BULL & BEAR GLOBAL INCOME FUND, INC.
1,576,468 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE FOR SUCH SHARES
Bull & Bear Global Income Fund, Inc. (the "Fund") is issuing to its
shareholders of record ("Record Date Shareholders") as of the close of business
on May 20, 1998 (the "Record Date") non-transferable rights ("Rights") entitling
the holders thereof to subscribe for an aggregate of 1,576,468 shares ("Shares")
of the Fund's common stock, par value $0.01 per share (the "Offer"). Each Record
Date Shareholder is being issued one Right for each whole share of the Fund's
common stock ("Common Stock") owned on the Record Date. The Rights entitle the
Record Date Shareholder to acquire at the Subscription Price (as hereinafter
defined) one Share for every two Rights held (one for two). Shareholders who
fully exercise their Rights will be entitled to request to subscribe for
additional shares of Common Stock pursuant to an Over-Subscription Privilege, as
defined and described herein. Shares requested pursuant to the Over-Subscription
Privilege may be subject to allotment. The Fund may increase at its discretion
the number of shares of Common Stock subject to subscription by up to 25% of the
Shares, or 394,117 Shares, for an aggregate total of 1,970,585 Shares.
Fractional Shares will not be issued upon the exercise of Rights. Accordingly,
Shares may be purchased only pursuant to the exercise of Rights in integral
multiples of two. The Rights are non-transferable and will not be admitted for
trading on the American Stock Exchange or any other exchange. See "The Offer."
THE SUBSCRIPTION PRICE PER SHARE (THE "SUBSCRIPTION PRICE") WILL BE 93% OF THE
LOWER OF (i) THE AVERAGE OF THE LAST REPORTED SALES PRICE OF A SHARE OF THE
FUND'S COMMON STOCK ON THE AMERICAN STOCK EXCHANGE ON THE DATE OF THE EXPIRATION
OF THE OFFER (THE "PRICING DATE") AND ON THE FOUR PRECEDING BUSINESS DAYS
THEREOF AND (ii) THE NET ASSET VALUE PER SHARE AS OF THE CLOSE OF BUSINESS ON
THE PRICING DATE.
The Fund announced its intention to make the Offer after the close of
trading on the American Stock Exchange on April 30, 1998. Shares of the Common
Stock trade on that exchange under the symbol "BBZ." The last reported net asset
value per share of Common Stock at the close of business on April 24, 1998 (the
last trading date on which the Fund publicly reported its net asset value prior
to the announcement of the Offer) and May 1, 1998 (the last trading date on
which the Fund publicly reported its net asset value prior to the date of this
Prospectus) was $7.85 and $7.86, respectively, and the last reported sale price
of a share of the Fund's Common Stock on that exchange on those dates was $8.00
and $8.1875, respectively.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON JUNE 10, 1998 (THE "EXPIRATION DATE"),
UNLESS EXTENDED AS DESCRIBED HEREIN.
Upon the completion of the Offer, Record Date Shareholders who do not
fully exercise their Rights will own a smaller proportional interest in the Fund
than would otherwise be the case if the Offer had not been made. In addition,
because the Subscription Price per Share will be less than the current net asset
value per share, the Offer will result in dilution of net asset value per share
for all shareholders. If the Subscription Price per Share were to be
substantially less than the current net asset value per share, such dilution
would be substantial. Shareholders will have no right to rescind their
subscriptions after receipt of their payment for Shares by the Subscription
Agent. See "Risk Factors and Special Considerations--Certain Effects of the
Offer." (continued on the following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Estimated Estimated
Subscription Estimated Proceeds to
Price (1) Sales Load (2) The Fund (3)(4)
- --------------------------------------------------------------------------------
Per Share...... $7.31 $0.29 $7.02
- --------------------------------------------------------------------------------
Total Maximum (5).. $11,523,981 $457,176 $11,066,805
==============================================================================
(notes on following page)
FIRST ALBANY CORPORATION
The date of this Prospectus is May 6, 1998
<PAGE>
(continued from previous page)
If you have questions or need further information about the Offer,
please call Corporate Investor Communications Inc., the Fund's information agent
for the Offer (the "Information Agent"), at 1-888-200-4398.
The primary investment objective of the Fund, a diversified, closed-end
management investment company, is to provide for its shareholders a high level
of income. This primary investment objective is fundamental and may not be
changed without shareholder approval. The Fund's secondary investment objective,
which may be changed by the Board of Directors of the Fund without shareholders'
approval, is capital appreciation. The Fund pursues its investment objectives by
investing primarily in a global portfolio of investment grade fixed income
securities. There can be no assurance that the Fund will achieve its investment
objectives. See "The Fund's Investment Program." The Fund uses financial
leverage from time to time to purchase or carry securities. Such financial
leverage is speculative and increases both investment opportunity and investment
risk. See "Risk Factors and Special Considerations." Bull & Bear Advisers, Inc.
serves as the Fund's investment manager. The address of the Fund is 11 Hanover
Square, New York, New York 10005, and the Fund's telephone number is (212)
785-0900.
This Prospectus sets forth information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated May 5, 1998 (the
"SAI") containing additional information about the Fund has been filed with the
Securities and Exchange Commission (the "SEC" or the "Commission") and is
incorporated by reference in its entirety into this Prospectus. A copy of the
SAI, the table of contents of which appears on the last page of this Prospectus,
may be obtained without charge by contacting the Information Agent at 1-888-
200-4398 or by calling the Fund toll-free at 1-800-847-4200.
---------------------------
(notes from previous page)
(1) Estimated on the basis of 93% of the net asset value
per share on May 1, 1998. See "The
Offer-- Subscription Price."
(2) In connection with the Offer, First Albany
Corporation (the "Dealer Manager") and other
broker-dealers soliciting the exercise of Rights will
receive aggregate soliciting fees equal to 2.375% of
the Subscription Price per Share for each Share
issued upon exercise of the Rights and pursuant to
the Over-Subscription Privilege. The Fund has also
agreed to pay the Dealer Manager a fee for financial
advisory services and marketing assistance in
connection with the Offer equal to 1.625% of the
Subscription Price per Share for Shares issued upon
exercise of the Rights and pursuant to the
Over-Subscription Privilege. The Fund has agreed to
indemnify the Dealer Manager against certain
liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities
Act").
