mortgage-backed
securities which are securities that directly or indirectly represent an
interest in an underlying pool of mortgages. Unlike ordinary fixed-income
securities, which generally pay a fixed rate of interest and return principal
upon maturity, mortgage-backed securities repay both interest income and
principal as part of their periodic payments. Because the mortgages underlying
mortgage-backed certificates can be prepaid at any time by homeowners or
corporate borrowers, mortgage-backed securities give rise to certain unique
"pre-payment" risks, as well as market risks and financial risks. The Fund may
invest in mortgage-backed securities issued or
18
<PAGE> 19
guaranteed by an agency or instrumentality of the U.S. Government.
Mortgage-backed securities that are guaranteed by the U.S. Government are
guaranteed only as to the timely payment of principal and interest. The market
value of such securities is not guaranteed and may fluctuate.
ZERO COUPON SECURITIES. The Balanced Fund may invest in zero coupon
securities which do not make regular interest payments; rather, they are sold at
a discount from face value. Principal and accrued discount (representing
interest accrued but not paid) are paid at maturity. Zero coupon securities are
subject to greater market value fluctuations from changing interest rates than
debt obligations of comparable maturities which make current cash distributions
of interest.
HIGH YIELD DEBT SECURITIES. The Balanced Fund may invest up to 35% of its
net assets in fixed income securities that, at the time of the investment, are
either rated CCC or higher by S&P or Caa or higher by Moody's or, if not rated,
considered to be of equivalent quality by the Subadviser of the Balanced Fund.
Please refer to the Statement of Additional Information for a description of
bond rating categories. Below investment grade securities (those rated below BBB
by S&P or Baa by Moody's or their equivalent) are commonly referred to as "junk
bonds." As of September 30, 1998, 24.1% of the net assets of the Balanced Fund
were invested in below investment grade securities. If the rating of a debt
security is downgraded while owned by the Fund, the Subadviser will determine
whether the Fund should continue to hold the security. It is expected that the
Subadviser will sell promptly any securities which are non-investment grade
which exceed 35% of the Fund's net assets, where it has determined such sale is
in the best interests of the Fund's shareholders.
While these securities generally offer higher yields than investment grade
securities with similar maturities, lower-quality securities involve greater
risks, including the possibility of default or bankruptcy. Generally, they are
considered to be predominantly speculative regarding, and more dependent on, the
issuer's ability to pay interest and repay principal. Such inability (or
perceived inability) would likely lessen the value of such securities, which
could lower the Fund's net asset value per share. Issuers of high-yield
securities may not be as strong financially as those issuing bonds with higher
credit ratings. Other potential risks associated with investing in high-yield
securities include: heightened sensitivity of highly-leveraged issuers to
adverse economic changes and individual-issuer developments; subordination to
the prior claims of other creditors; adverse publicity and changing investor
perceptions about these securities; and generally less liquid markets. The Fund
may incur additional expenses to the extent that it is required to seek recovery
upon a default in the payment of principal and interest on its holdings. Because
of the associated risks, successful investments in high-yield, high-risk
securities are more dependent on the Subadviser's credit analysis than generally
would be the case with investments in investment grade securities.
Many corporate high yield bonds are issued pursuant to Rule 144A under the
Securities Act of 1933 and therefore are subject to the Fund's restriction that
no more than 15% of the Fund's net assets can be invested in illiquid
securities.
REPURCHASE AGREEMENTS. As a means of earning income for periods as short as
overnight, the Balanced Fund may enter into repurchase agreements with selected
banks and broker-dealers. Under a repurchase agreement, the Fund acquires
securities, subject to the seller's agreement to repurchase at a specified time
and price. There may be delays and risks of loss if the seller is unable to meet
its obligation to repurchase. Default by the seller would expose the Fund to
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<PAGE> 20
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
WHEN-ISSUED SECURITIES. The Balanced Fund may purchase securities on a
when-issued basis for payment and delivery at a later date. Securities purchased
or sold on a when-issued basis involve a risk of loss if the value of the
security to be purchased declines before the settlement date.
The Green Century Balanced Fund and the Green Century Equity Fund
LENDING OF SECURITIES. Consistent with applicable regulatory policies, the
Balanced Fund may seek to increase its income by lending securities. The
Balanced Fund has no current intention of making loans of portfolio securities
that would amount to greater than 5% of the Fund's total assets. The Index
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 and cash or cash equivalents maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
The Index Portfolio would have the right to call a loan and obtain the
securities loaned at any time on three days' notice. Loans of securities involve
the risk that the borrower may fail to return the securities or may fail to
provide additional collateral.
FOREIGN SECURITIES. While the Balanced Fund generally emphasizes
investments in companies domiciled in the United States, the Fund may also
invest up to 25% of its assets in listed and unlisted foreign securities of the
same types and quality as the domestic securities in which the Fund may invest
when the anticipated performance of foreign securities is believed by the
Adviser and the Subadviser to offer more potential than domestic alternatives,
in all cases to the extent consistent with the investment objective of the Fund.
The Fund may also invest in American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs") with respect to such foreign securities. The Fund
may also invest in certificates of deposit issued by foreign banks, foreign and
domestic branches of U.S. banks and obligations issued or guaranteed by foreign
governments or political subdivisions thereof.
Investing in securities of foreign issuers involves considerations not
typically associated with investing in securities of companies organized and
operated in the United States. The value of a Fund's foreign investments may be
adversely affected by changes in political or social conditions, government
administrations, economic or monetary policies, diplomatic relations,
confiscatory taxation, currency restrictions, expropriation, nationalization,
limitation on the removal of funds or assets, or imposition of (or change in)
exchange control or tax regulations in foreign countries. In addition, the
economies of individual foreign nations may differ from the U.S. economy,
whether favorably or unfavorably, in areas such as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position; it may also be more difficult to obtain and
enforce a judgment against a foreign issuer. In general, less information is
publicly available with respect to foreign issuers than is available with
respect to U.S. companies. Most foreign companies are also not subject to the
uniform accounting and financial reporting requirements applicable to issuers in
the United States. Any foreign investments made by a Fund must be made in
compliance with U.S. and foreign currency restrictions and tax laws restricting
the amounts and types of foreign investments.
PORTFOLIO TURNOVER. The portfolio turnover rate is the ratio of the lesser
of sales or purchases to the monthly average value of the portfolio (excluding
from both the numerator and
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<PAGE> 21
the denominator all securities with maturities at the time of acquisition of one
year or less). Higher levels of activity result in higher transaction costs and
may also result in taxes on realized gains to be borne by the Fund's
shareholders. Purchases and sales are made for a portfolio whenever necessary,
in management's opinion, to meet its investment objective. The portfolio
turnover rates of the Balanced Fund for the fiscal years ended June 30, 1996,
1997 and 1998 were 136%,109% and 96% respectively. The portfolio turnover rate
for the Balanced Fund for the one-month period ended July 31, 1998 was 4%, not
annualized.
Frequent changes in the Index Portfolio's holdings may result from the
policy of attempting to correlate the Index Portfolio's securities holdings with
the compositions of the Social Index, and the frequency of such changes will
increase as the rate and volume of purchases and withdrawals of interests in the
Index Portfolio increases. The annual portfolio turnover rates of the Index
Portfolio for the fiscal years ended July 31, 1996, 1997 and 1998 were 5%, 1%
and 5% respectively.
INVESTMENT RESTRICTIONS. As a matter of fundamental investment policy which
cannot be changed without shareholder approval, no more than 25% of the value of
each Fund's and the Index Portfolio's assets may be invested in any one industry
(excluding U.S. Government securities) although the Equity Fund will invest all
of its assets in the Index Portfolio, and the Index 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 Social Index. Based on the current
composition of the Social Index, this is considered highly unlikely. If the
Index Portfolio were to concentrate its investments in a single industry, the
Index Portfolio and the Equity Fund would be more susceptible to any single
economic, political or regulatory occurrence than would be another investment
company which was not so concentrated. In addition, as a matter of fundamental
policy, the Equity Fund will invest all of its assets (either directly or
through the Index Portfolio) in one or more of: (i) stocks comprising an index
of securities selected applying social and environmental criteria (currently the
Social Index), (ii) short-term debt securities of issuers which meet social
criteria, (iii) cash, and (iv) options on equity securities. These fundamental
policies cannot be changed without the approval of the holders of a "majority of
the outstanding voting securities (as defined in the Investment Company Act of
1940, as amended (the "1940 Act") of the respective Funds and the Index
Portfolio. For further information on fundamental and non-fundamental policies
and restrictions, see the Statement of Additional Information.
The investment objective of the Balanced Fund is not fundamental and may be
modified without shareholder approval. The investment objectives of the Equity
Fund and the Index Portfolio also are not fundamental and may be changed without
the approval of the shareholders or investors, but not without written notice
thereof to shareholders thirty days prior to implementing the change. Because of
the risks inherent in all investments, there can be no assurance that the
objectives of the Funds will be met. See "Investment Objectives, Policies and
Risk Factors--The Green Century Equity Fund and the Master-Feeder Investment
Structure." Except as stated otherwise, all investment guidelines, policies and
restrictions described herein and in the Statement of Additional Information are
non-fundamental.
ORGANIZATION AND MANAGEMENT OF THE FUNDS
The Green Century Funds were organized on July 1, 1991 as a Massachusetts
business trust. Each Fund represents a separate series of shares of the Green
Century Funds. The Green
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Century Funds are registered under the 1940 Act as a diversified open-end
management investment company. The business and affairs of each of the Funds is
conducted under the direction of its Board of Trustees and the affairs of the
Index Portfolio are conducted under the direction of its Board of Trustees. The
Trustees of Green Century are identified below under "Green Century Board of
Trustees."
The Green Century Balanced Fund
INVESTMENT ADVISER. Green Century Capital Management (the "Adviser") is the
investment adviser for the Balanced Fund and oversees the portfolio management
of the Balanced Fund on a day-to-day basis. Green Century Capital Management's
role is to ensure that the Balanced Fund's investment objective and
environmental and investment policies are accurately and effectively
implemented. For its services, Green Century Capital Management receives an
advisory fee from the Balanced Fund which is accrued daily and paid monthly at
an annual rate equal to 0.75% of the Balanced Fund's average daily net assets.
This fee is higher than that paid by most mutual funds. Kristina Curtis, Chief
Operating Officer, is responsible for the day-to-day management of Green Century
Capital Management. She has served as Chief Operating Officer of Green Century
Capital Management since the company was organized in 1991. Green Century
Capital Management has served as investment adviser and administrator for the
Balanced Fund since the commencement of operations of the Balanced Fund. The
Balanced Fund is the only investment advisory client of Green Century Capital
Management.
SUBADVISER. Pursuant to a Subadvisory Agreement between Winslow Management
Company ("Winslow" or the "Subadviser") and Green Century Capital Management,
Winslow serves as the Subadviser for the Balanced Fund. Winslow, a division of
Eaton Vance Management, conducts the day-to-day investment management for the
Balanced Fund consistent with the guidelines and directions set by Green Century
Capital Management. An adherent of rigorous investment discipline, Winslow uses
a fundamental security analysis of each investment. This qualitative approach is
complemented with a proprietary computer model that mixes a variety of
statistical data to rank a large group of securities on an ongoing basis
pursuant to several factors. Winslow also attempts to take advantage of market
inefficiencies through timely execution of trades.
Winslow has managed equity and debt investments in environmental and
environmentally responsible companies for its clients since 1984. Winslow has
been a division of Eaton Vance Management since June 30, 1993 and formerly was
an independent company. As of September 30, 1998, Winslow had $80 million in
assets under management and Winslow and Eaton Vance, collectively, had over $27
billion in assets under management. Jackson W. Robinson provides the day-to-day
investment management for the Balanced Fund, and has provided such services for
the Balanced Fund since July 1, 1995. Mr. Robinson has served as President of
Winslow since 1984.
For its services, Winslow receives a base fee from the Adviser of 0.40% of
the average daily net assets of the Balanced Fund, subject to an adjustment up
or down of 0.20% annually as follows:
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<TABLE>
<CAPTION>
If, on an annual basis, the Balanced Fund's Total Then the Adviser will pay
Return differs from the Lipper Directors' Analytical Winslow an annual fee of:
Data Balanced Fund Average Total Return (the "Index
Total Return") by:
<S> <C>
positive 2.00% or more 0.60%
positive 1.00% to positive 1.99% 0.50%
negative 0.99% to positive 0.99% 0.40%
negative 1.00% to negative 1.99% 0.30%
negative 2.00% or more 0.20%
</TABLE>
The Board of Trustees believes that the performance adjustments are
appropriate although not within the 10 percentage points per year range
suggested by Release No. 7113 under the 1940 Act. In the event the Lipper
Directors' Analytical Data Balanced Fund Average ceases to become available or
the Trustees determine such Index Total Return is no longer a reasonable
performance benchmark, the Trustees may substitute another performance
benchmark. See the Statement of Additional Information for additional
information regarding Winslow's fee arrangement.
The Green Century Equity Fund and the Index Portfolio
INVESTMENT MANAGER. Domini Social Investments LLC ("DSI") provides
investment supervisory services, operational support and administrative services
to the Index Portfolio. For its services, DSI receives a fee equal on an annual
basis to 0.20% of the Index Portfolio's average daily net assets. DSI is
voluntarily waiving its fee by the amount, if any, by which the total ordinary
operating expenses of the Index Portfolio (excluding brokerage fees and
commissions, interest, taxes, and any other extraordinary expenses) exceed, on
an annual basis, 0.20% of the average daily net assets of the Index Portfolio.
This fee waiver may be reduced or eliminated at any time. DSI, an investment
adviser under the Investment Advisers Act of 1940, as amended, was organized in
April, 1997. It was formed by principals of KLD, the former investment adviser
for the Index Portfolio, and other investment company and marketing
professionals. DSI has no prior experience in managing or advising a mutual
fund.
Prior to October 22, 1997, KLD was the investment adviser to the Index
Portfolio. KLD continues to determine and monitor the composition of the Social
Index (which determines the composition of the Index Portfolio's securities),
and provides other services relating to socially responsible investments
pursuant to a license agreement between DSI and KLD. See "Investment Objectives,
Policies and Risk Factors." The following persons are primarily responsible for
the development and maintenance of the Social Index: Steven D. Lydenberg,
Director of Research, KLD, since 1990; and Peter D. Kinder, President, KLD,
since 1988.
The entering into of the Management Agreement and the Submanagement
Agreement (discussed below), and the termination of the investment advisory and
sponsorship agreements, were part of a restructuring by the Index Portfolio
effective October 22, 1997 which was designed to provide a more centralized
management structure for the Index Portfolio. Additional information regarding
the service providers for the Index Portfolio prior to October 22, 1997 is
provided in the Statement of Additional Information. Because of the expense
payment arrangements between the Equity Fund and Green Century Capital
Management, the changes in
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<PAGE> 24
the management of the Index Portfolio and the expenses to be incurred by the
Index Portfolio will not have any impact on the total expenses of the Equity
Fund to be borne by its shareholders. See "Fee Information."
Investment Submanager. Mellon Equity Associates ("Mellon Equity" or
"Submanager") provides investment submanagement services to the Index Portfolio
on a day-to-day basis pursuant to a Submanagement Agreement with DSI effective
October 22, 1997. Mellon Equity's services as Submanager include determining
what securities shall be purchased, sold or exchanged to track the composition
of the Index. Mellon Equity does not determine the composition of the Social
Index. DSI pays Mellon Equity an investment submanagement fee equal on an annual
basis to 0.10% of the average daily net assets of the Index Portfolio. Prior to
October 22, 1997, Mellon Equity served as the investment manager of the Index
Portfolio. For its services, the Index Portfolio paid Mellon Equity an
investment management fee equal on an annual basis to 0.10% of the average daily
net assets of the Index 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")). Mellon Equity has been registered
as an investment adviser under the Investment Advisers Act of 1940 since 1986.
As of September 30, 1998, Mellon Equity had approximately $21.8 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 Index Portfolio since November 1994. He has been employed by Mellon
Equity and/or Mellon Bank as a portfolio manager for over five years.
The Green Century Balanced Fund and The Green Century Equity Fund
Administrator. Green Century Capital Management serves as the Administrator
of the Green Century Funds. Pursuant to an Administrative Services Agreement,
Green Century Capital Management pays all the expenses of each Fund other than
the Funds' investment advisory fees, if any; fees under the Distribution Plan,
if any; interest, taxes, brokerage costs and other capital expenses; expenses of
the non-interested Trustees of the Funds (including counsel fees); and any
extraordinary expenses.
For such administrative services, the Administrator receives a fee from the
Balanced Fund at a rate such that immediately following any payment to the
Administrator, the total operating expenses of the Balanced Fund (including
investment advisory and distribution fees), on an annual basis, do not exceed
2.50% of the Balanced Fund's average daily net assets up to $30 million, 2.25%
on average net assets from $30 million to $100 million, and 1.75% on average net
assets in excess of $100 million. The Administrator receives a fee from the
Equity Fund at a rate such that immediately following any payment to the
Administrator, the combined total operating expenses of the Fund and the Index
Portfolio, on an annual basis, do not exceed 1.50% of the Fund's average daily
net assets.
Subadministrator. Sunstone Financial Group, Inc. ("Sunstone") serves as the
sub-administrator of the Funds pursuant to a Subadministration Agreement between
Green Century Capital Management and Sunstone dated July 7, 1997. As
sub-administrator, Sunstone is responsible for conducting certain administrative
services (which include clerical, regulatory and other services) for the Funds
subject to the supervision and direction of Green Century Capital Management.
Sunstone receives a fee from the Administrator (not the Funds) for its
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<PAGE> 25
administrative services on behalf of the Administrator which fee is based on
each Fund's average net assets at an annual rate beginning at 0.175% and
decreasing as assets exceed certain levels, currently subject to an annual
minimum fee for each Fund of $40,000. The annual minimum fee increases
incrementally each year. Sunstone does not act or serve in any capacity with
respect to the Index Portfolio. Prior to July 7, 1997, Signature Broker-Dealer
Services, Inc. served as subadministrator. Sunstone is an affiliate of the
Funds' distributor. Sunstone and its affiliates provided administration,
transfer agent and/or distribution services to 19 fund families representing
over $14 billion in assets as of September 30, 1998.
Distributor and Distribution Plan. As of July 7, 1997, Sunstone
Distribution Services, LLC ("Sunstone Distribution Services"), an affiliate of
Sunstone, serves as the Distributor of the shares of the Funds and acts as the
agent of each Fund in connection with the offering of its shares.