(3) Before deduction of offering expenses incurred by the
Fund, estimated at $300,000, including an aggregate
of up to $100,000 to be paid to the Dealer Manager as
partial reimbursement for its expenses.
(4) Funds received by check prior to the final due date
of this Offer will be deposited into a segregated
interest bearing account (which interest will be paid
to the Fund regardless of whether shares are issued
or not by the Fund) pending proration and
distribution of Shares.
(5) Assumes all Rights are exercised at the Estimated
Subscription Price. Pursuant to the Over- Subscription
Privilege, the Fund may at its discretion increase the
number of Shares subject to subscription by up to 25% of
the Shares offered hereby. If the Fund increases the
number of Shares subject to subscription by 25%, the
aggregate maximum Estimated Subscription
Price, Estimated Sales Load and Estimated Proceeds to the
Fund will be $14,404,976, $571,470 and $13,833,506,
respectively. The Sales Load and other offering expenses
will be charged against paid-in capital of the Fund.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus and SAI.
PURPOSE OF THE OFFER
As a consideration to making the Offer (as defined below), the Fund's
Board of Directors has determined that it would be in the best interests of the
Fund and its shareholders to increase the assets of the Fund available for
investment, thereby allowing the Fund to more fully take advantage of available
investment opportunities and increase the diversification of its portfolio,
consistent with the Fund's investment objectives. The Rights Committee of the
Board of Directors has recommended to the Board, and the Board has approved, the
Offer. The Rights Committee of the Board of Directors consists of the two
Directors who are not "interested persons" of the Fund under the Investment
Company Act of 1940, as amended (the "1940 Act"). See "Officers and Directors"
in the SAI. In reaching a decision to approve the Offer, the Board of Directors
was advised by Bull & Bear Advisers, Inc. (the "Investment Manager") as to
opportunities provided to the Fund by the availability of new funds for future
income and capital appreciation by taking advantage of new investments without
having to liquidate current holdings. The Investment Manager also advised the
Board of Directors of its belief that increasing the total assets of the Fund
may permit the Fund to obtain better execution prices for certain portfolio
transactions.
In reaching such decision, the Board of Directors considered, among
other matters, advice by the Investment Manager that a well-subscribed rights
offering may reduce the Fund's expense ratio, which may be of long-term benefit
to shareholders. In addition, the Board of Directors considered that such a
rights offering could result in an improvement in the liquidity of the trading
market for shares of the Fund's common stock ("Common Stock") on the American
Stock Exchange, where the shares are listed and traded. The Board of Directors
also considered the proposed terms of the Offer, including the expenses of the
Offer, and its dilutive effect, including the effect on non-exercising
shareholders of the Fund. The Board of Directors also considered the impact of
the Offer on its current policy to distribute, subject to market conditions, an
amount equal to a percentage of the Fund's net asset value. For further
discussion of the impact of the Offer on the Fund's dividends, please see "Risk
Factors and Special Considerations--Dividends and Distributions; Return of
Capital."
In considering the Offer and its effect on the best interests of the
Fund and its shareholders, the Board of Directors retained the Dealer Manager to
provide the Fund with financial advisory and marketing services relating to the
Offer, including the structure, timing and terms of the Offer. In addition to
the foregoing, the Board of Directors considered, among other things, the
benefits and drawbacks of conducting a non-transferable versus a transferable
rights offering, the pricing structure of the Offer, the effect on the Fund if
the Offer is undersubscribed and the experience of the Dealer Manager in
conducting rights offerings.
Since the Investment Manager's fees are based on the Fund's net assets,
the Investment Manager will benefit from an increase in the Fund's assets
resulting from the Offer. See "The Offer--Certain Impact on Fees."
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to its shareholders of record ("Record Date
Shareholders") as of the close of business on May 20, 1998 (the "Record Date")
non-transferable rights ("Rights") entitling the holders thereof to subscribe
for an aggregate of 1,576,468 shares ("Shares") of the Fund's Common Stock, par
value $0.01 per share (the "Offer"). Each Record Date Shareholder is being
issued one Right for each whole share of Common Stock owned on the Record Date.
The Rights entitle the Record Date Shareholder to acquire at the Subscription
Price (as hereinafter defined) one Share for every two Rights held (one for
two). Rights may be exercised at any time during the offering period (the
"Subscription Period"), which commences on May 20, 1998 and ends at 5:00 p.m.,
New York City time, on June 10, 1998 (the "Expiration Date"), unless extended by
the Fund until 5:00 p.m., New York City time, on a date no later than June 17,
1998. The right to acquire one Share for every two Rights held during the
Subscription Period at the Subscription Price is hereinafter referred to as the
"Primary Subscription."
Record Date Shareholders, where the context requires, shall also
include beneficial owners whose Shares are held of record by Cede & Co.
("Cede"), nominee for The Depository Trust Company, or by any other depository
or nominee. In the case of shares held of record by Cede or any other depository
or nominee, beneficial owners for whom Cede or any other depository or nominee
is the holder of record will be deemed to be the holders of the Rights that are
issued to Cede or such other depository or nominee on their behalf, including
for purposes of determining the maximum number of Shares a Record Date
Shareholder may acquire pursuant to the Offer.
The first regular monthly dividend to be paid on Shares acquired upon
exercise of Rights will be the first monthly dividend, the record date for which
occurs after the issuance of such Shares following the Expiration Date. It is
the Fund's present policy to pay dividends on the last business day of each
month to shareholders of record approximately fifteen days prior to the payment
date. Assuming the Subscription Period is not extended, it is expected that the
first dividend, if any, received by shareholders acquiring Shares in the Offer
would be paid on the last business day of July 1998.
3
<PAGE>
OVER-SUBSCRIPTION PRIVILEGE
Any Record Date Shareholder who fully exercises all Rights issued to
such shareholder is entitled to request to subscribe for Shares which were not
otherwise subscribed for by others in the Primary Subscription (the
"Over-Subscription Privilege"). If sufficient Shares are not available to honor
all requests for over-subscriptions, the Fund may, at its discretion, issue
shares of Common Stock up to an additional 25% of the Shares available pursuant
to the Offer (up to 394,117 Shares) in order to satisfy such over-subscription
requests. Shares requested pursuant to the Over-Subscription Privilege may be
subject to allotment, which is more fully discussed under "The
Offer--Over-Subscription Privilege."
SUBSCRIPTION PRICE
The subscription price per Share (the "Subscription Price") will be 93%
of the lower of (i) the average of the last reported sales price of a share of
the Fund's Common Stock on the American Stock Exchange on the Expiration Date
(the "Pricing Date") and on the four preceding business days thereof and (ii)
the net asset value per share as of the close of business on the Pricing Date.
See "The Offer--Subscription Price."
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted for trading on the American Stock Exchange
or any other exchange. However, the Shares to be issued pursuant to the Rights
will be admitted for trading on the American Stock Exchange.
METHOD OF EXERCISE OF RIGHTS
Rights will be evidenced by subscription certificates ("Subscription
Certificates") that will be mailed to Record Date Shareholders, or if shares are
held by Cede & Co. ("Cede"), the nominee for The Depository Trust Company, or
any other depository or nominee, to Cede or such other depository or nominee.
Rights may be exercised by completing and signing a Subscription Certificate and
delivering it, together with payment in full for the Shares (at the Estimated
Subscription Price shown on the cover of this Prospectus of $7.31 per share), by
check, to State Street Bank and Trust Company (the "Subscription Agent"). Rights
may also be exercised by contacting your broker, bank or trust company which can
arrange on your behalf to guarantee delivery of payment and of a properly
completed and executed Subscription Certificate (a "Notice of Guaranteed
Delivery"). Shareholders who exercise their Rights will have no right to rescind
their subscription after the Subscription Agent has received payment therefor.
See "The Offer--Subscription Agent" and "The Offer--Method of Exercise of
Rights."
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date
Shareholders whose record addresses are outside the United States (for these
purposes the United States includes its territories and possessions and the
District of Columbia) ("Foreign Record Date Shareholders"). The Rights to which
such Subscription Certificates relate will be held by the Subscription Agent for
such Foreign Record Date Shareholder's accounts until instructions are received
to exercise the Rights. If no instructions are received prior to the Expiration
Date, such Rights will expire.
IMPORTANT DATES TO REMEMBER
- --------------------------------------------------------------------------------
EVENT DATE*
- --------------------------------------------------------------------------------
Record Date May 20, 1998
- --------------------------------------------------------------------------------
Subscription Period May 20, 1998 to June 10, 1998*
- --------------------------------------------------------------------------------
(i) Subscription Certificates and Payment
for Shares or (ii) Notice of Guaranteed Delivery Due June 10, 1998*
- --------------------------------------------------------------------------------
Expiration and Pricing Date June 10, 1998*
- -------------------------------------------------------------------------------
Subscription Certificates and Payment
for Guarantees of Delivery Due June 16, 1998*
- --------------------------------------------------------------------------------
Confirmation to Purchasers June 22, 1998*
- --------------------------------------------------------------------------------
Final Payment for Shares Due July 7, 1998*
- --------------------------------------------------------------------------------
* Unless the Offer is extended to a date not later than June 17, 1998.
INFORMATION AGENT
The Information Agent for the Offer (the "Information Agent") is:
CORPORATE INVESTOR COMMUNICATIONS, INC.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
TOLL FREE: 1-888-200-4398
4
<PAGE>
DISTRIBUTION ARRANGEMENTS
First Albany Corporation will act as the dealer manager for the Offer.
The Fund has agreed to pay the Dealer Manager a fee for its financial advisory
services and marketing assistance equal to 1.625% of the Subscription Price per
Share for Shares issued upon exercise of the Rights and pursuant to the
Over-Subscription Privilege, and to pay broker-dealers, including the Dealer
Manager, aggregate fees for their soliciting efforts equal to 2.375% of the
Subscription Price per Share for each Share issued upon exercise of the Rights
and the Over-Subscription Privilege. See "Distribution Arrangements."
INFORMATION REGARDING THE FUND
The primary investment objective of the Fund, a diversified, closed-end
management investment company, is to provide for its shareholders a high level
of income. This primary investment objective is fundamental and may not be
changed without shareholder approval. The Fund's secondary investment objective,
which may be changed by the Board of Directors of the Fund (the "Directors")
without shareholder approval, is capital appreciation. There can be no assurance
that the Fund will achieve its investment objectives.
The Fund pursues its investment objectives by investing primarily in a
global portfolio of investment grade fixed income securities. The Fund will
normally invest at least 65% of its net assets in investment grade fixed income
securities which are rated, at the time of purchase, BBB or better by Standard &
Poor's Ratings Group ("S&P"), Baa or better by Moody's Investors Service, Inc.
("Moody's") or, if unrated, are determined by the Investment Manager to be of
comparable quality. The Fund may also invest up to 35% of its assets in fixed
income securities rated BB, B, or CCC by S&P or Ba, B, or Caa by Moody's or, if
unrated, securities determined by the Investment Manager to be of comparable
quality and may invest in other securities (including common stocks, warrants,
options and securities convertible into common stock), when such investments are
consistent with its investment objectives or are acquired as part of a unit
consisting of a combination of fixed income securities and other securities. As
of March 31, 1998, the Fund had approximately 68.25% of its total assets
invested in fixed income securities with an actual or deemed investment grade
rating, approximately 26.38% of its total assets in fixed income securities with
an actual or deemed ratings below investment grade and approximately 5.37% of
its total assets in securities other than fixed income securities. The Fund
currently expects to invest predominately in the United States, Europe, Latin
America and the Pacific Rim. The Fund will normally invest in at least three
different countries, but may invest in fixed income securities of only one
country for temporary defensive purposes. The Fund may use leverage from time to
time to purchase or carry securities. Such leverage is speculative and increases
both investment opportunity and investment risk. See "The Fund's Investment
Program." As of March 31, 1998, the Fund held investments in 18 countries,
distributed as follows:
COUNTRY Distribution
Argentina 16.7%
Brazil 3.9%
Bulgaria 2.1%
Chile 2.6%
China 1.2%
Colombia 5.4%
Dominican Republic 1.4%
France 1.3%
Lithuania 5.4%
Japan 0.9%
Mexico 6.9%
Poland 2.4%
Qatar 1.4%
Russia 5.6%
Turkey 1.3%
United Kingdom 7.7%
United States 31.5%
Venezuela 2.3%
Bull & Bear Advisers, Inc. anticipates that investment of the net
proceeds of the Offer, in accordance with the Fund's investment objectives and
policies, will take approximately up to two months from their receipt by the
Fund, depending on market conditions and the availability of appropriate
securities. See "Use of Proceeds." The Common Stock is listed and traded on the
American Stock Exchange under the symbol "BBZ." As of March 31, 1998, the net
assets of the Fund were approximately $25 million.