The Board of Trustees of Green Century has adopted a Distribution Plan with
respect to the Balanced Fund in accordance with Rule 12b-1 under the 1940 Act.
The Board of Trustees of Green Century adopted the Distribution Plan with
respect to the Balanced Fund after determining that there is a reasonable
likelihood that the Distribution Plan will benefit the Fund and its respective
shareholders. The Distribution Plan provides that the Balanced Fund shall pay a
distribution fee to the Distributor at an annual rate of up to 0.25% of the
average daily net assets of the Fund in anticipation of or as reimbursement for
expenses (other than interest or carrying charges) of (i) compensating
broker-dealers with trail or maintenance commissions and (ii) promoting the sale
of shares of the Fund such as by paying for the preparation, printing and
distribution of prospectuses for other than current shareholders and sales
literature or other promotional activities. If such an expense is not reimbursed
during the then-current fiscal year, it will not be reimbursed in a subsequent
fiscal year.
Transfer Agent. Effective November 16, 1998, Unified Fund Services, Inc.
("Unified") will serve as the transfer agent and shareholder services provider
for the Green Century Funds. As of September 30, 1998, Unified provided services
to 39 funds representing over $500 million in assets. Prior to November 16,
1998, Investors Bank & Trust Company ("IBT") served as transfer agent to the
Funds.
Custodian. IBT is the custodian for the Green Century Funds and the Index
Portfolio. As of September 30, 1998, IBT had approximately $151 billion in
assets under custody and provided services for approximately 1,486 mutual funds.
Auditors. KPMG Peat Marwick LLP are the independent auditors of the Green
Century Funds and the Index Portfolio.
Green Century Board of Trustees. The affairs of the Green Century Funds are
conducted under the direction of the Board of Trustees of Green Century and the
affairs of the Index Portfolio are conducted under the direction of its Board of
Trustees. The Trustees and officers of Green Century are separate and
independent from the Trustees and officers of the Index Portfolio. For more
information regarding the Trustees of Green Century and the Index Portfolio see
"Trustees and Officers" in the Statement of Addition Information. The following
are the Trustees of Green Century:
David J. Fine.......... Attorney, DANGEL, DONLAN & FINE, Boston, Massachusetts
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<PAGE> 26
Douglas M. Husid*...... President, GREEN CENTURY FUNDS; Co-Managing Partner,
GOULSTON & STORRS, Boston, Massachusetts
Steven Kadish.......... Assistant Vice Chancellor for Biological Laboratories
and Programs, UNIVERSITY OF MASSACHUSETTS MEDICAL
CENTER, Boston, Massachusetts
Stephen Morgan......... President, EUA, CITIZENS' CONSERVATION SERVICES,
INC., Lowell, Massachusetts
Douglas H. Phelps*..... Chairperson, U.S. PUBLIC INTEREST RESEARCH GROUP
C. William Ryan........ Owner and Director, BROOKLINE TAI CHI, Brookline,
Massachusetts
James H. Starr......... Attorney, STARR & BURGESS, PC, Crested Butte, Colorado
Wendy Wendlandt*....... Chairperson of the Board, EARTH DAY 2000, Los Angeles,
California
* An "interested person" (as defined in the 1940 Act) of the Funds.
Green Century Funds Advisory Board. National leaders of the environmental
and business communities serve on an advisory board to the Green Century Funds.
The Advisory Board serves as a resource regarding the application and refinement
of the Funds' environmental criteria. They are:
Joan Bavaria........ President, FRANKLIN RESEARCH AND DEVELOPMENT CORPORATION;
Chairperson, CERES (Coalition for Environmentally
Responsible Economies)
Hillel Gray......... Former Policy Director, NATIONAL ENVIRONMENTAL LAW CENTER
Denis Hayes......... Executive Director, BULLIT FOUNDATION;
Organizer, EARTH DAY 1990 and EARTH DAY 1970
Gene Karpinski...... Executive Director, U.S. PUBLIC INTEREST RESEARCH GROUP
Maureen Kirk........ Executive Director, OREGON STATE PUBLIC INTEREST RESEARCH
GROUP
Steven Rothstein.... President, ENVIRONMENTAL FUTURES, INC.
Andrew Savitz....... Director, COOPERS & LYBRAND: ENVIRONMENTAL ADVISORY
SERVICES
Robert B. Zevin..... Former Senior Vice President and Economist, UNITED STATES
TRUST COMPANY
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<PAGE> 27
YOUR ACCOUNT
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT
Regular Investment Account.................................. $ 2,000
Individual Retirement Account (IRA) and Education IRA....... $ 500
Uniform Gift or Transfer to Minors Account (UGMA/UTMA)...... $ 500
No minimum initial investment is required for investors
who wish to open an account with a $100 or more a month
Automatic Investment Plan.
TO ADD TO AN ACCOUNT
By Check, Wire or Exchange.................................. $ 100
By Automatic Investment Plan................................ $ 50
MINIMUM BALANCES--Shareholders are encouraged to maintain a share balance of
at least $1,000, which amount may be changed by the Trustees of the Funds.
Individual Retirement Accounts and Uniform Gift or Transfer to Minors Act
accounts have a $500 minimum balance requirement. The Funds reserve the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts with balances less than the minimum. This provision does not apply to
Automatic Investment Plan accounts. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will mail
the proceeds of the redeemed account to the shareholder.
How to Purchase Shares
Opening an Account
1 By Check
To open an account by check, please complete and sign the registration
form and mail it with a check made payable to Green Century Balanced Fund
or Green Century Equity Fund to: Green Century Funds, P.O. Box 6110,
Indianapolis, Indiana 46206-6110.
2 By Wire
You may also open an account by instructing your bank to wire Federal
funds (monies of member banks within the Federal Reserve System) to the
Green Century Funds' custodian bank. Your bank may impose a fee for sending
a wire. If you are opening a new account by wire transfer, you must
telephone the Funds to obtain additional information about this
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<PAGE> 28
alternative. The Funds will not be responsible for the consequences of
delays, including delays in the banking or Federal Reserve wire systems.
Please call 1-800-221-5519 weekdays from 9:00 a.m. to 5:00 p.m.
Eastern Time for more information about how to purchase shares by wire.
After calling, complete the registration form and mail it to the address
given above. Wire the amount of your initial investment per the following
instructions:
Union Federal Savings Bank of Indianapolis, Indiana
ABA#: 274070484
DDA#: 590144707
Green Century Balanced Fund OR Green Century Equity Fund
For Further Credit: Your Name and Your Green Century Funds Account
Number
3 By Exchange
You may also open an account in one Fund by exchanging shares with a
value of $2,000 or more ($500 for an IRA, Education IRA or UGMA/UTMA
account) from another Green Century Fund. Your new account will be
established using the same name(s) and address as your existing account.
To exchange by telephone, call 1-800-221-5519 weekdays from 9:00 a.m.
to 5:00 p.m. Eastern Time. To exchange by letter, write to the "Green
Century Funds" at the address given above, including the name of the Fund
from which you are exchanging, the registered name(s) of ownership and
address, the account number, the dollar amount or number of shares to be
exchanged and the Fund into which you are exchanging. Sign your name(s)
exactly as it appears on your account statement. The exchange requirements
for corporations, other organizations, trusts, fiduciaries, institutional
investors and retirement plans may be different from those for individual
accounts. Please call 1-800-221-5519 for more information. The Funds
reserve the right to modify or terminate the exchange privilege upon 60
days prior written notice to shareholders.
4 By Automatic Investment
You may open an account with no initial investment if you enroll in
the Automatic Investment Plan and invest a minimum of $100 a month through
the Plan. Complete and sign the registration form, including the Automatic
Investment Plan section and mail it to: Green Century Funds, P.O. Box 6110,
Indianapolis, IN 46206-6110. You may terminate your participation in the
Automatic Investment Plan at any time with written notification to the
Funds at the same address.
Making Additional Investments
1 By Check ($100 Minimum)
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<PAGE> 29
You may make subsequent investments by submitting a check for $100 or
more with the tear-off slip (remittance form) from your account statement.
You may also mail your check with a letter of instruction indicating the
amount of your purchase, your account number, and the name in which your
account is registered, to: Green Century Funds, P.O. Box 6110,
Indianapolis, IN 46206-6110.
2 By Wire ($100 Minimum)
You may also make additional investments by instructing your bank to
wire Federal funds. Your bank may impose a fee for sending the wire. The
Green Century Funds cannot be responsible for the consequences of delays,
including delays in the banking or Federal Reserve wire systems. Wire your
additional investment per the instructions which follow. Call
1-800-221-5519 to obtain a Transaction Reference Number prior to wiring
funds.
Union Federal Savings Bank of Indianapolis, Indiana
ABA#: 274070484
DDA#: 590144707
Green Century Balanced Fund OR Green Century Equity Fund
For Further Credit: Your Name and Your Green Century Funds Account
Number
3 By Exchange ($100 Minimum)
Follow instruction No. 3 under "Opening an Account."
4 Automatic Investment Plan ($50 Minimum)
You may arrange to make regular investments through automatic
deductions from your checking or savings account. If you wish to select
this option, please complete the appropriate section on your registration
form. If you wish to set up an Automatic Investment Plan after opening an
account, please call 1-800-93-GREEN for further information. You may
terminate your participation in the Automatic Investment Plan at any time
with written notification to the Funds at P.O. Box 6110, Indianapolis, IN
46206-6110.
How To Sell Shares (Redemptions)
You can take money out of your account at any time by selling
(redeeming) some or all of your shares. See also "Processing Time" on page
23.
1 By Telephone
This is the quickest and easiest way to sell Fund shares. In order to
be able to redeem your shares by telephone, you must elect this option on
your registration form when you open your account. If you did not elect
telephone redemption on your registration form, call 1-800-221-5519 for
more information. If you elected telephone redemption on your registration
form, call 1-800-221-5519 to request either that the monies be wired or
sent by
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<PAGE> 30
check to the authorized bank account listed on your registration
form or that a check be sent to you at the address listed on your
registration form. You must also provide your name, address, Fund account
number and social security number before you may redeem shares by
telephone. All telephone redemption requests are recorded. There will be a
charge for all wire redemptions. There is no charge for redemption by
check. If you open an account by wire, you cannot redeem shares by
telephone until the Funds' transfer agent has received your completed and
signed registration form. Telephone redemption is not available for shares
held in IRA accounts.
2 By Mail
In order to redeem your shares by mail, send a letter to the "Green
Century Funds" and include the Fund name, the account registration name(s)
and address, the account number, and the dollar amount or the number of
shares you wish to redeem. Mail your letter to: Green Century Funds, P.O.
Box 6110, Indianapolis, IN 46206-6110.
Sign your name(s) exactly as it appears on your account statement. For
your protection and to prevent fraudulent redemptions, we require a
signature guarantee for the signature of each person in whose name the
account is registered on written redemption requests. Green Century's
transfer agent accepts signature guarantees from financial institutions
defined under Rule 17A(d)-15 of the Securities Exchange Act of 1934 (FDIC
member commercial bank, trust company, New York Stock Exchange member
brokerage firm or New York or Massachusetts savings bank). Financial
institutions which participate in one of the medallion signature programs
must use the specific "Medallion Guaranteed" stamp. A notary public cannot
provide a signature guarantee. The redemption requirements for
corporations, other organizations, trusts, fiduciaries, institutional
investors and Individual Retirement Accounts (IRAs) may be different from
those for regular accounts. For more information please call
1-800-221-5519.
SHAREHOLDER AND ACCOUNT POLICIES
Transaction Information
Purchases by Check. Checks must be made payable to the Green Century
Balanced Fund or the Green Century Equity Fund (or to the Green Century Funds).
No third party checks will be honored. Checks also must be drawn on or payable
through a U.S. bank and be in U.S. dollars. If you purchase shares with a check
that is returned due to insufficient funds, your purchase will be cancelled and
you will be responsible for any losses or fees incurred in the transaction. If
you purchase shares by check and redeem them within 15 days of purchase, the
Funds will release your redemption proceeds when your check clears. It is
possible, although unlikely, that this could take up to 15 days. Redemption
requests by telephone, including exchanges, will be accepted prior to the
expiration of the 15-day period if your check has cleared. If you purchase
shares by Federal funds wire, you may avoid this delay.
Confirmation of Transactions. All purchases and redemptions will be
confirmed promptly. Usually a confirmation of your purchase or sale of Fund
shares will be mailed on the business day following receipt of your
instructions.
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<PAGE> 31
Share Price Calculation. Once each business day, the share price for each
Fund is calculated. This is the Fund's Net Asset Value (the "NAV"). Because the
Green Century Funds are no-load, this is also the offering price at which each
Fund share is sold. Shares are purchased at the next share price calculated
after your investment is received and accepted. Shares are sold at the next
share price calculated after your order is received and accepted. Shares are
purchased in full and fractional share amounts.
Processing Time. The Funds will normally send your redemption proceeds
within one business day following the redemption request, but may take up to
seven days (or longer in the case of shares recently purchased by check). All
purchase and redemption requests received in good order by the Funds' transfer
agent are executed, without a sales charge, at the next-determined net asset
value. Reinvested dividends receive the net asset value as of the ex-dividend
date.
Tax Information. A redemption of shares, including an exchange into another
Fund, is a sale of shares and may result in a gain or loss for income tax
purposes.
Social Security or Tax Identification Number. Please be sure to complete
the Social Security or Tax Identification Number section of the Funds'
registration form when you open an account with the Green Century Funds. Federal
tax law requires the Funds to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a Social Security or Tax Identification
Number and certain other information or upon notification from the Internal
Revenue Service or a broker that withholding is required. The Funds reserve the
right to reject new account registrations without a Social Security or Tax
Identification Number. The Funds also reserve the right to close, by redemption,
accounts without Social Security or Tax Identification Numbers.
Individual Retirement Accounts (IRAs) and Tax Deferred Accounts. Shares of
the Funds are available for Individual Retirement Accounts (IRAs), Roth IRAs,
Simplified Employee Pension Plans (SEP-IRAs), SIMPLE IRAs, Education IRAs and
403(b)(7) accounts. For further information and to receive the appropriate
forms, please call 1-800-93-GREEN.
Telephone Transaction Liability. All investors are given the privilege to
initiate transactions (except redemptions) by telephone upon opening an account.
To redeem shares by telephone, you must elect this option in writing. See page
31 for further information. Neither the Funds nor any of their service
contractors (including but not limited to the Funds' Adviser and Subadviser,
Administrator and the Transfer Agent, defined herein) will be liable for any
loss or expense in acting upon any telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Funds will use such procedures that are considered to be
reasonable, including requesting a shareholder to correctly state his or her
Fund account number, the name and address in which his or her account is
registered, his or her Social Security number, and, when applicable, his or her
banking institution, bank account number and the name in which his or her bank
account is registered. To the extent that the Funds fail to use reasonable
procedures to verify the genuineness of telephone instructions, the Funds and/or
their service contractors may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.
Shareholder Account Statements
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<PAGE> 32
Shareholders of the Green Century Funds will receive quarterly statements
showing all account activity during that quarter, including dividends.
Additional purchases and redemptions of shares of each Fund will be confirmed
promptly, usually as of the next business day after the purchase or redemption
is received. The Green Century Funds will send you detailed tax information on
the amount and type of their dividends and distributions each year.
Dividends and Taxes
The Funds normally declare and pay dividends of net income semiannually in
June and December and distribute net capital gains once a year in December. Any
dividends or capital gain distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Each Fund intends to
distribute substantially all of its income and net capital gains.
The fiscal year end of each Fund is July 31.
You may opt to receive distributions in cash (via check) or have them
reinvested in additional shares of the Funds. Dividends and capital gain
distributions are automatically reinvested unless you request otherwise. If you
invest in an Individual Retirement Account (IRA), all dividends and capital
gains distributions must be reinvested; however, if you are over 59 1/2 years
old, distributions from IRA accounts may be paid to you in cash (via check).
Except for tax-exempt accounts, dividends from net investment income are
taxable to shareholders as ordinary income. Long-term capital gain
distributions, if any (based on the applicable long-term capital gain holding
period), are taxable as long-term capital gains regardless of the length of time
you have owned your shares. Distributions of short-term capital gains are
taxable as ordinary income. A portion of the dividends from net investment
income and short-term capital gains may qualify for the dividends-received
deduction for corporations.
A shareholder may also be subject to state and local taxes on dividends and
distributions from the Funds. Shareholders will be notified to the extent, if
any, that dividends reflect interest received from U.S. Government securities.
Such dividends may be exempt from certain state income taxes.
Valuation of Shares
The net asset value per share of each Green Century Fund is computed by
dividing the value of each Fund's total assets, less its liabilities, by the
total number of shares outstanding. The net asset value of the Balanced Fund
fluctuates based on the market values of its investments; the net asset value of
the Equity Fund fluctuates based on the value of its beneficial interest in the
Index Portfolio. In calculating the net asset value per share, the Balanced Fund
uses the current market value of the securities and the Equity Fund uses the
value of its beneficial interest in the Index Portfolio.
The net asset value per share of each Fund is determined every business day
as of the close of regular trading of the New York Stock Exchange (usually 4:00
p.m. Eastern Time) and at such other times as may be necessary or appropriate.
For share prices 24 hours a day, call 1-800-221-5519.
The net asset value of the Index Portfolio is determined by deducting the
amount of the Index Portfolio's liabilities from the value of its assets. At the
close of each business day, the value of the Equity Fund's beneficial interest
in the Index Portfolio will be determined by
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<PAGE> 33
multiplying the net asset value of the Index Portfolio by the percentage,
effective for that day, which represents the Fund's share of the aggregate
beneficial interests in the Index Portfolio.
Description of Shares, Voting Rights and Liabilities
Green Century's Declaration of Trust permits the Board of Trustees to issue
an unlimited number of full and fractional Shares of Beneficial Interest (par
value $0.01 per share) and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in the respective Fund. Green Century reserves the right to create and
issue additional series of shares. Shares of each series participate equally in
the earnings, dividends and assets of that particular series.
Each share represents an equal proportionate interest in a Fund with each
other share of that Fund. (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. Upon
liquidation of a Fund, shareholders would be entitled to share pro rata in the
net assets of the Fund available for distribution to shareholders. The Funds are
not required to and have no current intention to hold annual meetings of
shareholders, although the Funds will hold special meetings of shareholders when
in the judgment of the Board of Trustees it is necessary or desirable to submit
matters for a shareholder vote. 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.
Green Century 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 a Fund itself was unable to meet its
obligations.
The Index Portfolio, in which all of the assets of the Equity Fund are
invested, is organized as a trust under the laws of the State of New York. The
Equity Fund and other entities investing in the Index Portfolio (e.g., other
investment companies and common and commingled trust funds) are each liable for
all obligations of the Index Portfolio.
Financial Intermediaries
From time to time, Green Century Capital Management enters into contracts
with banks, brokers and other financial intermediaries ("Financial
Intermediaries") pursuant to which a customer of the Financial Intermediary may
place purchase and redemption orders for Fund shares through that Financial
Intermediary and/or through designated intermediaries of the Financial
Intermediary which holds such shares in its name on behalf of that customer.
Pursuant to such contract, each Financial Intermediary as agent with respect to
shareholders of and prospective investors in the Funds who are customers of that
Financial Intermediary, among other things: provides necessary personnel and
facilities to establish and maintain certain shareholders accounts and records
enabling it to hold, as agent, its customers' shares in its name or its nominee
name on the shareholder records of the Green Century Funds; assists in
33
<PAGE> 34
processing purchase and redemption transactions; arranges for the wiring of
funds; transmits and receives funds in connection with customer orders to
purchase or redeem shares of the Funds; provides periodic statements showing a
customer's account balance and, to the extent practicable, integrates such
information with information concerning other customer transactions otherwise
effected with or through it; furnishes, either separately or on an integrated
basis with other reports sent to a customer, monthly and annual statements and
confirmations of all purchases and redemptions of Fund shares in a customer's
account; transmits proxy statements, annual reports, updated prospectuses and
other communications from the Green Century Funds to its customers; and
receives, tabulates and transmits to the Green Century Funds proxies executed by
its customers with respect to meetings of shareholders of the Funds. For these
services, the Financial Intermediary receives such fees from Green Century
Capital Management as may be agreed upon from time to time between Green Century
Capital Management and such Financial Intermediary.
An investor who has an account with a Financial Intermediary may place
purchase orders for Fund shares with the Green Century Funds through that
Financial Intermediary. The Funds will be deemed to have received the purchase
or redemption order for Fund shares when a Financial Intermediary or its
designated intermediary accepts the purchase or redemption order and such orders
will be priced at each Fund's net asset value after the acceptance of the
purchase or redemption order by a Financial Intermediary or its designated
intermediary. Each Financial Intermediary may establish and amend from time to
time a minimum initial and a minimum subsequent purchase requirement for its
customers. A transaction or other fee may be charged by a Financial Intermediary
on the purchase of Fund shares. Each Financial Intermediary may establish its
own policy with respect to the reinvestment of dividends and capital gains
distributions in additional Fund shares. Shares held by a Financial Intermediary
on behalf of a shareholder must be redeemed through that Financial Intermediary.
A transaction or other fee may be charged by a Financial Intermediary on the
redemption of Fund shares.
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<PAGE> 35
INVESTMENT ADVISER (Balanced Fund)
AND ADMINISTRATOR
Green Century Capital Management, Inc.
29 Temple Place
Boston, MA 02111
1-800-93-GREEN
INVESTMENT SUBADVISER (Balanced Fund)
Winslow Management Company
24 Federal Street
Boston, MA 02110
INVESTMENT MANAGER (Index Portfolio)
Domini Social Investments LLC
11 West 25th Street, 7th Floor
New York, NY 10010
INVESTMENT SUBMANAGER (Index Portfolio)
Mellon Equity Associates
500 Grant Street, Suite 3700
Pittsburgh, PA 15258
COUNSEL TO INDEPENDENT TRUSTEES OF THE FUNDS
Debevoise & Plimpton
555 13th Street, N.W.
Washington, DC 20004
SUBADMINISTRATOR and DISTRIBUTOR
Sunstone Financial Group, Inc. (Subadministrator)
Sunstone Distribution Services, LLC (Distributor)
207 East Buffalo Street, Suite 400
Milwaukee, WI 53202
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT
Unified Fund Services, Inc.
431 North Pennsylvania Street
Indianapolis, IN 46204-1806
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<PAGE> 36
COUNSEL TO GREEN CENTURY CAPITAL
MANAGEMENT, INC.
Goulston & Storrs
400 Atlantic Avenue
Boston, MA 02110
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
FOR MORE INFORMATION ABOUT THE GREEN CENTURY FUNDS CALL 1-800-93-GREEN
FOR SPECIFIC INFORMATION ABOUT YOUR OWN ACCOUNT, CALL 1-800-221-5519
Printed on recycled paper with soy-based ink.
(PROSPECTUS)
36
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[LOGO]
(R)
BALANCED
FUND
EQUITY
FUND
37
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STATEMENT OF ADDITIONAL INFORMATION
GREEN CENTURY FUNDS
29 Temple Place, Suite 200, Boston, Massachusetts 02111
Green Century Funds (the "Trust" or "the Funds" or "Green Century")
offers two separate series (each, a "Fund"), each with its own investment
objective. Each Fund pursues its respective investment objective through
investments consistent with the Trust's commitment to environmental
responsibility. The GREEN CENTURY BALANCED FUND (the "Balanced Fund") seeks
capital growth and income from a diversified portfolio of stocks and bonds. The
GREEN CENTURY EQUITY FUND (the "Equity Fund") seeks long-term total return from
a diversified portfolio of stocks which corresponds to the total return
performance of the "Domini Social IndexSM" (the "Social Index"), an index
comprised of stocks selected based upon environmental and social criteria. The
Equity Fund seeks to achieve its investment objective by investing all of its
investable assets (the "Assets") in the Domini Social Index Portfolio (the
"Index Portfolio"), a diversified open-end management investment company having
the same investment objective as the Equity Fund. The Index Portfolio invests in
the common stocks included in the Social Index. There can be no assurance that
the investment objective of either Fund will be achieved.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Trust's Prospectus dated October 28, 1998 a copy
of which may be obtained from the Trust at the address noted above. Terms used
but not defined herein, but which are defined in the Prospectus, are used as
defined in the Prospectus.
Table of Contents Page
Investment Objectives, Risks and Policies........................... 2
History of Green Century Funds and Green Century and
Capital Management Shareholder Activism...........................17
Investment Restrictions.............................................20
Trustees, Officers and Advisory Board...............................24
Investment Advisers and Managers....................................28
Administrator, Subadministrator, Transfer Agent and Custodian,
and Expenses........................................................34
Distribution Plan...................................................36
Net Asset Value; Redemption in Kind.................................37
Performance Advertising.............................................38
Federal Taxes.......................................................39
Description of Shares, Voting Rights and Liabilities................41
Portfolio Transactions and Brokerage Commissions....................43
Independent Auditors and Experts....................................47
Additional Information..............................................47
Financial Statements................................................48
1
<PAGE> 39
Appendix - Description of Securities Ratings........................49
The date of this Statement of Additional Information is October 28, 1998.
INVESTMENT OBJECTIVES, RISKS AND POLICIES
The following supplements the information contained in the Prospectus
concerning the investment objective, policies and techniques of the Funds and
the Index Portfolio.
BALANCED FUND
U.S. Government Agency Obligations The Fund will invest in obligations
issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Government (i.e., direct pass-through certificates of the Government
National Mortgage Association ("GNMA")), some of which are supported by the
right of the issuer to borrow from the U.S. Government (i.e., obligations of the
Federal Home Loan Banks) and some of which are backed only by the credit of the
issuer itself (i.e., obligations of the Student Loan Marketing Association).
Repurchase Agreements Repurchase agreements may be entered into for
the Fund only with selected banks or broker-dealers. This is an agreement in
which the seller of a security agrees to repurchase from the Fund the security
sold to the Fund at a mutually agreed upon time and price. As such, it is viewed
as the lending of money to the seller of the security. The resale price normally
is in excess of the purchase price, reflecting an agreed upon interest rate. The
rate is effective for the period of time assets of the Fund are invested in the
agreement and is not related to the coupon rate on the underlying security. The
period of these repurchase agreements will usually be short, from overnight to
one week. The securities which are subject to repurchase agreements, however,
may have maturity dates in excess of one year from the effective date of the
repurchase agreement. The Fund will always receive as collateral securities
whose market value (which is marked to the market daily), including accrued
interest, will be at least equal to 100% of the dollar amount invested on behalf
of the Fund in each agreement along with accrued interest. Payment for such
securities will be made by the Fund only upon physical delivery or evidence of
book entry transfer to the account of the Trust's custodian. If the seller under
a repurchase agreement becomes insolvent, the Fund's right to dispose of the
securities may be restricted. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the security before
repurchase of the security under a repurchase agreement, the Fund may encounter
delay and incur costs before being able to sell the security. If the seller of
the security defaults, the Fund might incur a loss if the value of the
collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon the collateral on behalf of the Fund may be delayed or limited
in certain circumstances. The seller of the security may also fail to repurchase
the obligations. Repurchase agreements are considered collateralized loans under
the Investment Company Act of 1940, as amended (the "1940 Act").
A repurchase agreement with more than seven days to maturity may not be
entered into for the Fund if, as a result, more than 15% of the market value of
the Fund's net assets would be invested in such
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repurchase agreements together with any illiquid securities that the Fund may
hold. The Balanced Fund has no current intention to invest more than 5% of its
net assets in repurchase agreements.
Certificates of Deposit The Fund may invest in certificates of deposit
of large domestic or foreign banks (i.e., banks which at the time of their most
recent annual financial statements show total assets in excess of one billion
U.S. dollars or the equivalent thereof) and certificates of deposit of smaller
banks as described below. Although the Trust recognizes that the size of a bank
is important, this fact alone is not necessarily indicative of its
creditworthiness. Investment in certificates of deposit issued by foreign banks
or foreign branches of domestic banks involves investment risks that are
different in some respects from those associated with investment in certificates
of deposit issued by domestic banks, including the possible imposition of
withholding taxes on interest income, the possible adoption of foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such certificates of deposit, or other adverse political or
economic developments. In addition, it might be more difficult to obtain and
enforce a judgment against a foreign bank or a foreign branch of a domestic
bank. (See "Foreign Securities".)
The Fund may also invest in certificates of deposit issued by banks and
savings and loan institutions which had at the time of their most recent annual
financial statements total assets of less than one billion dollars, provided
that (i) the principal amounts of such certificates of deposit are insured by an
agency of the U.S. Government, (ii) at no time will the Fund hold more than
$100,000 principal amount of certificates of deposit of any one such bank, and
(iii) at the time of acquisition, no more than 10% of the Fund's assets (taken
at current value) are invested in certificates of deposit of such banks having
total assets not in excess of one billion dollars.
When-Issued Securities The Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer and
no interest on the when-issued or forward delivery security accrues to the
purchaser. While when-issued or forward delivery securities may be sold prior to
the settlement date, it is intended that the Fund will purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued or forward delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of when-issued or forward delivery securities may be
more or less than the purchase price. The Trust does not believe that the Fund's
net asset value or income will be adversely affected by its purchase of
securities on a when-issued or forward delivery basis. The Fund will establish a
segregated account in which it will maintain cash, U.S. Government securities
and high-grade debt obligations equal in value to commitments for when-issued or
forward delivery securities.
Mortgage-Backed Securities and Mortgage Pass-Through Securities The
Fund may also invest in mortgage-backed securities, which are interests in pools
of mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below.
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Unscheduled or early payments on the underlying mortgage may shorten
the securities' effective maturities and lessen their growth potential. The Fund
may agree to purchase or sell these securities with payment and delivery taking
place at a future date. A decline in interest rates may lead to a faster rate of
repayment of the underlying mortgages, and expose the Fund to a lower rate of
return upon reinvestment. To the extent that such mortgage-backed securities are
held by the Fund, the prepayment right will tend to limit to some degree the
increase in net asset value of the Fund because the value of the mortgage-backed
securities held by the Fund may not appreciate as rapidly as the price of
noncallable debt securities.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages. These guarantees, however, do not apply
to the market value or yield of mortgage-backed securities or to the value of
Fund shares. Also, GNMA securities often are purchased at a premium over the
maturity value of the underlying mortgages. This premium is not guaranteed and
will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) mortgages from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the United States Government.
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FHLMC is a corporate instrumentality of the United States Government
and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. Its stock is owned by
the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates
("PCs") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but PCs are not backed by the full faith and credit of
the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such nongovernmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Fund's investment adviser and
investment subadviser determine that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable.
Foreign Currencies Investments in foreign securities usually will
involve currencies of foreign countries. Moreover, the Fund temporarily may hold
funds in bank deposits in foreign currencies during the completion of investment
programs and may purchase forward foreign currency contracts, foreign currency
futures contracts and options on such contracts. Because of these factors, the
value of the assets of the Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Fund may incur costs in connection with
conversions between various currencies. Although the Fund values its assets
daily in terms of U.S. dollars, it does not intend to convert its holdings of
foreign currencies into U.S. dollars on a daily basis. It will do so from time
to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the Fund at one rate, while offering a lesser rate
of exchange should the Fund desire to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward or futures contracts to purchase or
sell foreign currencies.
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Because the Balanced Fund may be invested in both U.S. and foreign
securities markets, changes in the Fund's share price will not be correlated
with movements in the U.S. markets. The Fund's share price will reflect the
movements of both the different stock and bond markets in which it is invested
and of the currencies in which the investments are denominated; the strength or
weakness of the U.S. dollar against foreign currencies may account for part of
the Fund's investment performance. U.S. and foreign securities markets do not
always move in step with each other, and the total returns from different
markets may vary significantly. The Fund may invest in many securities markets
around the world in an attempt to take advantage of opportunities wherever they
may arise.
Floating Rate Obligations Certain of the obligations that the Fund may
purchase have a floating or variable rate of interest. Such obligations bear
interest at rates that are not fixed, but which vary with changes in specific
market rates or indices, such as the Prime Rate, and at specified intervals.
Certain of such obligations may carry a demand feature that would permit the
holder to tender them back to the issuer at par value prior to maturity.
Because of the variable rate nature of such instruments, the yield of
the Fund will decline and its shareholders will forego the opportunity for
capital appreciation during periods when prevailing interest rates have
declined. On the other hand, during periods where prevailing interest rates have
increased, the Fund's yield will increase and its shareholders will have reduced
risk to capital depreciation.
Zero Coupon Securities The Fund may invest in zero coupon securities
which pay no cash income and are sold at substantial discounts from their value
at maturity. Zero coupon securities include so-called "stripped" U.S. Treasury
obligations as well as privately issued securities which are issued by a bank or
a securities firm that has purchased U.S. Treasury obligations and separated
their interest and principal components. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the purchase price and their value at maturity. Zero coupon securities
are subject to greater market value fluctuations from changing interest rates
than debt obligations of comparable maturities which make current distributions
of interest (cash). Zero coupon convertible securities offer the opportunity for
capital appreciation as increases (or decreases) in market value of such
securities closely follows the movements in the market value of the underlying
common stock. Zero coupon convertible securities generally are expected to be
less volatile than the underlying common stocks as they usually are issued with
short maturities (15 years or less) and are issued with options and/or
redemption features exercisable by the holder of the obligation entitling the
holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Funds, most likely
will be deemed the beneficial holder of the underlying U.S.
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Government securities. The Fund understands that the staff of the Division of
Investment Management of the Securities and Exchange Commission ("SEC") no
longer considers such privately stripped obligations to be U.S. Government
securities, as defined in the 1940 Act; therefore, the Fund intends to adhere to
this staff position and will not treat such privately stripped obligations to be
U.S. Government securities for the purpose of determining if the Fund is
"diversified," or for any other purpose, under the 1940 Act.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
Equity Investments Equity investments may or may not pay dividends and
may or may not carry voting rights. Common stock occupies the most junior
position in a company's capital structure. Convertible securities entitle the
holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time and to receive interest or dividends until the holder elects to convert.
The provisions of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holder's claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of preferred stock and convertible preferred stock, the holder's claims
on assets and earnings are subordinated to the claims of all creditors but are
senior to the claims of common shareholders.
Debt Securities The Fund may invest in debt securities of foreign and
U.S. issuers. The Fund's debt investments may be selected on the basis of
capital appreciation potential, by evaluating, among other things, potential
yield, if any, credit quality, and the fundamental outlooks for currency and
interest rate trends in different parts of the globe, taking into account the
ability to hedge a degree of currency or local bond price risk.
Risks Related to Lower-Rated Securities
The Fund's investments in high yield, high risk debt obligations rated
below investment grade, which have speculative characteristics, bear special
risks. They are subject to greater credit risks, including the possibility of
default or bankruptcy of the issuer. The value of such investments may also be
subject to a greater degree of volatility in response to interest rate
fluctuations, economic downturns and changes in the financial condition of the
issuer. These securities generally are less liquid than higher quality
securities. During periods of deteriorating economic conditions and contractions
in the credit markets, the ability of such issuers to service their debt, meet
projected goals or obtain additional financing may be impaired. The Fund will
also take
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such action as it considers appropriate in the event of anticipated financial
difficulties, default or bankruptcy of either the issuer of any such obligation
or of the underlying source of funds for debt service. Such action may include
retaining the services of various persons and firms (including affiliates of the
investment adviser and investment subadviser) to evaluate or protect any real
estate or other assets securing any such obligation or acquired by the Fund as a
result of any such event. The Fund will incur additional expenditures in taking
protective action with respect to portfolio obligations in default and assets
securing such obligations.
While any investment carries some risk, certain risks associated with
lower-rated securities are different from those for investment-grade securities.
The risk of loss through default is greater because lower-rated securities are
usually unsecured and are often subordinate to an issuer's other obligations.
Additionally, the issuers of these securities frequently have high debt levels
and are thus more sensitive to difficult economic conditions, individual
corporate developments and rising interest rates. Consequently, the market price
of these securities may be quite volatile and may result in wider fluctuations
of the Fund's net asset value per share.
There remains some uncertainty about the performance level of the
market for lower-rated securities under adverse market and economic
environments. An economic downturn or increase in interest rate could have a
negative impact on both the markets for lower-rated securities (resulting in a
greater number of bond defaults) and the value of lower-rated securities held in
the portfolio of investments.
The economy and interest rates can affect lower-rated securities
differently than other securities. For example, the prices of lower-rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher-rated investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If an issuer of a security defaults, the Fund may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty would
likely result in increased volatility for the market prices of lower-rated
securities as well as the Fund's net asset value. In general, both the prices
and yields of lower-rated securities will fluctuate.