The Fund commenced operations as a diversified, closed-end management
investment company on February 7, 1997. Prior to that date the Fund was a
diversified series of shares designated Bull & Bear Global Income Fund (and
prior to October 29, 1992 and since September 1, 1983, Bull & Bear High Yield
Fund) of Bull & Bear Funds II, Inc., an open-end management investment company
organized in 1974 and operating under the name Bull & Bear Incorporated until
October 29, 1993.
5
<PAGE>
It is the Fund's present policy, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of Common Stock. The
Fund recently adopted a managed distribution policy to distribute on a monthly
basis 0.83% of the Fund's net asset value (10% on an annual basis). This policy
is intended to provide shareholders with a stable cash flow and to reduce any
market price discount to its net asset value. There can be no assurance that the
Fund will be able to maintain its current level of dividends, and the Board of
Directors may, in its sole discretion, change the Fund's current dividend policy
or its current level of dividends in response to market or other conditions.
From the commencement of the Fund's operations as a closed-end investment
company to the adoption of the managed distribution policy described above, the
Fund's shares generally traded in the market at a discount to net asset value.
Since the adoption of the managed distribution policy, the Fund's shares
generally have traded at or above net asset value.
THE INVESTMENT MANAGER
The Investment Manager of the Fund is Bull & Bear Advisers, Inc. (the
"Investment Manager"). The Fund's Portfolio Manager is Steven A. Landis. Mr.
Landis has been principally responsible for the Fund's portfolio investment
decisions since April 1995 and is also Senior Vice President and a member of the
Investment Policy Committee of the Investment Manager with overall
responsibility for the Bull & Bear fixed income funds. Mr. Landis was formerly
Associate Director - Proprietary Trading at Barclays De Zoete Wedd Securities
Inc. from 1993 to 1995 and was Director, Bond Arbitrage at WG Trading Company
from 1992 to 1993.
For its services, the Investment Manager receives an investment
management fee, payable monthly and based on the average weekly net assets of
the Fund, at the annual rate of 7/10 of 1% of the first $250 million, 5/8 of 1%
from $250 million to $500 million, and 1/2 of 1% over $500 million. From time to
time, the Investment Manger may reimburse all or part of this fee to improve the
Fund's yield and total return. The Investment Manager provides certain
administrative services to the Fund at cost.
Since the Investment Manager's fees are based on the Fund's net assets,
the Investment Manager will benefit from an increase in the Fund's assets
resulting from the Offer. See "The Offer--Certain Impact on Fees."
USE OF PROCEEDS
The Fund expects that, subject to market conditions, substantially all
of the net proceeds of the Offer will be invested in accordance with the Fund's
investment objectives and policies within approximately two months from the date
of their receipt by the Fund. Pending such investment, the proceeds will be
invested in short-term debt instruments. See "The Fund's Investment Program."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain matters that should be considered,
among others, in connection with an exercise of Rights and an additional
investment in the Fund. See "Risk Factors and Special Considerations."
Certain Effects of the Offer. Upon the completion of the Offer,
shareholders who do not fully exercise their Rights will own a smaller
proportional interest in the Fund than would be the case if the Offer had not
been made. In addition, an immediate dilution of the net asset value per share
will be experienced by all shareholders as a result of the Offer because the
Subscription Price will be less than the then current net asset value per share,
the Fund will bear the expenses of the Offer and the number of shares
outstanding after the Offer will have increased proportionately more than the
increase in the size of the Fund's net assets. Although it is not possible to
state precisely the amount of such a decrease in net asset value because it is
not known at this time how many Shares will be subscribed for or what the
Subscription Price will be, such dilution might be substantial. For example,
assuming all Rights are exercised by Record Date Shareholders at the Estimated
Subscription Price of $7.31 per share (which is 93% of the Fund's net asset
value per share at May 1, 1998 the Fund's net asset value per share (after
payment of the Dealer Manager and soliciting fees and estimated offering
expenses) would be reduced by approximately $0.38 per share or 4.8%. The
dilution in net asset value will disproportionately affect shareholders who do
not exercise their rights.
Foreign Investments. Investors should understand and consider carefully
the substantial risks involved in investing in foreign securities. Foreign
securities, which are generally denominated in foreign currencies, and
utilization of forward contracts on foreign currencies involve certain
considerations comprising both risk and opportunity not typically associated
with investing in U.S. securities. These considerations include: fluctuations in
currency exchange rates; restrictions on foreign investment and repatriation of
capital; costs of converting foreign currencies into U.S. dollars; greater price
volatility and trading illiquidity; less public information on issuers of
securities; difficulty in enforcing legal rights outside of the United States;
lack of uniform accounting, auditing, and financial reporting standards; the
possible imposition of foreign taxes, exchange controls, and currency
restrictions; and possible political, economic, and social instability of
developing as well as developed countries including without limitation
nationalization, expropriation of assets, and war. Furthermore, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Securities of many foreign companies may be less liquid and their prices more
volatile than securities issued by comparable U.S. issuers. Transactions in
foreign securities may be subject to less efficient settlement practices. These
risks are often heightened when the Fund's investments are concentrated in a
small number of countries. In addition, because transactional and custodial
expenses for foreign securities are generally higher than for domestic
securities, the expense ratio of the Fund can be expected to be higher than
investment companies investing exclusively in domestic
6
<PAGE>
securities. Foreign securities trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment, may expose the Fund to increased risk in the event of a failed trade or
insolvency of a foreign broker/dealer. Legal remedies for defaults and disputes
may have to be pursued in foreign courts, whose procedures differ substantially
from those of U.S. courts.