In certain circumstances it may be difficult to determine a security's
fair value due to a lack of reliable objective information. Such instances occur
where there is not an established secondary market for the security or the
security is lightly traded. As a result the Fund's valuation of a security and
the price it is actually able to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated
securities held by the Fund, especially in a thinly traded market. Illiquid or
restricted securities held by the Fund may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
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Current laws, such as those requiring federally-insured savings and
loan associations to remove investments in lower-rated securities from their
portfolios, as well as other pending proposals, may have a material impact on
the market for lower-rated securities.
The ratings assigned by a rating agency evaluates the safety of
lower-rated security's principal and interest payments, but does not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, the subadviser performs its own analysis of the
issuers whose lower-rated securities the Fund holds. Because of this, the Fund's
performance may depend more on the subadviser's credit analysis than is the case
of mutual funds investing in higher-rated securities.
Options on Securities The Fund may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered options") in
an attempt to increase gain. However, the Fund may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Fund.
The Fund may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." Where the Fund cannot effect a closing purchase transaction, it
may be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
The Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Fund will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The investment adviser and
investment subadviser will monitor the creditworthiness of dealers with whom the
Fund enters into such options transactions under the general supervision of the
Trust's Trustees.
Options on Securities Indices In addition to options on securities,
the Fund may also purchase and write (sell) call and put options on securities
indices. The absence of a liquid secondary market to close out options positions
on securities indices is more likely to occur, although the Fund generally will
only purchase or write such an option if the investment adviser and investment
subadviser believe the option can be closed out. Use of options on securities
indices also entails the risk that trading in such options may be interrupted if
trading in certain securities included in the index is interrupted. The Fund
will not purchase such options unless
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its investment adviser and investment subadviser believe the market is
sufficiently developed such that the risk of trading in such options is no
greater than the risk of trading in options on securities. Price movements in
the Fund's portfolio may not correlate precisely with movements in the level of
an index and, therefore, the use of options on indices cannot serve as a
complete hedge. Because options on securities indices require settlement in
cash, the Fund may be forced to liquidate portfolio securities to meet
settlement obligations.
Options on Currencies The Fund may write (sell) call and put options
on currencies to increase gain and may purchase such options to hedge the value
of securities the Fund holds or intends to buy. Purchased currency options may
be denominated in a currency that is linked to the currency the Fund owns or may
wish to purchase. This technique, referred to as "proxy hedging," involves the
additional risk that the linkage between the currencies may be changed or
eliminated.
Futures Contracts The Fund may enter into futures contracts on
securities, currencies and indices which are traded on exchanges that are
licensed and regulated by the Commodity Futures Trading Commission ("CFTC") or,
consistent with CFTC regulations, on foreign exchanges. The Fund will do so to
hedge against anticipated changes in securities values, as a substitute for the
purchase or sale of securities or currencies or to enhance return.
To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on an exchange
regulated by the CFTC, in each case that are not for bona fide hedging purposes
(as defined by the CFTC), the aggregate initial margin and premiums required to
establish these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized losses on
any contracts the Fund has entered into.
The Fund may also purchase and write call and put options on futures
contracts which are traded on exchanges that are licensed and regulated by the
CFTC, or, consistent with CFTC regulations, on foreign exchanges.
While the holder or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, the Fund's ability to establish and close out options positions
at fairly established prices will be subject to the existence of a liquid
market. The Fund will not purchase or write options on futures contracts unless,
in the opinion of the Fund's Adviser and Subadviser, the market for such options
has sufficient liquidity that the risks associated with such options
transactions are not at unacceptable levels.
While futures contracts will be traded to reduce certain risks, futures
trading itself entails certain other risks. Unanticipated changes in securities
values, interest rates or currency prices may result in a poorer overall
performance for the Fund than if it had not entered into any futures contracts.
Some futures contracts may not have a broad and liquid market, in which case the
contracts may not be able to be closed at a fair price and the Fund may lose in
excess of the initial margin deposit. Moreover, in the event of an imperfect
correlation between the futures contract and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
The Fund will incur brokerage costs and will be required to post and
maintain "margin" as a good-faith deposit against performance of its obligations
under futures contracts and under options written by the Fund.
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In addition, the Fund is required to segregate assets, such as liquid securities
and cash, in an amount equal to the value of the instruments underlying futures
contracts and call options purchased and put options written by the Fund.
Forward Currency Exchange Contracts--A forward currency exchange
contract ("forward contract") involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
While the Fund will enter into forward and futures contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the Fund may benefit from such transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Fund than if it had not engaged in any such transaction.
Moreover, there may be an imperfect correlation between the Fund's portfolio
holdings of securities denominated in a particular currency and forward or
futures contracts entered into by the Fund. Such imperfect correlation may
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Combined Transactions The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
foreign currency transactions (including forward foreign currency exchange
contracts) and any combination of futures, options and foreign currency
transactions ("component" transactions), instead of a single transaction, as
part of a single hedging strategy when, in the opinion of the investment adviser
and investment subadviser, it is in the best interest of the Fund to do so. A
combined transaction, while part of a single hedging strategy, may contain
elements of risk that are present in each of its component transactions.
Use of Segregated and Other Special Accounts Options, futures and
forward foreign currency transactions which obligate the Fund to provide cash,
securities or currencies to complete such transactions will entail the Fund
either segregating assets in an account with, or on the books of, the Custodian
to the extent the Fund does not own the securities, or the securities
denominated in the currency, which are the subject of the obligation, or
otherwise "covering" the transaction as allowed under interpretive positions of
the SEC. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate high grade
liquid debt obligations sufficient to meet the obligation by purchasing and
delivering the securities if the call is exercised. A call option written on an
index will require the Fund to have portfolio securities which correlate with
the index or to segregate such high grade liquid assets. A put option written by
the Fund also will require the Fund to segregate such high grade liquid assets
sufficient to cover the Fund's obligation to buy the securities covered by the
put if the put is exercised.
Except when the Fund enters into a forward contract for the purpose of
the purchase or sale of a security denominated in a foreign currency, a forward
foreign currency contract which obligates the Fund to provide currencies will
require the Fund to hold currencies or liquid securities denominated in that
currency which will equal the Fund's obligations. Such a contract requiring the
purchase of currencies also requires segregation.
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Unless the Fund owns or maintains a segregated account consisting of
the securities, cash or currencies which are the subject of the obligation as
described above, the Fund will hold liquid assets in a segregated account. These
assets cannot be transferred while the obligation is outstanding unless replaced
with other suitable assets. Rather than segregating assets in the case of an
index-based transaction, the Fund could own securities substantially replicating
the movement of the particular index.
In the case of a futures contract, the Fund, apart from its duty to
segregate, must deposit initial margin and variation margin, as often as daily
if the position moves adversely, sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Similarly, options on futures contracts
require margin to the extent necessary to meet the Fund's commitments.
In lieu of such procedures, such transactions may be covered by other
means, consistent with applicable regulatory policies. The Fund may enter into
certain offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
hedging transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if the Fund
held a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Of course, the offsetting transaction must terminate at
the time of or after the primary transaction.
Other Mortgage-Backed Securities Governmental, government-related or
private entities may create mortgage loan pools and other mortgage-related
securities offering mortgage pass-through and mortgage-collateralized
investments in addition to those described above. The mortgages underlying these
securities may include alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term fixed rate mortgages. As new types
of mortgage-related securities are developed and offered to investors, the
investment adviser and investment subadviser will, consistent with the Fund's
investment objective, policies and quality standards, consider making
investments in such new types of mortgage-related securities. The Fund will not
purchase any such other mortgage-backed securities until the Trust's Prospectus
and this Statement of Additional Information have been supplemented.
EQUITY FUND
The Equity Fund seeks to achieve its investment objective by investing
all its Assets in the Index Portfolio, which has the same investment objective
as the Equity Fund. The Index Portfolio seeks to achieve its investment
objective by investing in the common stocks comprising the Social Index. The
Equity Fund's policy is to invest at least 80% of its Assets (either directly or
through the Index Portfolio) in the stocks comprising the Social Index.
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In selecting stocks for inclusion in the Social Index:
1. Kinder, Lydenberg & Domini & Co., Inc. ("KLD") evaluated, in
accordance with the social criteria described in the Prospectus, each of the
companies the stocks of which comprise the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"). If a company whose stock was included in the S&P
500 met KLD's social criteria and met its further criteria for industry
diversification, financial solvency, market capitalization, and minimal
portfolio turnover, it was included in the Social Index. As of October 22, 1998,
of the 500 companies whose stocks comprised the S&P 500, approximately 48.6%
were included in the Social Index.
2. The remaining stocks comprising the 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 in the Prospectus, as well as upon its 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 Social Index, industry sector weighting in
the Social 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.
KLD may exclude from the Social Index stocks issued by companies which
are in bankruptcy or whose bankruptcy KLD believes may be imminent.
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, 1998 represented
approximately 83% of the aggregate market value of common stocks traded on the
New York Stock Exchange.
Inclusion of a stock in the S&P 500 Index 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 Equity Fund or the Index Portfolio. "S&P 500" is a
trademark of S&P. A company which is not included in the S&P 500 may be included
in the Social Index primarily in order to afford representation to an industrial
sector which would otherwise be under-represented in the Social Index.
The weightings of stocks in the 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, 1998
approximately 45% of the Social Index was comprised of the 20 largest companies
in that Index.
The Index Portfolio intends to readjust its securities holdings
periodically such that those holdings will correspond, to the extent reasonably
practicable, to the Social Index both in terms of composition and weighting. The
timing and extent of adjustments in the holdings of the Index Portfolio, and the
extent of the correlation of the holdings of the Index Portfolio with the Social
Index, will reflect the Index Portfolio's submanager's judgment as to the
appropriate balance as between the goal of correlating its holdings with the
composition of the Social Index and the goals of minimizing transaction costs
and keeping sufficient reserves
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available for anticipated redemptions of shares. To the extent practicable, the
Index Portfolio will seek a correlation between the weightings of securities
held by the Index Portfolio to the weightings of the securities in the Social
Index of 0.95 or better. The Board of Trustees of the Index Portfolio will
receive and review, at least quarterly, a report prepared by the Submanager
comparing the performance of the Index Portfolio with that of the Social Index,
and comparing the composition and weighting of the Index Portfolio's holdings
with those of the Social Index, and will consider what action, if any, should be
taken in the event of a significant variation between the performance of the
Equity Fund or the Index Portfolio, as the case may be, and that of the Social
Index, or between the composition and weighting of the Index Portfolio's
securities holdings with those of the stocks comprising the Social Index. If the
correlation between the weightings of securities held by the Index Portfolio and
the weightings of the stocks in the Social Index falls below 0.95, the Board of
Trustees of the Index Portfolio will review, with the Submanager of the Index
Portfolio methods for increasing such correlation, such as through adjustments
in securities holdings of the Index Portfolio. As of July 31, 1998, the
correlation between the weightings of securities held by the Index Portfolio and
the weightings of the stocks in the Social Index was 0.99. To the extent
practicable, the Index Portfolio will attempt to be fully invested.
Securities Subject to Taxation: With respect to stocks of foreign
issuers, the Index Portfolio does not purchase securities which the Index
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 Index Portfolio's
investments. In the event unforeseen exchange controls or foreign withholding
taxes are imposed with respect to any of the Index Portfolio's investments, the
effect may be to reduce the income received by the Index Portfolio on such
investments.
Rule 144A Securities: Although neither the Equity Fund nor the Index
Portfolio has any current intention to do so, each may invest in securities
which may be resold pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act").
Option Contracts: Although it has no current intention to do so, the
Index 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 Index Portfolio or possible
declines in the value of securities which are expected to be sold by the Index
Portfolio. Generally, the Index 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.
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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 Index 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 Index Portfolio, and the Index 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 Index 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 investment
adviser of the Index Portfolio does not believe that these trading and position
limits would have an adverse impact on the possible use of hedging strategies by
the Index Portfolio.
Short Sales: Although it has no current intention to do so, the Index
Portfolio may make short sales of securities or maintain a short position, if at
all times when a short position is open the Index Portfolio owns an equal amount
of such securities, or securities convertible into such securities.
BALANCED FUND AND EQUITY FUND
Foreign Securities Diversification of assets on a global basis
decreases the degree to which events in any one country, including the United
States, will affect an investor's entire investment holdings. In the period
since World War II, many leading foreign economies have grown more rapidly than
the United States economy, providing investment opportunities, although there
can be no assurance that this will be true in the future. As with any long-term
investment, the value of shares when sold may be higher or lower than when
purchased.
Investors should recognize that investing in foreign securities
involves certain risk factors, including those set forth below, which are not
typically associated with investing in United States securities and which may
affect the Funds' performance favorably or unfavorably. Many foreign stock
markets, while growing in volume of trading activity, have substantially less
volume than the New York Stock Exchange, and securities of some foreign
companies are less liquid and more volatile than securities of domestic
companies. Similarly, volume and liquidity in most foreign bond markets is less
than that in the United States market and at times, volatility of price can be
greater than in the United States. Further, foreign markets have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of a Fund are
uninvested and no return is earned thereon. The inability of a Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in losses to a Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Fixed commissions on some foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
Funds will endeavor to achieve the most favorable net results on portfolio
transactions. Further, the Funds may encounter difficulties or be unable to
pursue legal remedies and obtain judgment in foreign courts. There is generally
less government supervision and regulation of business and
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industry practices, stock exchanges, brokers and listed companies than in the
United States. It may be more difficult for the Funds' agents to keep currently
informed about corporate actions such as stock dividends or other matters which
may affect the prices of portfolio securities. Communications between the United
States and foreign countries may be less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States economy in such respects as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. The investment advisers seek to mitigate the risks
associated with the foregoing considerations through diversification and
continuous professional management.
The Funds may invest in sponsored and unsponsored American Depository
Receipts (ADRs) and, in the case of the Balanced Fund, Global Depository
Receipts (GDRs). ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership in the underlying securities. Transactions in these
securities may not necessarily be settled in the same currency as transactions
in the securities into which they represent. Generally ADRs, in registered form,
are designed for use in U.S. securities markets.
Risks of Specialized Investment Techniques Abroad The above described
specialized investment techniques, when conducted abroad, may not be regulated
as effectively as in the United States; may not involve a clearing mechanism and
related guarantees; and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political, legal and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Funds' ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
Lending of Portfolio Securities Each Fund and the Index Portfolio may
lend their securities to brokers, dealers and financial institutions, provided
(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 loan may be called at any time and the return of the securities loaned
obtained within three business days; (3) each Fund or the Index Portfolio, as
the case may be, 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 Funds or the Index Portfolio, as the
case may be.
Each Fund and the Index Portfolio will earn income for lending their
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 Funds and the Index
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 Funds, the Index Portfolio, the investment adviser of the Funds or
Index Portfolio, the investment subadviser of the Balanced Fund or the
investment manager of the Index Portfolio.
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At the present time, the Balanced Fund has no intention to loan
securities worth more than 5% of the Fund's assets. Although the Index Portfolio
reserves the right to lend its securities, it has no current intention of doing
so in the foreseeable future. The Equity Fund will not lend its securities.
HISTORY OF THE GREEN CENTURY FUNDS AND
GREEN CENTURY CAPITAL MANAGEMENT
SHAREHOLDER ACTIVISM
While the companies in the portfolios of the Green Century Balanced
Fund and the Index Portfolio must meet basic standards for corporate
environmental responsibility, some still have room for improvement. In such
cases, Green Century may enter into dialogue with those companies or file a
shareholder resolution to initiate improvement. In addition, the Green Century
Balanced Fund may hold small positions in companies which do not meet the Fund's
environmental criteria for the express purpose of enabling the Fund to advocate
for changes in irresponsible corporate behavior. Since shareholder advocacy is
critical to Green Century's mission of promoting greater corporate environmental
responsibility, Green Century will continue to file additional shareholder
resolutions and work with other concerned environmentally conscious investors.
The following is a history of Green Century's shareholder activism as of October
15, 1998.
CERES -- Green Century Capital Management has been involved with CERES, the
Coalition of Environmentally Responsible Economies, created in 1989 to spur
corporations to better their environmental behavior. The CERES Principles
establish comprehensive corporate environmental standards and disclosure
requirements. Companies that endorse the CERES Principles back up their pledges
with concrete information, publicly reported in the CERES Report. Green Century
Capital Management's participation in CERES has enabled it to join in
negotiations with various corporations, which have ranged from Aveda and Ben &
Jerry's to General Motors and Sunoco, and help increase the pressure for change.
Green Century Capital Management staff also spoke at the May 1993 PepsiCo annual
shareholders meeting in favor of that company's endorsement of the CERES
Principles.
In June of 1997, Green Century co-sponsored a resolution at Thermo
Electron, urging the company to endorse the CERES Principles. The resolution won
4.5 percent of the vote, sufficient to allow the resolution's filers to re-file
next year and to continue to press the company to endorse the CERES Principles.
PEPSICO -- In November of 1993, the Balanced Fund filed a shareholder resolution
at Pepsi Co. to spur the corporation to further improve its environmental
programs and limit its active opposition to environmental protection measures
such as recycling campaigns and efforts to pass state and national Bottle Bill
legislation. The vote was held at the May 1994 annual shareholders meeting at
which Green Century Capital Management staff made a presentation in support of
the resolution. The resolution received 43.8 million votes, equal to 8.45% of
the votes cast on the resolution. This was a strong first showing, sending a
message to PepsiCo management about the growing shareholder concern for the
environment.
In 1995, PepsiCo came to the negotiating table with Green Century,
apparently wishing to avoid the negative publicity that another shareholder
resolution involving PepsiCo's opposition to the bottle bill could create. The
company agreed to conduct a comprehensive study of its environmental policies
and devise a set of principles designed to guide company-wide action. PepsiCo
also agreed to discontinue the use of
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disposable shipping containers in favor of plastic shells that it will reuse.
The company also committed to manufacture a new aluminum lid that will save 25
million pounds of aluminum per year.
GENERAL MILLS In July of 1994, Green Century Capital Management learned that
General Mills had allowed the manufacture and distribution of 50 million boxes
of cereal that had been made from oats treated with an illegal pesticide. Though
General Mills recalled the contaminated cereal, Green Century Capital Management
wrote to General Mills CEO H. Brewster Atwater requesting that the company more
closely monitor its food manufacturing. Mr. Atwater responded by outlining the
steps the company would take to prevent similar mishaps.
INTEL In 1994 the Balanced Fund joined forces with the Jessie Smith Noyes
Foundation in filing a shareholder resolution that would require Intel, an
electronics producer, to make publicly available information which would allow
public assessment of its facilities' environmental and safety hazards. The
resolution was in response to a report by the Southwest Organizing Project which
states that Intel's Rio Rancho plant in New Mexico would require amounts of
water exceeding local capacity. While the resolution did not pass, it did move
Intel President Andrew Grove to initiate a long sought after dialogue with
Noyes' President Stephen Viederman.