The Fund may invest in securities of issuers located in emerging market
countries. The risks of investing in foreign securities may be greater with
respect to securities of issuers in, or denominated in the currencies of,
emerging market countries. The economies of emerging market countries generally
are heavily dependent upon international trade and accordingly, have been and
may continue to be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries with which they trade. The securities markets of emerging
market countries are substantially smaller, less developed, less liquid and more
volatile than the securities markets of the U.S. and other developed countries.
Disclosure and regulatory standards in many respects are less stringent in
emerging market countries than in the U.S. and other developed countries. There
also may be a lower level of monitoring and regulation of emerging markets and
the activities of investors in such markets, and enforcement of existing
regulations may be extremely limited. Investing in local markets, particularly
in emerging market countries, may require the Fund to adopt special procedures,
seek local government approvals or take other actions, each of which may involve
additional costs to the Fund. Emerging market countries may also restrict
investment opportunities in issuers in industries deemed important to national
interests.
Fixed Income Securities. The Fund will normally invest at least 65% of
its net assets in investment grade fixed income securities. Securities rated BBB
or better by S&P or Baa or better by Moody's are investment grade but Moody's
considers securities rated Baa to have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity for issuers of such securities to make principal and income payments
than is the case for higher-rated securities. The Fund also may invest up to 35%
of its assets in fixed income securities rated below investment grade but not
lower than CCC by S&P or Caa by Moody's. These securities are deemed by those
agencies to be in poor standing and predominantly speculative; the issuers may
be in default on such securities or deemed without capacity to make scheduled
payments of income or repay principal, involving major risk exposure to adverse
conditions. The Fund is also permitted to purchase fixed income securities that
are not rated by S&P or Moody's but that the Investment Manager determines to be
of comparable quality to that of rated securities in which the Fund may invest.
Such securities are included in percentage limitations applicable to the
comparable rated securities. The values of fixed income securities will change
as market interest rates fluctuate. During periods of falling interest rates,
the values of outstanding fixed income securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations generally will be greater for
securities with longer maturities.
Lower rated fixed income securities generally offer a higher current
yield than that available on higher grade issues. However, lower rated
securities involve higher risks, in that they are especially subject to adverse
changes in general economic conditions and in the industries in which the
issuers are engaged, to changes in the financial condition of the issuers, and
to price fluctuations in response to changes in interest rates. During periods
of economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of principal and income and increase the possibility of default. In
addition, such issuers may not have more traditional methods of financing
available to them, and may be unable to repay debt at maturity by refinancing.
The risk of loss due to default by such issuers is significantly greater because
such securities frequently are unsecured and subordinated to the prior payment
of senior indebtedness.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. In such agreements, the Fund sells the underlying
security to a creditworthy securities dealer or bank and the Fund agrees to
repurchase it at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and involve leveraging
which is speculative and increases both investment opportunity and investment
risk. When the Fund enters into reverse repurchase agreements, its custodian
will set aside in a segregated account cash or liquid securities whose value is
marked to the market daily with a market value at least equal to the repurchase
price. If necessary, assets will be added to the account daily so that the value
of the account will not be less than the amount of the Fund's purchase
commitment. Such agreements are subject to the risk that the benefit of
purchasing a security with the proceeds of the sale by the Fund will be less
than the cost to the Fund of transacting the reverse repurchase agreement. Such
agreements will be entered into when, in the judgment of the Investment Manager,
the risk is justified by the potential advantage of greater total return to
shareholders.
Leverage. From time to time the Fund borrows money from banks
(including its custodian bank), engages in reverse repurchase agreements and
issues senior securities, including debt and preferred stock, to purchase and
carry securities and pays interest thereon. These practices are referred to as
leverage, are speculative, and increase both investment opportunity and
investment risk. If the investment income on securities purchased with leverage
exceeds the interest paid on the leverage, the Fund's income will be
correspondingly higher. If the investment income fails to cover the Fund's
costs, including interest on leverage, or if there are losses, the net asset
value of the Fund's shares will decrease faster than would otherwise be the
case. When the Fund is leveraged, the 1940 Act requires the Fund to have asset
coverage of at least 200% for preferred securities it has issued and 300% for
its borrowings or the debt securities it has issued. Interest on money borrowed
is an expense the Fund would not otherwise incur, and it may therefore have
little or no investment income during periods of substantial borrowings.
7
<PAGE>
Use of leverage by the Fund would increase the Fund's total return to
shareholders if the Fund's returns on its investments out of the proceeds of
such leverage exceed the cost of such leverage. Although there can be no
assurance that the use of leverage will be successful, the Investment Manager
believes that the ability to employ leverage may potentially increase yields and
total returns.
The Fund has a committed bank line of credit and the interest rate is
equal to the Federal Reserve Funds Rate plus 1.00 percentage points. At December
31, 1997, there was no balance outstanding. For the six months ended December
31, 1997, the weighted average interest rate was 6.40% based on the balances
outstanding from the line of credit and reverse repurchase agreements during the
period and the weighted average amount outstanding was $7,679,271 or 20.9% of
the Fund's weighted average total assets.
Illiquid Securities. The Fund may invest without limit in illiquid
securities, including securities with legal or contractual conditions or
restrictions on resale. Investing in such securities entails certain risks. The
primary risk is that the Fund may not be able to dispose of a security at the
desired price at the time it wishes to make such disposition. In addition, such
securities often sell at a discount from liquid and freely tradable securities
of the same class or type, although they are also usually purchased at an
equivalent discount which enhances yield while the securities are held by the
Fund. Such securities may also be more difficult to price accurately.
Dividends and Distributions; Return of Capital. It is the Fund's
present policy, which may be changed by the Board of Directors, to pay dividends
on a monthly basis to holders of Common Stock. The Fund recently adopted a
managed distribution policy to distribute on a monthly basis 0.83% of the Fund's
net asset value (10% on an annual basis). This policy is intended to provide
shareholders with a stable cash flow and to reduce any market price discount to
its net asset value. There can be no assurance that the Fund will be able to
maintain its current level of dividends, and the Board of Directors may, in its
sole discretion, change the Fund's current dividend policy or its current level
of dividends in response to market or other conditions. The Fund's ability to
maintain this distribution policy is a function of the yield generated by the
Fund's investments and the Fund's ability to realize capital gains, which
depends on market conditions at the time those investments are made and on the
performance of those investments. To the extent that the Fund's portfolio
investments generate returns exceeding that which is required to pay any target
level of dividends set by the Board of Directors, the Fund may decide to retain
and accumulate that portion of the Fund's return which exceeds such dividend
level and may pay applicable taxes thereon, including any federal income or
excise taxes. Alternatively, to the extent that the Fund's current return is not
sufficient to pay a target level of dividends set by the Board of Directors, the
Fund may distribute to holders of its Common Stock all or a portion of any
retained earnings or make a return of capital to maintain such target level.