The following year, the Balanced Fund and Noyes filed another
shareholder resolution with Intel, prompting Intel to revise its Environmental,
Health and Safety Policy to include sharing information on the company's
environmental and safety hazards with the public. Further, Intel agreed that the
"communities" with which it will share information will include all community
groups and not just the elected officials and local advisory panels set up by
Intel to which the company had offered limited information in the past. As a
result, Noyes, with the support of Green Century and the other co-filers,
withdrew the shareholders resolution. The resolution's proponents and local
community organizations will continue to monitor Intel's implementation of the
new policy.
SECURITIES AND EXCHANGE COMMISSION In February of 1995, Green Century Capital
Management staff corresponded with SEC Commissioner Arthur Levitt to urge him
not to allow the SEC to restrict shareholder activism, and with Senator John
Kerry to urge him to consider the rights of shareholders to file resolutions
when considering two pending nominations to the Securities and Exchange
Commission ("SEC").
In September 1997, the SEC proposed new rules that Green Century
Capital Management believed would have disenfranchised shareholder activists by
severely limiting the shareholder resolution process. Green Century Capital
Management formally opposed the new rules by registering concerns with SEC
Commissioner Arthur Levitt and by filing comments with SEC Secretary Jonathon
Katz. Green Century Capital Management joined a diverse coalition of 340
organizations opposed to the new proposed rules. Coalition partners included
environmental organizations such as the National Wildlife Federation and the
Sierra Club. Green Century Capital Management staff also met with the staff of
U.S. House Commerce Committee members, urging members to oppose the proposed
rules. In a victory for shareholder activists, in May of 1998 the SEC adopted
final regulations that preserved the shareholder resolution process.
TIME WARNER In 1992, Time Warner, Inc. committed to convert Time magazine to
chlorine-free paper. The company has not only not done so as of yet and has
resisted requests to report on its plans to convert.
In 1995, Green Century Capital Management staff wrote Time President
Reginald Brack to request that Time convert to chlorine free paper in its
publications. The Balanced Fund then joined as a co-filer in a
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shareholder resolution at Time which asked the Time Board of Directors to report
on its plans to convert to the use of chlorine-free paper. The resolution was
presented at Time Warner's annual shareholder meeting by Green Century Trustee
Wendy Wendlandt on May 16, 1996 and won a yes vote of nearly 18 million shares,
or 5.5% of the votes cast. This was enough to persuade Time Warner CEO Gerald
Levin to state that he welcomed continuing dialogue with the resolution's
proponents and to qualify the resolution to be introduced the following year.
In May of 1997 the resolution was voted on a second time and did not
garner enough votes to allow us to re-introduce it in 1998. Green Century will
continue to work with our co-filers and others on alternative strategies.
PROCTER & GAMBLE - On May 1, 1998, the Equity Fund, on behalf of the Index
Portfolio, joined with other shareholders of Procter & Gamble to file a
resolution with the company. It is Green Century's belief that Procter &
Gamble's use of chlorinated bleached paper perpetuates the release of
unnecessary toxins that are harmful to human and environmental health. The
resolution pressed the company to report to the shareholders on steps it can
take to use chlorine-free pulp and paper as well as on its plans for a long-term
phase out of chlorinated compounds in all of its products. The resolution was
presented at Procter & Gamble's October 13, 1998 annual meeting. While the
resolution did not pass, it garnered enough votes to allow us to re-introduce it
in 1999.
ARCO - In September 1998, the Equity Fund wrote Mike Bowlin, the CEO of Atlantic
Richfield (ARCO), to ask the company to refrain from drilling in the Coastal
Plain, 1002 Area, of the Arctic National Wildlife Refuge in Alaska. The Arctic
National Wildlife Refuge is the only conservation area in the nation that
provides a complete range of Arctic and sub-Arctic ecosystems balanced with a
wide variety of wildlife including large populations of caribou, muskoxen,
brown, black and polar bears, wolves, Dall sheep, snow geese and thousand of
other migratory birds. The Coastal Plain is the biological heart of the Refuge,
to which a vast herd of caribou migrate each spring to give birth. The
Department of the Interior has concluded that oil development in the Coastal
Plain would result in major adverse impacts on this caribou population and
Interior Secretary Bruce Babbitt has likened drilling for oil in the Refuge to
damming up the Grand Canyon. The 125-mile long Coastal Plain is the only section
of Alaska's 1100-mile long North Slope not open for oil and gas drilling. In
fact, oil companies already have access to 95 percent of Alaska's North Slope.
Most recent federal estimates have predicted that only 2.6 million barrels of
oil would be economically recoverable in the Coastal Plain - less than 5 months
worth of use in the United States.
Green Century will work with other concerned investors and
environmental organizations such as U.S.PIRG to prevent the destruction of this
precious resource. Barring a positive response from Mr. Bowlin, the Equity Fund,
on behalf of the Index Portfolio, will file a shareholder resolution in November
1998 requesting that the company voluntarily refrain from drilling in 1002 Area
of the Refuge. Green Century Capital Management may also look for opportunities
to organize similar shareholder resolutions with other oil companies, such as
Chevron, who wish to drill in the Arctic National Wildlife Refuge.
GREEN CENTURY EQUITY FUND PROXY VOTES - Invested in a portfolio that owns the
stocks of 400 companies, the Equity Fund's portfolio has opportunities to vote
its shares on many environmental and social issues. Key among these in recent
years was the movement to encourage corporations to endorse the CERES
Principles. The Equity Fund's manager supported shareholder resolutions
advocating CERES endorsements at several companies, including American Express
Company and Kellogg Company.
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INVESTMENT RESTRICTIONS
Each Fund and the Index Portfolio is operated under the following
investment restrictions which are deemed fundamental policies and may be changed
with respect to a Fund or the Index Portfolio only with the approval of the
holders of a "majority of the outstanding voting securities" of the Fund or the
Index Portfolio which, as defined in the 1940 Act and as used herein, means the
vote of (i) 67% or more of the Fund's shares or the Index Portfolio's interests
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund or interests in the Index Portfolio are present in person or
represented by proxy; or (ii) more than 50% of the Fund's outstanding shares or
the Index Portfolio's outstanding interests whichever is less. Whenever the
Equity Fund is requested to vote on a matter pertaining to the Index Portfolio,
the Trustees of the Equity Fund will, in their discretion and in accordance with
applicable law, either seek instructions from shareholders of the Equity Fund
and vote the shares only in accordance with such instructions, or vote the
shares held by the Equity Fund in the same proportion as the vote of all other
holders of shares in the Index Portfolio.
BALANCED FUND
The Trust, on behalf of the Balanced Fund, may not:
(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's net
assets, it may borrow money as a temporary measure for extraordinary or
emergency purposes and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate not more
than 1/3 of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate requests for
the redemption of shares while effecting an orderly liquidation of portfolio
securities or to maintain liquidity in the event of an unanticipated failure to
complete a portfolio security transaction or other similar situations) or
reverse repurchase agreements, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance company sponsored
by the Investment Company Institute; for additional related restrictions, see
clause (i) under the caption "Non-Fundamental State and Federal Restrictions"
below. (As an operating policy, the Fund may not engage in reverse repurchase
agreements.);
(2) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
(3) underwrite securities issued by other persons except insofar as the
Trust or the Fund may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(4) make loans to other persons except (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value), (b) through the
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use of repurchase agreements or the purchase of short-term obligations and
provided that not more than 10% of the Fund's net assets will be invested in
repurchase agreements maturing in more than seven days, or (c) by purchasing a
portion of an issue of debt securities of types commonly distributed privately
to financial institutions, for which purposes the purchase of short-term
commercial paper or a portion of an issue of debt securities which are part of
an issue to the public shall not be considered the making of a loan;
(5) 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
(except futures and option contracts) in the ordinary course of business (the
Trust may hold and sell, for the Fund's portfolio, real estate acquired as a
result of the Fund's ownership of securities);
(6) make short sales of securities or maintain a short position, unless
at all times when a short position is open it 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 and equal in amount
to, the securities sold short, and unless not more than 10% of the Fund's net
assets (taken at market value) is represented by such securities, or securities
convertible into or exchangeable for such securities, at any one time (the Trust
has no current intention to engage in short selling);
(7) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of the Fund's investment objective, up to 25% of its total assets may be
invested in any one industry, except that positions in futures or option
contracts shall not be subject to this restriction; and
(8) 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, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
Non-Fundamental Restrictions In order to comply with certain federal
statutes and policies the Trust, on behalf of the Balanced Fund, will not as a
matter of operating policy:
(1) purchase securities issued by any investment company if as a
result thereof (a) more than 10% of the Fund's total assets (taken
at the greater of cost or market value) to be invested in the
securities of such issuers; (b) more that 5% of the Fund's total
assets (taken at the greater of cost or market value) to be
invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for
the Fund (the Trust has no current intention of investing the
assets of the Fund in other investment companies);
(2) invest more than 15% of the net assets of the Fund (taken at the
greater of cost or market value) in securities that are illiquid
or not readily marketable;
(3) with respect to 75% of the total assets of the Fund, invest more
than 5% of the total assets of the Fund in the securities or
obligations of any one issuer (other than U.S. Government
obligations) or acquire more than 10% of the outstanding voting
securities of any one issuer;
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These policies are not fundamental and may be changed without
shareholder approval in response to changes in the various state and federal
requirements.
EQUITY FUND AND INDEX PORTFOLIO
Neither the Equity Fund nor the Index Portfolio may:
(1) borrow money, except that as a temporary measure for extraordinary
or emergency purposes either the Fund or the Index Portfolio may borrow an
amount not to exceed 1/3 of the current value of the net assets of the Fund or
the Index Portfolio, respectively, including the amount borrowed (moreover,
neither the Fund nor the Index Portfolio may purchase any securities at any time
at which borrowings exceed 5% of the total assets of the Fund or the Index
Portfolio, respectively, taken in each case at market value) (it is intended
that the Index 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 Index 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 Index 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 Index 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 Index Portfolio and except
insofar as either the Fund or the Index 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 Index 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 Index 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
22
<PAGE> 60
in the ordinary course of business (the Fund and Index 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 Index 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 Index 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 Index Portfolio's, as
applicable, net assets (taken in each case at market value) is held as
collateral for such sales at any one time;
(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 Index 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 Index Portfolio; and
(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 Social Index,
in which case the Index 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 Index Portfolio.
Non-Fundamental Restrictions: In order to comply with certain federal
statutes and policies, the Portfolio will not, as a matter of operating policy,
purchase puts, calls, straddles, spreads and any combination thereof if the
value of its aggregate investment in such securities will exceed 5% of the
Portfolio's total assets at the time of such purchase.
This policy is not fundamental and may be changed by the Portfolio
without the approval of its investors in response to changes in federal
requirements.
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 a Fund or the Index Portfolio or a later change
in the rating of a security held by a Fund or the Index Portfolio will not be
considered a violation of policy; provided that if at any time the ratio of
borrowings of a Fund to the net asset value of a Fund exceeds the ratio
permitted by Section 18(f) of the 1940 Act, a Fund will take the corrective
action required by Section 18(f).
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<PAGE> 61
TRUSTEES, OFFICERS AND ADVISORY BOARD
The Trustees and officers of the Trust and the Index Portfolio and their
principal occupations during the past five years (although their titles may have
varied during the period) are:
TRUSTEES OF THE TRUST
DAVID J. FINE (50) - Trustee of the Trust; Attorney, Dangel, Donlan &
Fine (since January, 1996); Attorney, Dangel & Fine (from August, 1993 to
January, 1996); Attorney, Fine, Halpern & Strassfeld (from July, 1991 to August,
1993).
DOUGLAS M. HUSID* (47) - Trustee of the Trust; President of the Trust;
Co-Managing Partner, Goulston & Storrs, P.C. (since October, 1991).
STEVEN KADISH (42) - Trustee of the Trust; Assistant Vice Chancellor for
Biologic Laboratories and Programs, University of Massachusetts Medical Center
(since June, 1997); Assistant Secretary for Administration and Finance,
Commonwealth of Massachusetts (from June, 1995 to June, 1997) Director of
Operations, Medicaid, Department of Public Welfare, Commonwealth of
Massachusetts (from July, 1992 to June, 1995); Deputy Director, Division of
Capital Planning and Operations, Commonwealth of Massachusetts (prior to July,
1992).
STEPHEN MORGAN (50) - Trustee of the Trust; President, EUA, Citizens
Conservation Services, Inc. (since January, 1995); Chief Operating Officer,
Citizens Conservation Corp. (from July, 1991 to January, 1995).
DOUGLAS H. PHELPS* (51) - Trustee of the Trust; Chair, Fund for Public
Interest Research (since May, 1983); President, Telefund, Inc. (since January,
1988).
C. WILLIAM RYAN (44) - Trustee of the Trust; Director, Brookline Tai Chi
(since March, 1992).
JAMES H. STARR (51) - Trustee of the Trust; Attorney, Starr and Burgess,
PC (since 1989); Director, Crested Butte Land Trust (since 1991).
WENDY WENDLANDT* (36) - Trustee of the Trust; Chairperson of the Board,
Earth Day 2000 (since February, 1991); Senior Staff, Fund for Public Interest
Research (since November, 1989).
OFFICERS OF THE TRUST
KRISTINA A. CURTIS (46) - Treasurer of the Trust; Treasurer, Director
and Chief Operating Officer, Green Century Capital Management, Inc. (since July,
1991).
ADRIENNE M. SHISHKO (35) - Secretary and Assistant Treasurer of the
Trust; General Counsel, Vice President - Marketing and Director, Green Century
Capital Management, Inc. (from July, 1991 to March, 1996).
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<PAGE> 62
TRUSTEES OF THE INDEX PORTFOLIO
EMILY W. CARD (55) - 1158 26th Street, #450, Santa Monica, California
90403; Attorney; President, The Card Group, Inc..
AMY L. DOMINI* (47) - 230 Congress Street, Boston, Massachusetts, 02110;
Chair, President and Trustee of the Index Portfolio, the Domini Social Equity
Fund (since 1990) and the Domini Institutional Trust (since 1996); Managing
Principal of Domini Social Investments, LLC (since 1997); Officer of KLD;
Trustee, Loring, Wolcott & Coolidge (since 1987); Trustee, Episcopal Church
Pension Fund; Former Member, Governing Board, Interfaith Center on Corporate
Responsibility.
ALLEN M. MAYES (76) - P.O. Box 21222, Beaumont, Texas, 77720; Retired
Senior Associate General Secretary of the General Board of Pensions of the
United Methodist Church (since May, 1982); 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 (since November, 1969).
WILLIAM C. OSBORN (52) - 115 Buckminster Road, Brookline, Massachusetts,
02146; Principal, Venture Investment Management Company LLC (since 1996); Vice
President and General Manager, TravElectric Services Corp. (from 1993 to 1995);
President, Environmental Technologies, Inc. (from 1990 to 1993); Director,
Evergreen Solar, Inc. (since 1996); Director, Conservation Services Group (since
1992).
KAREN PAUL (53) - 4050 Park Avenue, Miami, Florida 33133; Associate Dean
and Professor of Business Environment, Florida International University (since
1991); Partner, Trinity Industrial Technology (since 1995); Director, Center for
Management in the Americas (since 1997); and Co-Director, Center for Global
Business (since 1998).
TIMOTHY SMITH (55) - Interfaith Center for Corporate Responsibility, 475
Riverside Drive, Room 550, New York, New York 10115; Executive Director of the
Interfaith Center on Corporate Responsibility (since 1974); Trustee of the
Calvert New Africa Fund (since 1994).
FREDERICK C. WILLIAMSON, SR. (82) - Five Roger Williams Green,
Providence, Rhode Island 02904; Treasurer and Trustee, RIGHA (charitable
foundation supporting health care needs) since 1990; Chairman, Rhode Island
Historical Preservation and Heritage Commission (since 1995); Trustee, National
Parks and Conservation Association (1986-1997); Trustee of the National Park
Trust (since 1991); Advisor, National Parks and Conservation Association (since
1997).
*An "interested person" of the Trust or the Index Portfolio as that term
is defined in the 1940 Act.
OFFICERS OF THE INDEX PORTFOLIO**
CAROLE M. LAIBLE (34) - Secretary and Treasurer of the Index Portfolio
(since 1997); Financial Compliance Officer of Domini Social Investments LLC
(since 1997); Financial Compliance Officer of 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.
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<PAGE> 63
DAVID P. WIEDER (31) - Vice President of the Index Portfolio (since
1997); Managing Principal, Domini Social Investments LLC (since 1997); President
of Fundamental Shareholder Services, Inc.
SIGWARD M. MOSER (35) - Vice President of the Index Portfolio (since
1997); Managing Principal, Domini Social Investments LLC (since 1997); President
of Communications House International, Inc; Director of Financial Communications
Society.
PETER D. KINDER (52) - Vice President of the Index Portfolio; Member,
Domini Social Investments LLC (since 1997); Officer of KLD (since March, 1988).
STEVEN D. LYDENBERG (51) - 530 Atlantic Avenue, Boston, Massachusetts,
02210; Vice President of the Index Portfolio; Member, Domini Social Investments
LLC (since 1997); Director of Research of KLD (since January, 1990).
Unless otherwise indicated, the mailing address of all of the Trustees
and officers of the Trust is Green Century Funds, 29 Temple Place, Suite 200,
Boston, Massachusetts 02111. Unless otherwise indicated, the mailing address of
all the officers of the Index Portfolio is 11 West 25th Street, 7th Floor, New
York, New York 10010. Each of the officers also serve as officers of the Domini
Social Equity Fund and Domini Institutional Trust, other registered investment
companies which invest in the Index Portfolio. Each of the listed Trustees of
the Index Portfolio also serves as Trustees of the Domini Social Equity Fund and
the Domini Institutional Trust.
No Trustee of the Trust receives any compensation from the Trust, but
each Trustee who is not an "interested person" of the Trust is reimbursed for
any out-of-pocket expenses incurred in attending meetings of the Board of
Trustees or of any committee thereof. Each Trustee of the Index Portfolio who is
not otherwise affiliated with the Index Portfolio, receives an annual retainer
of $1000 from the Index Portfolio.