Based upon current market conditions, the Investment Manager believes that the
net proceeds of the Offer may be invested in securities producing a rate of
return equal to or above the rate of return that the Fund is currently earning
on its portfolio. Accordingly, the Investment Manager believes that earnings
from new investments derived from the net proceeds of the Offer will better
enable the Fund to maintain its current level of dividends. The Investment
Manager also believes that the increase in total net assets of the Fund
resulting from a well-subscribed rights offering may result in certain economies
of scale and, accordingly, a lower expense ratio for the Fund. Based upon
information provided by the Investment Manager and current market conditions,
the Board of Directors has determined that the Offer will not result in any
material adverse change to the Fund's current dividend policy or its ability to
maintain its current level of dividends. Should the Fund's annual total return
(on a net asset value basis), inclusive of earned income and capital
appreciation, be less than 10%, however, the current level of dividends per
share paid pursuant to the managed 10% distribution policy described above, may
decline. Whether the Offer is subscribed for or not, however, there can be no
assurance that the Fund can or will maintain its current dividend policy or
current level of dividends.
Market Value and Net Asset Value. Shares of closed-end investment
companies frequently trade at a discount to net asset value. This characteristic
of shares of a closed-end fund is a risk separate and distinct from the risk
that the Fund's net asset value may decrease. The Fund cannot predict whether
its shares will trade at, below or above net asset value. In addition, changes
in market yields will affect the Fund's net asset value since prices of
fixed-income securities generally increase when interest rates decline and
decrease when interest rates rise. Since the commencement of the Fund's
operations as a closed-end investment company until the adoption of the managed
distribution policy described above the Fund's shares generally traded in the
market at a discount to net asset value. Since the adoption of the managed
distribution policy, the Fund's shares generally have traded at or above net
asset value. See "Net Asset Value" and "Common Stock."
Year 2000 Risks. Like other investment companies and financial and
business organizations around the world, the Fund will be adversely affected if
the computer systems used by Bull & Bear Advisers, Inc. and the Fund's other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." The Fund is taking steps that it believes are reasonably designed
to address the Year 2000 Problem with respect to the computer systems it uses
and to obtain satisfactory assurances that comparable steps are being taken by
each of the Fund's major service providers. The Fund does not expect to incur
any significant costs in order to address the Year 2000 Problem. However, at
this time there can be no assurances that these steps will be sufficient to
avoid any adverse impact on the Fund.
8
<PAGE>
FEE TABLE
The following table sets forth certain fees and expenses of the Fund.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of the
Subscription Price per Share) (1)................................ 4.00%
ANNUAL EXPENSES (as a percentage of net assets)
Management Fees................................................... 0.70%
Interest Payments on Borrowed Funds............................... 1.99%
Other Expenses (2)................................................ 0.66%
-----------
TOTAL ANNUAL EXPENSES (2)........................................... 3.35%
===========
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
You would pay the following
expenses on a $1,000 investment $74 $144 $217 $407
assuming a 5% annual return (3).......
(1) The Dealer Manager and the other broker-dealers soliciting the exercise
of Rights will receive aggregate soliciting fees equal to 2.375% of the
Subscription Price per Share for each Share issued upon exercise of the
Rights and pursuant to the Over-Subscription Privilege. The Fund has
also agreed to pay the Dealer Manager a fee for financial advisory and
marketing services in connection with the Offer equal to 1.625% of the
Subscription Price per Share for Shares issued upon exercise of the
Rights and pursuant to the Over-Subscription Privilege. These fees will
be borne by the Fund and indirectly by all of the Fund's shareholders,
including those shareholders who do not exercise their Rights.
(2) Based upon annualized expenses for the six month period ended December
31, 1997 as a percentage of average net assets and on the net assets of
the Fund after giving effect to the anticipated net proceeds of the
Offer, including proceeds from the issuance of up to 25% of the Shares
pursuant to the Over-Subscription Privilege. Does not include offering
expenses of the Fund incurred in connection with the Offer, estimated
at $300,000. Such offering expenses will be charged against paid-in
capital of the Fund.
(3) The example reflects the Sales Load and other expenses of the Fund
incurred in connection with the Offer and assumes
that all of the Rights are exercised.
THE PURPOSE OF THE FOREGOING TABLE AND EXAMPLE IS TO ASSIST
SHAREHOLDERS IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN
THE FUND BEARS, DIRECTLY OR INDIRECTLY, BUT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR RATE OF RETURN. THE ACTUAL EXPENSES
OF THE FUND MAY BE GREATER OR LESS THAN THOSE SHOWN.
For more complete descriptions of certain of the Fund's costs and expenses, see
"The Investment Manager" below and "The Investment Management Agreement" in the
SAI.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of
Common Stock outstanding throughout each period presented. The per share
operating performance and ratios for each of the periods, other than the six
month period ended December 31, 1997 (which is unaudited), have been audited by
Tait, Weller & Baker, the Fund's independent accountants, as stated in their
report which is incorporated by reference into the SAI. The following
information should be read in conjunction with the Financial Statements and
Notes thereto, which are incorporated by reference into the SAI.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE
6 MONTHS
ENDED
12/31/97
(UNAUDITED) FOR THE FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $8.43 $7.92 $8.00 $8.25 $9.39 $8.56 $7.97 $8.67 $9.73 $10.83 $13.04
===== ===== ===== ===== ===== ===== ===== ===== ===== ====== ======
Income from investment operations:
Net investment income*................ .29 .51 .26 .17 .60 .66 .77 .81 .99 1.27 1.41
Net realized and unrealized
gain (loss) on investments* (.50) .59 .23 .18 (1.02) .92 .54 (.64) (.97) (1.13) (2.19)
----- --- --- --- ------ --- --- ---- ----- ------ ------
Total from investment operations. (.21) 1.10 .49 .35 (.42) 1.58 1.31 .17 .02 .14 (.78)
----- ---- --- --- ----- ---- ---- --- --- --- ----
Distributions:
Dividends from net investment income.... (.42) (.59) (.26) (.17) (.60) (.66) (.72) (.82) (.98) (1.24) (1.43)
Dividends in excess of net realized gains.. -- -- -- -- (.12) (.09) -- -- -- -- --
Dividends from paid-in-capital.............. -- -- (.31) (.43) -- -- --_ (.05) (.10) -- --
------ ------- ----- ----- ----- ------ ------ ----- ---- ----- ----
Total distributions..................... (.42) (.59) (.57) (.60) (.72) (.75) $(.72) $(.87) $(1.08) $(1.24) $(1.43)
----- ----- ----- ----- ----- ----- ----- ----- ------ ------ ------
Net asset value, end of period.............. $7.80 $8.43 $7.92 $8.00 $8.25 $9.39 $8.56 $7.97 $8.67 $9.73 $10.83
---- ==== ==== ==== ==== ==== ==== ==== ==== ==== =====
Per share market value, end of period.... $8.25 $8.50 n/a n/a n/a n/a n/a n/a n/a n/a n/a
---- ====
Total return on net asset value basis..... (2.59%) 14.71% 6.26% 4.52% (5.12)% 19.39% 17.09% 2.45% .54% 1.34% (5.99)%
======= ====== ===== ==== ======= ====== ====== ===== ==== ===== =======
Total return on market value basis(d).... 2.19% 15.71% n/a n/a n/a n/a n/a n/a n/a n/a n/a
===== ======
Net assets, end of period (000's omitted).. $24,148 $25,361 $30,86 $39,180 $44,355 $51,768$44,323$42,515 $51,318 $82,520 $124,095
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== =======
Ratio of operating expenses to
average net assets(a)(b) 3.72%** 2.71% 2.18% 2.21% 1.98% 1.95% 1.93% 1.95% 1.72% 1.68% 1.71%
------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ratio of net investment income
to average net assets(c) 8.90%** 7.35% 6.55% 6.20% 6.58% 7.44% 9.25% 10.08% 10.99% 12.08% 11.96%
------- ----- ----- ----- ----- ----- ----- ------ ------ ------ ------
Portfolio turnover rate.............. 196% 475% 585% 385% 223% 172% 206% 555% 134% 122% 124%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Senior securities- collateral for securities loaned:
Total amount outstanding............... $2,456,150 - - - - - - - - - -
Asset coverage........................ 1083% - - - - - - - - - -
Average market value(e)................... $1,814,469 - - - - - - - - - -
</TABLE>
* Per share income and operating expenses and net realized and unrealized
gain (loss) on investments have been computed using the average number
of shares outstanding. These computations had no effect on net asset
value per share.
** Annualized.
(a) Ratios excluding interest expense were 1.73% and 2.00%** for the six months
ended December 31, 1997 and for the year ended June 30, 1997, respectively. (b)
Ratio after transfer agent and custodian credits was 1.53%** for the six months
ended December 31, 1997. (c) Ratios including interest expense were 6.91%** and
6.64% for the six months ended December 31, 1997 and for the year ended June 30,
1997, respectively. (d) Effective February 7, 1997, the Fund converted from an
open-end management investment company to a closed-end management investment
company. The Fund has
calculated total return on market value basis based upon purchases and
sales of shares of the Fund at current market values and reinvestment
of dividends and distributions at the lower of the per share net asset
value on the payment date or the average of closing market price for
the five days preceding the payment date.
(e) Average of all month-end market values of collateral for securities loaned
during the period.
10
<PAGE>
THE OFFER
PURPOSE OF THE OFFER
As a consideration to making the Offer (as defined below), the Fund's
Board of Directors has determined that it would be in the best interests of the
Fund and its shareholders to increase the assets of the Fund available for
investment, thereby allowing the Fund to more fully take advantage of available
investment opportunities and increase the diversification of its portfolio,
consistent with the Fund's investment objectives. The Rights Committee of the
Board of Directors has recommended to the Board, and the Board has approved, the
Offer. The Rights Committee of the Board of Directors consists of the two
Directors who are not "interested persons" of the Fund under the Investment
Company Act of 1940, as amended (the "1940 Act"). See "Officers and Directors"
in the SAI. In reaching a decision to approve the Offer, the Board of Directors
was advised by the Investment Manager as to opportunities provided to the Fund
by the availability of new funds for future income and growth by taking
advantage of new investments without having to liquidate current holdings. The
Investment Manager also has advised the Board of Directors of its belief that
increasing the total assets of the Fund may permit the Fund to obtain better
execution prices for certain portfolio transactions.
In reaching such decision, the Board of Directors considered, among
other matters, advice by the Investment Manager that a well-subscribed rights
offering may reduce the Fund's expense ratio, which may be of long-term benefit
to shareholders. In addition, the Board of Directors considered that such a
rights offering could result in an improvement in the liquidity of the trading
market for shares of the Fund's common stock ("Common Stock") on the American
Stock Exchange, where the shares are listed and traded. The Board of Directors
also considered the proposed terms of the Offer, including the expenses of the
Offer, and its dilutive effect, including the effect on non-exercising
shareholders of the Fund. The Board of Directors also considered the impact of
the Offer on its current policy to distribute, subject to market conditions, an
amount equal to a percentage of the Fund's net asset value. For further
discussion of the impact of the Offer on the Fund's dividends, please see "Risk
Factors and Special Considerations--Dividends and Distributions; Return of
Capital."