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<PAGE> 64
Trust Trustees
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM THE TRUST FOR
THE TRUST FOR THE THE FISCAL YEAR
YEAR ENDED JUNE 30, ENDED JUNE 30, 1998
1998 AND FOR THE ONE AND FOR THE ONE
MONTH PERIOD ENDED MONTH PERIOD ENDED
JULY 31, 1998 FOR JULY 31, 1998 FOR
THE BALANCED FUND THE BALANCED FUND
AND FOR THE YEAR AND FOR THE YEAR
ENDED ENDED
JULY 31, 1997 FOR JULY 31, 1997 FOR
THE EQUITY FUND THE EQUITY FUND
David J. Fine, Trustee None None
Douglas M. Husid, None None
Trustee
Steven Kadish, Trustee None None
Stephen Morgan, Trustee None None
Douglas H. Phelps, None None
Trustee
C. William Ryan, None None
Trustee
James H. Starr, Trustee None None
Wendy Wendlandt, None None
Trustee
Index Portfolio Trustees
TOTAL COMPENSATION
AGGREGATE FROM THE TRUST AND
COMPENSATION FROM THE INDEX PORTFOLIO
THE INDEX PORTFOLIO FOR THE YEAR ENDED
FOR THE YEAR ENDED JULY 31, 1998
JULY 31, 1998
Emily W. Card, Trustee $1,000 $1,000
Amy L. Domini, Chair, None None
President and Trustee
Allen M. Mayes, Trustee $1,000 $1,000
William C. Osborn, Trustee $1,000 $1,000
Karen Paul, Trustee $1,000 $1,000
Timothy Smith, Trustee $1,000 $1,000
Frederick C. Williamson, $1,000 $1,000
Trustee
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<PAGE> 65
The Board of Trustees of the Trust has created an Advisory Board as a
resource with respect to the application and refinement of the Trust's
environmental criteria. The Advisory Board has no other power, authority or
responsibility with respect to the management of the Trust or the conduct of the
affairs of the Trust. No member of the Advisory Board receives any compensation
for his or her services. The Advisory Board serves as a resource regarding the
application and refinement of the Funds' environmental criteria. They are:
Joan Bavaria.......... President, FRANKLIN RESEARCH AND DEVELOPMENT CORPORATION;
Chairperson, CERES (Coalition for Environmentally
Responsible Economies)
Hillel Gray........... Former Policy Director, NATIONAL ENVIRONMENTAL LAW
CENTER
Denis Hayes........... Executive Director, BULLIT FOUNDATION; Organizer, EARTH
DAY 1990 and EARTH DAY 1970
Gene Karpinski........ Executive Director, U.S. PUBLIC INTEREST RESEARCH GROUP
Maureen Kirk.......... Executive Director, OREGON STATE PUBLIC INTEREST RESEARCH
GROUP
Steven Rothstein...... President, ENVIRONMENTAL FUTURES, INC.
Andrew Savitz......... Director, COOPERS & LYBRAND: ENVIRONMENTAL ADVISORY
SERVICES
Robert B. Zevin....... Former Senior Vice President and Economist, UNITED STATES
TRUST COMPANY
As of October 13, 1998 all Trustees and officers of the Trust as a group
owned less than 1% of the outstanding shares of each Fund. As of October 13,
1998, the following are the only persons known by the Trust to have more than 5%
of the outstanding shares of the Balanced or Equity Funds: Glyn Mills Nominees
(Lombard Street) Limited A/C 1781 owned 22.86% of the outstanding shares of the
Balanced Fund and National Financial Services Corporation owned 6.59% of the
Balanced Fund. National Financial Services owned 15.52% of the Equity Fund.
Shareholders owning 25% or more of the outstanding shares of a Fund may take
actions without the approval of any other investor in that Fund.
INVESTMENT ADVISER AND MANAGER
BALANCED FUND
INVESTMENT ADVISER Under an Investment Advisory Agreement dated as of
August 13, 1991 (the Advisory Agreement") between the Trust, on behalf of the
Balanced Fund, and Green Century Capital Management, Inc. ("Green Century
Capital" or the "Adviser"), and subject to the general supervision of the
Trust's Trustees and in conformance with the respective stated policies of the
Balanced Fund, Green Century Capital provides general investment advice to the
Balanced Fund. Green Century Capital also helps the Trust design, and instructs
the Balanced Fund's investment subadviser as to how to implement the Trust's
environmental criteria.
The Advisory Agreement provides that it will continue indefinitely if
its continuance is specifically approved at least annually by the vote of the
holders of a majority of the outstanding voting securities of the Fund or by
vote of a majority of the Trust's Board of Trustees; and provided further that
such continuance is also approved annually by the vote of a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons of
the Trust's Adviser, cast in person at a meeting called for the purpose of
voting on
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<PAGE> 66
such approval. The Advisory Agreement may be terminated at any time without
payment of any penalty, by the Trust's Board of Trustees or by a vote of the
majority of the outstanding voting securities of the Fund upon 60 days' prior
written notice to the Adviser and by the Adviser upon 60 days' prior written
notice to the Trust. The Advisory Agreement provides that it shall terminate
automatically in the event of its assignment.
The Advisory Agreement further provides that absent willful misfeasance,
bad faith, gross negligence, or reckless disregard of obligations or duties
under the Advisory Agreement on the part of the Adviser, the Adviser shall not
be subject to liability to the Trust or to any shareholder of the Fund for any
act or omission in the course of, or in connection with, rendering services
under the Advisory Agreement or for any losses that may be sustained in the
purchase, holding of sale of any security. The Advisory Agreement also provides
that the services of the Adviser are not deemed exclusive and that the Adviser
may render similar services to others.
Under the Advisory Agreement, the Trust has agreed that the names "Green
Century Funds" and "Green Century" are proprietary to the Adviser.
As compensation for the services rendered and obligations assumed by the
Adviser, the Trust pays to the Adviser monthly a fee equal on an annual basis to
0.75% of the average daily net assets of the Balanced Fund, computed and accrued
daily. For the fiscal years ended June 30, 1996, 1997 and 1998, the Balanced
Fund accrued advisory fees aggregating $51,494, $67,209 and $104,833,
respectively. For the one month period ended July 31, 1998, the Balanced Fund
accrued advisory fees aggregating $10,301.
INVESTMENT SUBADVISER Green Century Capital has entered into an
Investment Subadvisory Agreement on behalf of the Balanced Fund (an "Subadvisory
Agreement") with Winslow Management Company ("Winslow" or the "Subadviser")
dated as of July 1, 1995. It is Winslow's responsibility under the direction of
the Adviser, to make the day-to-day investment decisions for the Balanced Fund
and to place the purchase and sale orders for the portfolio transactions of the
Balanced Fund consistent with the environmental criteria established by the
Adviser and subject to the general direction of the Adviser. Winslow is a
separate operating division of Eaton Vance Management ("Eaton Vance"), a
registered investment adviser. Winslow manages equity and debt investments in
environmental and environmentally responsible companies for its clients. Winslow
has been a division of Eaton Vance since June 30, 1993 and formerly was an
independent company. As of September 30, 1998, Winslow had over $80 million in
assets under management.
The Subadvisory Agreement provides that it will continue indefinitely if
its continuance is approved at least annually by vote of the holders of a
majority of the outstanding voting securities of the Fund or by vote of a
majority of the Trust's Board of Trustees; and further provided that such
continuance is also approved annually by the vote of a majority of the Trustees
who are not parties to the Subadvisory Agreement or interested persons of the
Subadviser, cast in person at a meeting called for the purpose of voting on such
approval. The Subadvisory Agreement will terminate automatically in the event of
the termination of the Advisory Agreement or in the event of its assignment. In
addition, the Subadvisory Agreement may be terminated at any time without
payment of any penalty, by the Trust's Board of Trustees or by a vote of the
majority of the outstanding voting securities of the Fund upon 60 days' prior
written notice to the Subadviser and by the Subadviser upon 60 days' prior
written notice to the Trust.
The Subadvisory Agreement further provides that absent willful
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties under the Subadvisory Agreement on the part of the Subadviser, the
Subadviser shall not be subject to liability to the Trust or to any shareholder
of the Fund for any
29
<PAGE> 67
act or omission in the course of, or connected with, rendering services
thereunder or for any losses that may be sustained in the purchase, holding of
sale of any security. The Subadvisory Agreement also provides that the services
of the Subadviser are not deemed exclusive and that the Subadviser may render
similar services to others.
For its services, Green Century Capital has agreed to pay Winslow a fee
equal on an annual basis to 0.40% of the value of the average daily net assets
of the Balanced Fund (the "Base Fee"), such fee shall be accrued daily and
payable at the end of each quarter, and subject to the following adjustment: for
each calendar quarter commencing one year after Winslow begins rendering
services hereunder, the Base Fee shall be adjusted as follows: (i) if the Fund's
total return (calculated in accordance with Rule 482 of Regulation C promulgated
under the 1933 Act) for the immediately prior twelve month period ("Fund Total
Return") is greater than the total return of the Lipper Directors' Analytical
Data Balanced Fund Average (the "Index Total Return") plus 1%, then the Base Fee
for such quarter shall be increased by an amount which is the product of .025%
multiplied by the average daily net assets for such year, (ii) if the Fund Total
Return exceeds the Index Total Return plus 2%, then the Base Fee for such
quarter shall be increased by an amount which is the product of .05% multiplied
by the average daily net assets for such year, (iii) if the Fund Total Return is
less than the Index Total Return minus 1%, then the Base Fee for such quarter
shall be decreased by an amount which is the product of .025% multiplied by the
average daily net assets for such year, or (iv) if the Fund Total Return is less
than the Index Total Return minus 2%, then the Base Fee for such quarter shall
be reduced by an amount which is the product of .05% multiplied by the average
daily net assets for such year.
For Example:
If, on an annual basis, the Balanced Fund's
Total Return differs from the Index Total Then the Adviser will
Return by: pay Winslow an annual fee of:
positive 2.00% or more 0.60%
positive 1.00% to positive 1.99% 0.50%
negative 0.99% to positive 0.99% 0.40%
negative 1.00% to negative 1.99% 0.30%
negative 2.00% or more 0.20%
The Board of Trustees believes that the performance adjustments are
appropriate although not within the 10 percentage points per year range
suggested by Release No. 7113 under the 1940 Act. In the event the Lipper
Directors' Analytical Data Balanced Fund Average ceases to become available or
the Trustees determine such Index Total Return is no longer a reasonable
performance benchmark, the Trustees may substitute another performance
benchmark.
For the fiscal years ended June 30, 1996, 1997 and 1998 , the Adviser paid
Winslow subadvisory fees aggregating $27,464, $37,023 and $60,011, respectively.
For the one-month period ended July 31, 1998, the Advisor paid Winslow advisory
fees aggregating $5,491.
Prior to July 1, 1995, Scudder, Stevens & Clark served as investment subadviser
to the Balanced Fund. For the fiscal year ended June 30, 1995, the Adviser paid
Scudder, Stevens & Clark subadvisory fees of $7,670.
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<PAGE> 68
EQUITY FUND AND INDEX PORTFOLIO
INVESTMENT ADVISER The Equity Fund has not retained the services of an
investment adviser or investment subadviser since the Fund seeks to achieve its
investment objective by investing all its assets in the Index Portfolio. The
Index Portfolio has retained the services of Domini Social Investments LLC
("DSI") as investment manager and Mellon Equity Associates ("Mellon Equity") as
submanager for the Index Portfolio.
INVESTMENT MANAGER Pursuant to a Management agreement dated and
effective as of October 22, 1997 (the "Management Agreement") between the Index
Portfolio and DSI, DSI provides investment supervisory and administrative
services to the Index Portfolio. The services provided by DSI 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 Index Portfolio.
The Management Agreement provides that it shall remain in force until
October 22, 1999, on which date it will terminate unless its continuance after
October 22, 1999 is specifically approved at least annually (i) by the vote of a
majority of the Trustees of the Index Portfolio who are not "interested persons"
of the Index Portfolio or of DSI at a meeting specifically called for the
purpose of voting on such approval, and (ii) by the Board of Trustees of the
Index Portfolio or by vote of a majority of the outstanding voting securities of
the Index Portfolio. The Management Agreement also provides that it may be
terminated at any time without the payment of any penalty by the Trustees or by
the vote of a majority of the outstanding voting securities of the Index
Portfolio, or by DSI, in each case on not more than 60 days' nor less than 30
days' written notice to the other party. The Management Agreement shall
automatically terminate in the event of its assignment.
Pursuant to the Management Agreement, DSI 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 the execution of securities
transactions for the Index Portfolio, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties thereunder. The Management Agreement
further provides that the services of DSI to the Index Portfolio are not deemed
to be exclusive, DSI being free to render investment advisory, administrative
and/or other services to others.
For its services under the Management Agreement, DSI receives a fee
equal on an annual basis to 0.20% of the Index Portfolio's average daily net
assets, except that for the first year of the Management Agreement, the fee
payable to DSI was reduced by the amount, if any, by which the total ordinary
operating expenses of the Index Portfolio (excluding brokerage fees and
commissions, interest, taxes, and any other extraordinary expenses) exceed, on
an annual basis, 0.20% of the average daily net assets of the Index Portfolio.
DSI is currently continuing this waiver on a voluntary basis. From October 22,
1997 through July 31, 1998, DSI received management fees of $724,004.
Prior to October 22, 1997, the investment adviser to the Index Portfolio
was Kinder, Lydenberg, Domini & Co., Inc. ("KLD"). The services provided by KLD
consisted of the determination of the stocks to be included in the Social Index
and evaluating, in accordance with KLD's environmental and social criteria, debt
securities which may be purchased by the Index Portfolio. KLD furnished at its
own expense all facilities and personnel necessary in connection with providing
these services. For its services under its investment advisory agreement with
the Index Portfolio, KLD was entitled to receive from the Index Portfolio a fee
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accrued daily and paid monthly at an annual rate equal to 0.025% of the Index
Portfolio's average daily net assets. For the fiscal year ended July 31, 1995,
KLD voluntarily waived all of its advisory fees. For the fiscal years ended July
31, 1996, 1997 and 1998, KLD received advisory fees of $38,150, $46,528 and
$17,385, respectively.
In addition to serving as investment manager, prior to October 22, 1997,
KLD also served as sponsor of the Index Portfolio. Pursuant to a Sponsorship
Agreement dated November 6, 1996, KLD was responsible for the ordinary operating
expenses of the Index Portfolio (other than brokerage fees and commissions,
interest, taxes and extraordinary expenses) and provided the Index Portfolio
with administrative personnel and services necessary to operate the Index
Portfolio. For these services and facilities, KLD received fees from the Index
Portfolio at an annual rate of 0.20% of the average daily net assets of the
Index Portfolio for the Index Portfolio's then-current fiscal year. KLD
continues to determine and monitor the composition of the Domini 400 Social
Index (which determines the composition of the Index Portfolio's securities),
and provide other services relating to socially responsible investments pursuant
to a license agreement between DSI and KLD. KLD received sponsorship fees of
$295,633 for the period November 6, 1996 to July 31, 1997 and $0 for the period
from August 1, 1997 to October 22, 1997 from the Index Portfolio. The
Sponsorship Agreement was terminated as of October 22, 1997.
Prior to October 22, 1997, and pursuant to an Administrative Services
Agreement between Signature Broker-Dealer Services, Inc. ("Signature") and KLD,
KLD engaged Signature to provide certain administrative services to the Index
Portfolio. In such capacity, Signature performed certain administrative services
requested by KLD. For these services, since November 6, 1996, KLD paid to
Signature a fee computed daily and paid monthly at an annual rate of 0.025% of
the average daily net assets of the Index Portfolio. For its services, for the
period from October 4, 1996 until November 6, 1996, Signature received fees
computed daily and paid monthly from the Index Portfolio at an annual rate equal
to 0.025% of the average daily net assets of the Index Portfolio. Prior to
October 4, 1996, Signature received administrative fees computed daily and paid
monthly from the Index Portfolio at an annual rate of 0.05% of the average daily
net assets of the Index Portfolio. For the fiscal years ended July 31, 1996,
1997 and 1998, Signature received Administrative Services fees from the Index
Portfolio of $38,150 $46,528 and $17385, respectively. The Administrative
Services Agreement was terminated effective October 22, 1997.
"Domini(SM)" and "Domini 400 Social Index(SM)" are service marks of KLD
which are licensed to DSI with the consent of Amy L. Domini. Pursuant to
agreements among DSI, Ms. Domini and the Index Portfolio, the Index Portfolio
may be required to discontinue the use of these service marks if DSI ceases to
be the Manager of the Index Portfolio or Ms. Domini withdraws her consent.
The Equity Fund and the Index Portfolio use certain proprietary rights,
know-how and financial services referred to as the Hub and Spoke investment fund
structure from Signature Financial Group. Hub and Spoke is a registered service
mark of Signature Financial Group.
INVESTMENT SUBMANAGER Mellon Equity Associates ("Mellon Equity")
provides investment submanagement services to the Index Portfolio on a
day-to-day basis pursuant to a Submanagement Agreement with DSI effective
October 22, 1997. Mellon Equity's services as submanager include providing DSI
with such investment advice and supervision as DSI may from time to time
consider necessary for the proper supervision of the Index Portfolio's
investment assets, and determining what securities shall be purchased, sold or
exchanged and what portion of the assets of the Index Portfolio allocated by DSI
shall be
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held uninvested. Mellon Equity does not determine the composition of the Domini
Social Index.
The Submanagement Agreement provides that it shall remain in force until
October 22, 1999, on which date it will terminate unless its continuance after
October 22, 1999 is specifically approved at least annually (i) by the vote of a
majority of the Trustees of the Index Portfolio who are not "interested persons"
of the Index Portfolio or of DSI or Mellon Equity at a meeting specifically
called for the purpose of voting on such approval, and (ii) by the Board of
Trustees of the Index Portfolio or by vote of a majority of the outstanding
voting securities of the Index Portfolio. The Submanagement Agreement also
provides that it may be terminated at any time without the payment of any
penalty by the Trustees of the Index Portfolio, or by the vote of a majority of
the outstanding voting securities of the Index Portfolio, or by DSI with the
prior consent of the Trustees of the Index Portfolio, in each case on not more
than 60 days' nor less than 30 days' written notice to the other party. In
addition, the Submanagement Agreement may be terminated at any time without the
payment of any penalty by Mellon Equity on not less than 90 days' written notice
to DSI and the Trustees of the Index Portfolio. The Submanagement Agreement
shall automatically terminate in the event of its assignment.
Pursuant to the Submanagement Agreement, Mellon Equity 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 the execution of securities
transactions for the Index Portfolio, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties thereunder. The Submanagement Agreement
further provides that the services of Mellon Equity to the Index Portfolio are
not deemed to be exclusive, Mellon Equity being free to render investment
advisory, administrative and/or other services to others.
Under the Submanagement Agreement, DSI pays Mellon Equity an investment
submanagement fee equal on an annual basis to 0.10% of the average daily net
assets of the Index Portfolio.
Prior to October 22, 1997, Mellon Equity managed the assets of the Index
Portfolio pursuant to an investment management agreement with the Index
Portfolio. Prior to November 21, 1994, State Street Bank and Trust Company
served as investment manager to the Index Portfolio. Mellon Equity furnished at
its own expense all services, facilities and personnel necessary in connection
with managing the Index Portfolio's investments and effecting securities
transactions for the Index Portfolio. Since October 4, 1996, the Index Portfolio
paid Mellon Equity an investment management fee equal on an annual basis to
0.10% of the Index Portfolio's average daily net assets. For the fiscal years
ended July 31, 1996, 1997 and 1998, respectively, the Index Portfolio incurred
$128,901, $182,885 and $86,354 in investment management fees.
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ADMINISTRATOR, SUBADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN, AND EXPENSES
ADMINISTRATOR Pursuant to an Administrative Services Agreement dated April 7,
1995 between the Trust and Green Century Capital (the "Administration
Agreement"), Green Century Capital, as the Trust's administrator (the
"Administrator"), provides the Trust with general office facilities and
supervises the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the monitoring
of performance and billings of, the Trust's independent contractors and agents;
the preparation and filing of all documents required for compliance by the Trust
with applicable laws and regulations; and arranging for the maintenance of books
and records of the Trust. As described in the Prospectus, the Administrator also
pays, pursuant to the Administration Agreement, all the operating expenses of
each Fund other than the Funds' investment advisory fees, if any, fees under the
Distribution Plan, if any, interest, taxes, brokerage costs and other capital
expenses, expenses of the non-interested Trustees of the Funds (including
counsel fees) and any extraordinary expenses.
Green Century Capital was founded in 1991 by a partnership of
not-for-profit environmental advocacy organizations for the following purposes:
to provide quality environmentally responsible investment opportunities to the
members of its founding organizations and other environmentally conscious
investors; to generate revenue to support the environmental research and
advocacy work of its founding organizations; and to work in tandem with its
founding organizations to promote greater corporate environmental responsibility
by advocating that companies improve their environmental performance. As do the
advocacy organizations that founded Green Century Capital, Green Century upholds
the right of people to speak for the public interest and corporate
responsibility.
The Administration Agreement provides that it shall remain in force
until terminated. The Administration Agreement may be terminated as to any Fund
at any time, without the payment of any penalty, by the Board of Trustees of the
Trust or by the Administrator, in each case on not less than 30 days' written
notice to the other party. The Administration Agreement further provides that
the Administrator shall not be liable for any error of judgment or mistake of
law or for any act or omission in the administration or management of the Trust
or the performance of its duties, except for willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of the reckless
disregard of its obligations and duties.
For such administrative services, the Administrator receives a fee from
the Balanced Fund at a rate such that immediately following any payment to the
Administrator, the total operating expenses of the Balanced Fund (including
investment advisory and distribution fees), on an annual basis, do not exceed
2.50% of the Balanced Fund's average daily net assets up to $30 million, 2.25%
on average net assets from $30 million to $100 million, and 1.75% on average net
assets in excess of $100 million. The Administrator receives a fee from the
Equity Fund at a rate such that immediately following any payment to the
Administrator, the combined total operating expenses of the Fund and the Index
Portfolio (including investment advisory fees and any amortization of
organization expenses), on an annual basis, do not exceed 1.50% of the Equity
Fund's average daily net assets.
For the fiscal years ended June 30, 1996, 1997 and 1998, the Balanced
Fund accrued administrative services fees aggregating $102,989, $134,417 and
$209,666, respectively. For the one-month period ended July 31, 1998, the
Balanced Fund accrued administrative service fees aggregating $20,597. For the
period
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<PAGE> 72
September 13, 1995 to July 31, 1996 and the fiscal years ended July 31, 1997 and
1998, the Equity Fund accrued administrative service fees to the Administrator
of the Trust aggregating $3,431, $27,359 and $122,190, respectively.
SUBADMINISTRATOR Pursuant to a Subadministration Agreement dated July 7, 1997
(the "Subadministration Agreement"), between the Administrator and Sunstone
Financial Group, Inc. ("Sunstone"), Sunstone provides certain day-to-day
administrative services to the Trust, under the supervision and direction of the
Administrator of the Trust. The Subadministration Agreement provides that it
shall continue to July 7, 1998 unless sooner terminated, and thereafter will
continue automatically in effect for successive annual periods until terminated.
The Agreement may be terminated at any time with respect to any one or both
Funds without penalty (i) upon mutual consent of the parties, or (ii) by either
party upon not less than ninety (90) days' written notice.
The Subadministration Agreement provides further that Sunstone shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by Green Century Capital or the Funds in connection with the matters to which
the Agreement relates, except for a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under the
Subadministration Agreement.
Sunstone receives a fee from the Administrator (not the Funds) for its
administrative services on behalf of the Administrator, which fee is based on
each Fund's average net assets beginning at the annual rate of 0.175% on the
first $50,000,000 of average net assets and decreasing as assets reach certain
levels, subject to an annual minimum for each Fund of $35,000 in the first year,
$40,000 in the second year, and $50,000 in the third year. The minimum annual
fee increases 6.0% each year after year three. Sunstone does not act or serve in
any capacity with respect to the Index Portfolio. For the fiscal year ended June
30, 1998 and the one month ended July 31, 1998, the Administrator paid fees of
$34,436 and $3,304, respectively, to Sunstone relating to services performed on
behalf of the Balanced Fund. For the year ended July 31, 1998, the Administrator
paid fees of $35,388 to Sunstone relating to services performed on behalf of the
Equity Fund.
Prior to July 7, 1997, Signature Broker-Dealer Services, Inc. ("Signature")
served as the subadministrator of the Funds. For the fiscal years ended June 30,
1995, 1996 and 1997, Green Century Capital paid subadministrative services fees
to Signature for its subadministrative services for the Equity Fund and the
Balanced Fund aggregating $4,602, $10,708, and $16,062, respectively. For the
period July 1, 1997 to July 6, 1997, Green Century Capital Management paid
subadministrative services fees to Signature aggregating $273.
TRANSFER AGENT The Trust has entered into a transfer agency agreement with
Unified Fund Services, Inc. ("Unified") pursuant to which Unified acts as
transfer agent for the Trust (the "Transfer Agent") effective November 16, 1998.
Unified will maintain an account for each shareholder of each Fund, performs
other transfer agency functions and acts as dividend disbursing agent for each
Fund. Prior to November 16, 1998, Investors Bank & Trust Company ("IBT") served
as transfer agent for the Trust.
CUSTODIAN Pursuant to a Custodian Agreement with each of the Trust and the Index
Portfolio, IBT also acts as the custodian of the Funds' assets (i.e., cash and
securities or, in the case of the Equity Fund, its interest in the Index
Portfolio) and as the custodian of the Index Portfolio's assets (the
"Custodian"). The Custodian's responsibilities include safeguarding and
controlling the Funds' and the Index Portfolio's cash and securities,
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handling the receipt and delivery of securities, determining income and
collecting interest on the Funds' and the Index 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 shares
and interests in the Fund and the Index Portfolio, respectively. Securities held
by the Funds and the Index Portfolio may be deposited into certain securities
depositaries. The Custodian does not determine the investment policies of the
Funds or the Index Portfolio nor does the Custodian decide which securities the
Funds or the Index Portfolio will buy or sell. The Index Portfolio may, however,
invest in securities of the Custodian and may deal with the Custodian as a
principal in securities transactions. For its services, IBT will receive such
compensation as may from time to time be agreed upon by it and the Funds and the
Index Portfolio, as the case may be.
DISTRIBUTION PLAN
The Trust has adopted a Distribution Plan with respect to the Balanced
Fund in accordance with Rule 12b-1 under the 1940 Act after concluding that
there is a reasonable likelihood that the Distribution Plan will benefit the
Fund and its shareholders. The Trust has not adopted a Distribution Plan with
respect to the Equity Fund. The Distribution Plan provides that the Balanced
Fund shall pay a fee to Sunstone Distribution Services, LLC, as the distributor
of shares of the Balanced Fund (the "Distributor"), at an annual rate not to
exceed 0.25% of the Fund's average daily net assets in anticipation of, or as
reimbursement for expenses (i) of compensating broker-dealers with trail or
maintenance commissions and (ii) of printing prospectuses and reports used for
sales purposes, expenses of the preparation and printing of sales literature and
other such distribution-related expenses. Prior to July 7, 1997, Signature
served as distributor of the shares of the Trust. For the fiscal years ended
June 30, 1996, 1997 and 1998, the Balanced Fund accrued distribution fees
aggregating $17,165, $22,403 and $34,944, respectively. For the one-month period
ended July 31, 1998, the Balanced Fund accrued distribution fees aggregating
$3,437.
The Distribution Plan will continue in effect indefinitely if such
continuance is specifically approved at least annually by a vote of both a
majority of the Trustees and a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust and who have no direct or
indirect financial interest in the operation of the Distribution Plan or in any
agreement related to the Plan ("Qualified Trustees"). The Distribution Plan
requires that the Trust shall provide to its Board of Trustees, and its Board of
Trustees shall review, at least quarterly, a written report of the amounts
expended (and the purposes therefor) under the Distribution Plan. The
Distribution Plan further provides that the selection and nomination of the
Qualified Trustees shall be committed to the discretion of the disinterested
Trustees then in office. The Distribution Plan may be terminated at any time by
a vote of a majority of the Qualified Trustees or by a vote of the shareholders
of the Balanced Fund. The Distribution Plan may not be amended to increase
materially the amount of permitted expenses thereunder without the approval of
shareholders and may not be materially amended in any case without a vote of the
majority of both the Trustees and Qualified Trustees. The Distributor will
preserve copies of any plan, agreement or report made pursuant to the
Distribution Plan for a period of not less than six years from the date of the
Plan, and for the first two years the Distributor will preserve such copies in
an easily accessible place.
The Distributor acts as the agent of the Trust in connection with the
offering of shares of the Balanced Fund and the Equity Fund pursuant to a
Distribution Agreement. After the prospectuses and periodic reports have been
prepared, set in type and mailed to existing shareholders, the Distributor pays
for the printing and
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distribution of copies thereof which are used in connection with the offering of
shares of the Funds to prospective investors.
NET ASSET VALUE; REDEMPTION IN KIND
The net asset value of each Fund's shares is determined each day the New
York Stock Exchange is open for trading ("Fund Business Day"). (As of the date
of this Statement of Additional Information, such Exchange 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 New York Stock Exchange (usually 4:00 p.m., Eastern time) in the case of the
Funds 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 at the time the determination is made.
Valuation Procedures: Balanced Fund In valuing the Balanced Fund's
assets, a security listed on the New York Stock Exchange (and not subject to
restrictions against sale by the Fund on such Exchange) will be valued at its
last sale price on such Exchange. Lacking any sales, the security will be valued
at the mean between the closing asked price and the closing bid price.
Securities listed on other exchanges (and not subject to restriction against
sale by the Fund on such exchanges) will be similarly valued, using quotations
on the exchange on which the security is traded most extensively. Unlisted
securities which are quoted on the NASD National Market System, for which there
have been sales of such securities, will be valued at the last sale price
reported on such system. If there are no such sales, the value will be the high
or "inside" bid, which is the bid supplied by the NASD on its NASDAQ System for
such securities in the over-the-counter market. The value of such securities
quoted on the NASDAQ System, but not listed on the National Market System, will
be valued at the high or "inside" bid. Unlisted securities which are not quoted
on the NASDAQ System and for which over-the-counter market quotations are
readily available will be valued at the mean between the current bid and asked
prices for such securities in the over-the-counter market. Other unlisted
securities (and listed securities subject to restriction on sale) will be valued
at their fair value as determined in good faith by the Trustees although the
actual calculation may be done by others. Short-term corporate investments with
remaining maturities of sixty days or less are valued at amortized cost. Open
futures contracts are valued at the most recent settlement price, unless such
price does not reflect the fair value of the contract, in which case such
positions will be valued by or under the direction of the Trustees.
Subject to the Trust's compliance with applicable regulations, the Trust
has reserved the right to pay the redemption price of shares of the Balanced
Fund, either totally or partially, by a distribution in kind of portfolio
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has elected, however, to be governed by Rule 18f-1 under the
1940 Act, as a result of which the Trust is obligated with respect to any one
investor during any 90 day period to redeem shares of the Balanced Fund solely
in cash up to the lesser of $250,000 or 1% of the Fund's net assets at the
beginning of such 90 day period.
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Valuation Procedures: Equity Fund and Index Portfolio The value of the
Index Portfolio's net assets (i.e., the value of its securities and other assets
less its liabilities, including expenses payable or accrued) is determined at
the same time and on the same day as the Equity Fund determines its net asset
value per share. The net asset value of the Equity Fund's investment in the
Index Portfolio is equal to the Fund's pro rata share of the total investment of
the Fund and of other investors in the Index Portfolio less the Fund's pro rata
share of the Index Portfolio's liabilities. Equity securities held by the Index
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
Index 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 Index Portfolio. Index 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 Index Portfolio's Board
of Trustees.
PERFORMANCE ADVERTISING
Equity Fund and Balanced Fund The average annual total rate of return
of the Funds will be calculated for any period by (a) dividing (i) the sum of
the aggregate net asset value per share on the last day of the period of shares
purchased with a $1,000 payment on the first day of the period and the aggregate
net asset value per share on the last day of the period of shares purchasable
with dividends and capital gains distributions declared during such period with
respect to shares purchased on the first day of such period and with respect to
shares purchased with such dividends and capital gains distributions, by (ii)
$1,000, (b) raising the quotient to a power equal to 1 divided by the number of
years in the period, and (c) subtracting 1 from the result.
The total rate of return of the Funds for any specified period will be
calculated by (a) dividing (i) the sum of the aggregate net asset value per
share on the last day of the period of shares purchased with a $1,000 payment on
the first day of the period and the aggregate net asset value per share on the
last day of the period of shares purchasable with dividends and capital gains
distributions declared during such period with respect to shares purchased on
the first day of such period and with respect to shares purchased with such
dividends and capital gains distributions, by (ii) $1,000, and (b) subtracting 1
from the result.
For the period March 18, 1992 (commencement of operations) through July
31, 1998, the average annual total return of the Balanced Fund was 8.20%. The
Balanced Fund's average annual total return for the one and five year periods
ended July 31, 1998 were 2.07% and 10.37%, respectively.
The Equity Fund's total rate of return for the fiscal year ended July
31, 1998 was 21.32%. The Fund's average annual total return for the five years
ended July 31, 1998 was 21.90%. The Fund's average annual total return for the
fiscal periods since the Index Portfolio's commencement of investment operations
(June 3, 1991) through July 31, 1998 was 18.01%. The Equity Fund, which
commenced investment operations on September 13, 1995, invests all of its Assets
in the Index Portfolio, a separate registered investment company which commenced
investment operations on June 3, 1991 and commenced operations on August 10,
1990.
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Consistent with applicable regulatory guidance, performance for the period from
June 3, 1991 to the commencement of operations of the Equity Fund will reflect
the investment performance of the Index Portfolio. The performance for this
prior period reflects the deduction of the charges and expenses of the Equity
Fund set forth in the Expense Table in the Prospectus.
Total rate of return and yield information with respect to the Social
Index will be computed in the same fashion as set forth above with respect to
the Equity 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 Social Index weighted in accordance with the weightings of the
stocks comprising the Social Index. Performance information with respect to the
Social Index will not take into account brokerage commission and other
transaction costs which will be incurred by the Index Portfolio.
The total rate of return should not be considered a representation of
the total rate of return of the respective Fund or the Index Portfolio in the
future since the total rate of return is not fixed. Actual total rates of return
will depend on changes in the market value of, and dividends and interest
received from, the investments held by the Funds or Index Portfolio and expenses
of the Funds and the Index Portfolio during the period. Performance is
historical and will fluctuate. An investor's shares when redeemed may be worth
more or less than their original cost.
Total rate of return information may be useful for reviewing the
performance of a Fund or the Index Portfolio and for providing a basis for
comparison with other investment alternatives. However, unlike bank deposits or
other investments which pay a fixed yield for a stated period of time, total
rate of return fluctuates, and this should be considered when reviewing
performance or making comparisons.
Any current "yield" quotation of the Funds shall consist of an
annualized historical yield, carried to at least the nearest hundredth of one
percent, based on a 30 calendar day or one-month 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.
FEDERAL TAXES
Each year, the Trust intends to qualify each Fund and elect that each
Fund be treated as a separate "regulated investment company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). Under Subchapter
M of the Code each Fund will not be subject to federal income taxes on amounts
distributed to shareholders. As long as each Fund qualifies as a "regulated
investment company" under the Code, the Fund will not be required to pay
Massachusetts income or excise taxes.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) at least 90% of a Fund's annual gross income,
without offset for losses from the sale or other disposition of securities, be
derived from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies or other income derived with respect to its business of investing in
such securities; and (b) the holdings of a Fund are diversified so that, at the
end of
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each quarter of its taxable year, (i) at least 50% of the market value of a
Fund's assets is represented by cash and cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited
in respect of any one issuer to an amount not greater than 5% of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of a Fund's assets is invested in the securities of
any one issuer (other than U.S. Government securities and securities of other
regulated investment companies). In addition, in order not to be subject to
federal income tax, at least 90% of a Fund's net investment income and net
short-term capital gains earned in each year must be distributed to the Fund's
shareholders. If a 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 taxable income and Fund distributions would generally be taxable as
ordinary dividend income to the shareholders.
Shareholders of the Funds will normally have to pay federal income taxes
and any state or local income taxes on the dividends and capital gain
distributions they receive 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
made in cash or in additional shares. A portion of the Funds' net investment
income and short-term capital gains dividends is normally eligible for the
dividends received deduction for corporations 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, whether made in cash or in additional shares, may receive
favorable tax treatment 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 Funds will notify shareholders regarding the federal tax status of
its distributions after the end of each calendar year.
Gains or losses on sales of securities for the Funds may receive
favorable tax treatment if the securities have been held by it longer than the
applicable holding period except in certain cases where a put has been acquired
or a call has been written thereon for the Fund. Other gains or losses on the
sale of securities will be short-term capital gains or losses.
Options Gains and losses on the sale, lapse or other termination of
options on securities will generally be treated as gains and losses from the
sale of securities. If an option written for the Balanced Fund or the Index
Portfolio lapses or is terminated through a closing transaction, such as a
repurchase for the Balanced Fund or the Index Portfolio of the option from its
holder, the Balanced Fund or the Index Portfolio may realize a short-term
capital gain or loss, depending on whether the premium income is greater or less
than the amount paid in the closing transaction. If securities are sold for the
Balanced Fund or the Index Portfolio pursuant to the exercise of a call option
written for it, the premium received will be added to the sale price of the
securities delivered in determining the amount of gain or loss on the sale.
Certain option contracts held for the Balanced Fund and the Index
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes; that is, treated as having been sold at
market value. Sixty percent of any gain or loss recognized on these deemed sales
and on actual dispositions will be treated as long-term capital gain or loss,
and the remainder will be treated as short-term capital gain or loss regardless
of how long the Balanced Fund or the Index Portfolio has held such options.
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The Balanced Fund or the Index Portfolio may be required to defer the
recognition of losses on stock or securities to the extent of any unrecognized
gain on offsetting positions held for it.
Redemption of Shares Any gain or loss realized on the redemption of
Fund shares by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the shares have been held for more than the
applicable holding period, and otherwise as short-term capital gain or loss.
However, any loss realized by a shareholder upon the redemption of Fund shares
held one year or less will be treated as a long-term capital loss to the extent
of any long-term capital gains distributions received by the shareholder with
respect to such shares. Additionally, any loss realized on a redemption or
exchange of Fund shares will be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before such
disposition, such as pursuant to reinvestment of a dividend or capital gains
distribution in Fund shares.
Investment Activities The Balanced Fund's and Index Portfolio's
activities in options may be restricted by the requirements of the Internal
Revenue Code for qualification as a regulated investment company. In addition,
the Balanced Fund's and the Index Portfolio's activities involving futures
contracts and forward contracts may be limited by the requirements of Subchapter
M of the Internal Revenue Code for qualification as a regulated investment
company.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional Shares of Beneficial Interest (par value
$0.01 per share) of each series and to divide or combine the shares into a
greater or lesser number of shares of that series without thereby changing the
proportionate beneficial interests in that series. The Funds are the only
current series of shares of the Trust, and the Trust has reserved the right to
create and issue additional series of shares. Each share of a series represents
an equal proportionate interest in that series with each other share of that
series. The shares of each series participate equally in the earnings, dividends
and assets of the particular series. Shares of each series are entitled to vote
separately to approve advisory agreements or changes in fundamental investment
policy, but shares of all series may vote together in the election or selection
of Trustees, principal underwriters and accountants. Upon liquidation or
dissolution of a series, shareholders of that series would be entitled to share
pro rata in the net assets of that series available for distribution to
shareholders.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. The Trust is not required and has no present
intention to hold annual meetings of shareholders, but the Trust 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. Shareholders
have under certain circumstances (i.e., upon application and submission of
certain specified documents to the Trustees by a specified number of
shareholders) 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 by a declaration in writing by a
specified number of shareholders. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each series affected by the amendment.
(See "Investment Objectives, Policies and Restrictions-Investment
Restrictions".) Shares have no preference,
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preemptive, conversion or similar rights. Shareholders in the Fund do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees if they chose to
do so. Shares, when issued, are fully paid and nonassessable, except as set
forth below. The Fund may be terminated (i) upon sale of its assets, if approved
by the vote of the holders of two thirds of its outstanding shares, except that
if the Board of Trustees recommends such sale of assets, the approval by vote of
the majority of the Fund's outstanding shares will be sufficient, or (ii) by the
vote of the holders of the majority of the Fund's outstanding shares, or (iii)
by the Trustees of the Trust by written notice to the shareholders. If not so
terminated, each Fund will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust shall maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust, 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 Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to act,
but nothing in the Declaration of Trust protects a Trustee against any liability
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
Each investor in the Index Portfolio, including the Equity Fund, may add
to or reduce its investment in the Index Portfolio on each Fund Business Day. At
the close of each such business day, the value of each investor's interest in
the Index Portfolio will be determined by multiplying the net asset value of the
Index Portfolio by the percentage representing that investor's share of the
aggregate beneficial interests in the Index 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 Index 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 Index 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 Index 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 Index 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 Index Portfolio by all
investors in the Index Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Index Portfolio
as of the close of business on the following Fund Business Day.
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PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BALANCED FUND
Specific decisions to purchase or sell securities for the Fund are made
by a portfolio manager who is an employee of the Subadviser and who is appointed
and supervised by its senior officers. Changes in the Fund's investments are
reviewed by the Board of Trustees. The Fund's portfolio manager may serve other
clients of the respective Subadviser in a similar capacity.
Decisions concerning the execution of portfolio security transactions of
the Balanced Fund, including the selection of the market and the broker-dealer
firm, are made by the Subadviser. The Subadviser is also responsible for the
execution of transactions for all other accounts managed by it.
The Subadviser places the security transactions of the Balanced Fund and
of all other accounts managed by it for execution with many broker-dealer firms.
The Subadviser uses its best efforts to obtain execution of portfolio
transactions at prices which are advantageous to the Fund and (when a disclosed
commission is being charged) at reasonably competitive commission rates. In
seeking such execution, the Subadviser will use its best judgement in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
general execution and operational capabilities of the broker-dealer, the nature
and character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the reputation,
reliability, experience and financial condition of the broker-dealer, the value
and quality of services rendered by the broker-dealer in other transactions, and
the reasonableness of the commission, if any. Transactions on United States
stock exchanges and other agency transactions involve the payment by the Fund of
negotiated brokerage commissions. Such commissions vary among different
broker-dealer firms, and a particular broker-dealer may charge different
commissions according to such factors as the difficulty and size of the
transaction and the volume of business done with such broker-dealer.
Transactions in foreign securities usually involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid or received by the Fund
usually includes an undisclosed dealer markup or markdown. In an underwritten
offering the price paid by the Fund often includes a disclosed fixed commission
or discount retained by the underwriter or dealer. Although commissions paid on
portfolio security transactions will, in the judgement of the Subadviser, be
reasonable in relation to the value of the services provided, commissions
exceeding those which another firm might charge may be paid to broker-dealers
who were selected to execute transactions on behalf of the Fund and the
Subadviser's other clients in part for providing brokerage and research services
to the Subadviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Balanced
Fund may receive a commission which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction if
the Subadviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided. This
determination may be made on the basis of either that particular transaction or
on the basis of the overall responsibilities which the Subadviser and its
affiliates have for accounts over which they exercise investment discretion. In
making any such determination, the
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Subadviser will not attempt to place a specific dollar value on the brokerage
and research services provided or to determine what portion of the commission
should be related to such services. Brokerage and research services may include
advice as to the value of securities, the advisability of investing in,
purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, 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); and
the "Research Services" referred to in the next paragraph.
It is a common practice in the investment advisory industry for the
advisers of investment companies, institutions and other investors to receive
research, statistical and quotation services, data, information and other
services, products and materials which assists such advisers in the performance
of their investment responsibilities ("Research Services") from broker-dealer
firms which execute portfolio transactions for the clients of such advisers and
from third parties with which these broker-dealers have arrangements. Consistent
with this practice, the Subadviser receives Research Services from many
broker-dealer firms with which the Subadviser places the Fund transactions and
from third parties which with these broker-dealers have arrangements. These
Research Services include such matters as general economic and market reviews,
industry and company reviews, evaluations of securities and portfolio strategies
and transactions, recommendations as to the purchase and sale of securities and
other portfolio transactions, financial, industry and trade publications, news
and information services, pricing and quotation equipment and services, and
research oriented computer hardware, software, data bases and services. Any
particular Research Service obtained through a broker-dealer may be used by the
Subadviser in connection with client accounts other than those accounts which
pay commissions to such broker-dealer. Any such Research Service may be broadly
useful and of value to the Subadviser in rendering investment advisory services
to all or a significant portion of its clients, or may be relevant and useful
for the management of only one client's account or of a few clients' accounts,
or may be useful for the management of merely a segment of certain clients'
accounts, regardless of whether any such account or accounts paid commissions to
the broker-dealer through which such Research Service was obtained. The advisory
fee paid by the Balanced Fund is not reduced because the Subadviser receives
such Research Services. The Subadviser evaluates the nature and quality of the
various Research Services obtained through broker-dealer firms and attempts to
allocate sufficient commissions to such firms to ensure the continued receipt of
Research Services which the Subadviser believes are useful or of value to it
rendering investment advisory services to its clients.
Subject to the requirement that the Subadviser shall use its best
efforts to seek to execute Fund security transactions at advantageous prices and
at reasonably competitive commission rates or spreads, the Subadviser is
authorized to consider as a factor in the selection of any broker-dealer firm
with whom Fund orders may be placed the fact that such firm has sold or is
selling shares of investment companies sponsored by the Subadviser or Eaton
Vance. This policy is not inconsistent with a rule of the National Association
of Securities Dealers, Inc., which provides that no firm which is a member of
the Association shall favor or disfavor the distribution of shares of any
particular investment company or group of investment companies on the basis of
brokerage commissions received or expected by such firm from any source.
Securities considered as investments for the Balanced Fund may also be
appropriate for other investment accounts managed by the Subadviser or its
affiliates. The Subadviser will attempt to allocate equitably portfolio security
transactions among the Fund and the portfolios of its other investment accounts
whenever decisions are made to purchase or sell securities by the Fund and one
or more of such other accounts simultaneously. In making such allocations, the
main factors to be considered are the respective
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investment objectives of the Fund and such other accounts, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment by the Fund and such accounts, the size of investment
commitments generally held by the Fund and such accounts and the opinions of the
persons responsible for recommending investments to the Fund and such accounts.
While this procedure could have a detrimental effect on the price or amount of
the securities available to the Fund from time to time, it is the opinion of the
Trustees of the Trust and the Fund that the benefits available from the
Subadviser organization outweigh any disadvantage that may arise from exposure
to simultaneous transactions.
For the fiscal years ended June 30, 1996, 1997 and 1998, the Balanced
Fund paid brokerage commissions aggregating $21,408, $20,762 and $33,721,
respectively. For the one-month period ended July 31, 1998, the Balanced Fund
paid brokerage commissions aggregating $1,701. Approximately 50% of the
brokerage commissions were allocated primarily on the basis of research services
provided for each such period.
The portfolio turnover rate is the ratio of the lesser of sales or
purchases to the monthly average value of the portfolio (excluding from both the
numerator and the denominator all securities with maturities at the time of
acquisition of one year or less). Higher levels of Fund activity result in
higher transaction costs and may also result in taxes on realized capital gains
to be borne by the Fund's shareholders. Purchases and sales are made for the
Fund whenever necessary, in management's opinion, to meet the Fund's objective.
The portfolio turnover rate of the Balanced Fund for the fiscal years ended June
30, 1996, 1997 and 1998 was 136%, 109% and 96%, respectively. The portfolio
turnover rate for the Balanced Fund for the one-month period ended July 31, 1998
was 4%.
EQUITY FUND AND INDEX PORTFOLIO
Specific decisions to purchase or sell securities for the Index
Portfolio are made by a portfolio manager who is an employee of Mellon Equity
and who is appointed and supervised by its senior officers. Changes in the Index
Portfolio's investments are reviewed by its Board of Trustees. The portfolio
manager of the Index Portfolio may serve other clients of Mellon Equity in a
similar capacity.
Frequent changes in the Index Portfolio's holdings may result from the
policy of attempting to correlate the Index Portfolio's securities holdings with
the composition of the Social Index, and the frequency of such changes will
increase as the rate and volume of purchases and redemptions of shares of the
Index Portfolio increases. The annual portfolio turnover rates of the Index
Portfolio for the fiscal years ended July 31, 1996, 1997 and 1998 were 5%, 1%
and 5%, respectively.
The Index 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. Mellon Equity attempts to achieve this result by selecting
broker-dealers to execute transactions on behalf of the Index Portfolio and
other clients of Mellon Equity 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), Mellon Equity 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 Mellon
Equity on the tender of the Index
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Portfolio's securities in so-called tender or exchange offers. Such soliciting
dealer fees are in effect recaptured for the Index Portfolio by Mellon Equity.
At present no other recapture arrangements are in effect. Consistent with the
foregoing primary consideration, the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and such other policies as the Trustees
of the Index Portfolio may determine, Mellon Equity may consider sales of shares
of the Equity Fund and of securities of other investors in the Index Portfolio
as a factor in the selection of broker-dealers to execute the Index Portfolio's
securities transactions. Neither the Index Portfolio nor the Equity Fund will
engage in brokerage transactions with DSI, Mellon Equity or Green Century
Capital or any of their respective affiliates or any affiliate of the Equity
Fund or the Index Portfolio.
Under the Submanagement Agreement and as permitted by Section 28(e) of
the Securities Exchange Act of 1934, Mellon Equity may cause the Index Portfolio
to pay a broker-dealer acting on an agency basis which provides brokerage and
research services to Mellon Equity or DSI an amount of commission for effecting
a securities transaction for the Index Portfolio in excess of the amount other
broker-dealers would have charged for the transaction if Mellon Equity
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or Mellon
Equity's or DSI's overall responsibilities to the Index Portfolio or to its
other clients. Not all of such services are useful or of value in advising the
Index 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
Index Portfolio's policy of investing in accordance with the Social Index,
Mellon Equity and DSI 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
Mellon Equity, 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 Index Portfolio and Mellon Equity's or DSI'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 Mellon Equity or DSI for no consideration
other than brokerage or underwriting commissions.
Mellon Equity and DSI attempt to evaluate the quality of research
provided by brokers. Mellon Equity and DSI sometimes use evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions. However, neither Mellon Equity nor DSI 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 Index Portfolio pays to Mellon Equity and DSI will not
be reduced as a consequence of the Index Portfolio's receipt of brokerage and
research services. To the extent the Index Portfolio's securities transactions
are used to obtain brokerage and research services, the brokerage commissions
paid by the Index Portfolio will exceed those that might otherwise be paid for
such portfolio transactions and research, by an
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amount which cannot be presently determined. Such services may be useful and of
value to Mellon Equity or DSI in serving both the Index Portfolio and other
clients and, conversely, such services obtained by the placement of brokerage
business of other clients may be useful to Mellon Equity or DSI in carrying out
its obligations to the Index Portfolio. While such services are not expected to
reduce the expenses of Mellon Equity or DSI, Mellon Equity or DSI 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, 1996, 1997 and 1998 the Index Portfolio paid
brokerage commissions of $45,018, $101,337 and $175,344.
In certain instances there may be securities which are suitable for the
Index Portfolio as well as for one or more of Mellon Equity's or DSI's other
clients. Investment decisions for the Index Portfolio and for Mellon Equity's or
DSI'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 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 Index
Portfolio is concerned. However, it is believed that the ability of the Index
Portfolio to participate in volume transactions will produce better executions
for the Index Portfolio.
INDEPENDENT AUDITORS AND EXPERTS
KPMG Peat Marwick LLP are the independent auditors of the Balanced Fund,
the Equity Fund and the Index Portfolio, providing audit services and review of
filings with the SEC. Prior to July 1, 1995, other auditors served as
independent auditors of the Balanced Fund. The financial statements of the Funds
incorporated herein by reference have been so incorporated by reference in
reliance upon the report of KPMG Peat Marwick LLP as experts in accounting and
auditing. The financial statements of the Index Portfolio incorporated herein by
reference have been so incorporated by reference in reliance upon the report of
KPMG Peat Marwick LLP as experts in accounting and auditing.
ADDITIONAL INFORMATION
A shareholder's right to receive payment with respect to any redemption
may be suspended or the payment of the redemption proceeds postponed: (i) during
periods when the New York Stock Exchange is closed for other than weekends and
holidays or when trading on such Exchange is restricted as determined by the SEC
by rule or regulation, (ii) during periods in which an emergency exists which
causes disposal of, or evaluation of the net asset value of, the Funds'
portfolio securities to be unreasonable or impracticable, or (iii) for such
other periods as the SEC may permit.
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With respect to the securities offered by the Funds' Prospectus, this
Statement of Additional Information and the Prospectus do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act. Pursuant to the rules and regulations of the SEC, certain portions
have been omitted. The Registration Statement including the exhibits filed
therewith may be examined at the office of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and the
Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference.
FINANCIAL STATEMENTS
The financial statements of the Funds and the Index Portfolio as of June
30, 1998 and July 31, 1998 and for the one month period ended July 31, 1998 for
the Balanced Fund have been filed as part of each of the Fund's annual report
with the Securities and Exchange Commission pursuant to Section 30(b) of the
1940 Act and Rule 30b2-1 thereunder, are hereby incorporated herein by reference
from such report. A copy of such report will be provided, without charge, to
each person receiving this Statement of Additional Information.
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APPENDIX - DESCRIPTION OF SECURITIES RATINGS(1)
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safe-guarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM DEBT
Moody's short term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
one year.
Issuers rated PRIME-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 or P-1
repayment ability will often be evidenced by many of the following
characteristics:
Leading market positions in well established industries. High
rates of return on funds employed.
Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 or P-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S CORPORATE BOND RATINGS:
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
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A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
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D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P's rating because no public rating has been requested,
because there is insufficient information on which to base a rating, or because
S&P's does not rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER
A: S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1 ".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
FITCH INVESTORS SERVICE, INC.
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
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BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligors ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligors ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligors limited margin of safety
and the need for reasonable business and economic activity throughout the life
of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default of interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
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F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as the
"F-1+" and "F-1 " categories.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
DUFF & PHELPS
INVESTMENT GRADE BOND RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AND AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, AND A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, AND BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
HIGH YIELD BOND RATINGS
BB+, BB, AND BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, AND B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
Preferred stocks are rated on the same scale as bonds but the preferred rating
gives weight to its more junior
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COMMERCIAL PAPER/CERTIFICATES OF DEPOSIT
CATEGORY 1: TOP GRADE
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity including
internal operating factors and/or ready access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
CATEGORY 2: GOOD GRADE
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
CATEGORY 3: SATISFACTORY GRADE
DUFF 3: Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless timely payment is expected.
No ratings are issued for companies whose paper is not deemed to be of
investment grade.
* * * * *
NOTES:
(1) The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated
do not necessarily represent ratings which would be given to these
securities on the date of the Fund's fiscal year end.
Bonds which are unrated expose the investor to risks with respect to capacity to
pay interest or repay principal which are similar to the risks of lower-rated
bonds. The Balanced Fund is dependent on the investment adviser's or investment
subadviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
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