In considering the Offer and its effect on the best interests of the
Fund and its shareholders, the Board of Directors retained the Dealer Manager to
provide the Fund with financial advisory and marketing services relating to the
Offer, including the structure, timing and terms of the Offer. In addition to
the foregoing, the Board of Directors considered, among other things, the
benefits and drawbacks of conducting a non-transferable versus a transferable
rights offering, the pricing structure of the Offer, the effect on the Fund if
the Offer is undersubscribed and the experience of the Dealer Manager in
conducting rights offerings.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to Record Date Shareholders Rights to subscribe for
Shares pursuant to the exercise of such Rights. Each Record Date Shareholder is
being issued one Right for each whole share of Common Stock owned on the Record
Date. The Rights entitle the Record Date Shareholder to acquire at the
Subscription Price one Share for every two Rights held (one for two). Fractional
Shares will not be issued upon the exercise of Rights. Accordingly, Shares may
be purchased only pursuant to the exercise of Rights in integral multiples of
two. Rights may be exercised at any time during the Subscription Period, which
commences on May 20, 1998 and ends at 5:00 p.m., New York City time, on June 10,
1998, unless extended by the Fund until 5:00 p.m., New York City time, to a date
not later than June 17, 1998 (such date, as it may be extended being referred to
as the "Expiration Date"). A Record Date Shareholder's right to acquire one
Share for every two Rights held during the Subscription Period at the
Subscription Price is hereinafter referred to as the "Primary Subscription." The
Rights are evidenced by Subscription Certificates, which will be mailed to
Record Date Shareholders, except as discussed below under "Foreign
Restrictions."
Any Record Date Shareholder who fully exercises all Rights issued to
such shareholder will be entitled to request to subscribe for additional Shares
pursuant to the Over-Subscription Privilege. Shares requested pursuant to the
Over-Subscription Privilege are subject to allotment and may be subject to
increase in the event the Fund increases the number of shares available pursuant
to the Over-Subscription Privilege, which is more fully discussed below under
"Over-Subscription Privilege." Record Date Shareholders, where the context
requires, shall also include beneficial owners whose Shares are held of record
by Cede, the nominee for The Depository Trust Company, or by any other
depository or nominee. In the case of Shares held of record by Cede or any other
depository or nominee, beneficial owners for whom Cede or any other depository
or nominee is the holder of record will be deemed to be the holders of Rights
that are issued to Cede or such other depository or nominee on their behalf,
including for purposes of determining the maximum number of Shares such
beneficial owner may acquire pursuant to the Offer.
Fractional Shares will not be issued upon the exercise of Rights. If a
Record Date Shareholder's total ownership is fewer than two shares, such Record
Date Shareholder may subscribe for one Share. Shareholders will have no right to
rescind their subscriptions after receipt of their payment for Shares by the
Subscription Agent.
The first regular monthly dividend to be paid on Shares acquired upon
exercise of Rights will be the first monthly dividend, the record date for which
occurs after the issuance of such Shares following the Expiration Date. It is
the Fund's present policy to pay dividends on the last business day of each
month to shareholders of record approximately fifteen days prior to the
11
<PAGE>
payment date. Assuming the Subscription Period is not extended, it is expected
that the first dividend received by shareholders acquiring Shares in the Offer
would be paid on the last business day of July, 1998.
OVER-SUBSCRIPTION PRIVILEGE
To the extent Record Date Shareholders do not exercise all of the
Rights issued to them, the underlying Shares represented by such Rights will be
offered by means of the Over-Subscription Privilege to Record Date Shareholders
who have exercised all the Rights issued to them pursuant to the Primary
Subscription and who desire to acquire additional Shares. Only Record Date
Shareholders who exercise all such Rights may indicate on the Subscription
Certificate the number of additional Shares desired pursuant to the
Over-Subscription Privilege. If sufficient Shares remain as a result of
unexercised Rights, all over-subscriptions may be honored in full. If sufficient
Shares are not available to honor all requests for over-subscriptions, the Fund
may, at its discretion, issue shares of Common Stock up to an additional 25% of
the Shares available pursuant to the Offer (up to 394,117 Shares) in order to
satisfy such over-subscription requests. Regardless of whether the Fund issues
such additional Shares, to the extent Shares are not available to honor all
over-subscriptions, the available Shares will be allocated among those who
over-subscribe based on the number of Rights originally issued to them by the
Fund, so that the number of Shares issued to Record Date Shareholders who
subscribe pursuant to the Over-Subscription Privilege will generally be in
proportion to the number of shares owned by them in the Fund on the Record Date.
The allocation process may involve a series of allocations in order to assure
that the total number of Shares available for over-subscriptions is distributed
on a pro rata basis.
The Fund will not sell any Shares that are not subscribed for pursuant
to the Primary Subscription or the Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price for each Share to be issued pursuant to the
Rights will be 93% of the lower of (i) the average of the last reported sales
price of a share of the Fund's Common Stock on the American Stock Exchange on
the Pricing Date and on the four preceding business days thereof and (ii) the
net asset value per share as of the close of business on the Pricing Date. For
example, if the average of the last reported sales price on the American Stock
Exchange on the Pricing Date and on the four preceding business days thereof of
a share of the Fund's Common Stock is $8.00, and the net asset value as of the
close of business on the Pricing Date is $7.85, the Subscription Price will be
$7.30 (93% of $7.85). If, however, the average of the last reported sales price
of a share on that exchange on the Pricing Date and on the four preceding
business days thereof is $7.75, and the net asset value as of the close of
business on the Pricing Date is $7.85, the Subscription Price will be $7.21 (93%
of $7.75). See "Common Stock."
The Fund announced the Offer after the close of trading on the American
Stock Exchange on April 30, 1998. The last reported net asset value per share of
Common Stock at the close of business on April 24, 1998 (the last trading date
on which the Fund publicly reported its net asset value prior to the
announcement of the Offer)) and May 1, 1998 (the last trading date on which the
Fund publicly reported its net asset value prior to the date of this Prospectus)
was $7.85 and $7.86, respectively, and the last reported sale price of a share
of the Fund's Common Stock on that exchange on those dates was $8.00 and
$8.1875, respectively.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted for trading on the American Stock Exchange
or any other exchange. However, the Shares to be issued pursuant to the Rights
will be admitted for trading on the American Stock Exchange. Rights are offered
to Record Date Shareholders, which term, for purposes of the Offer, includes (i)
the person or persons who are the owners, co-owners and beneficiaries of the
account(s) in which the shares of Common Stock are held (collectively, the
"Designated Persons") and (ii) any account (including a trust, Individual
Retirement Account, qualified plan account or other similar arrangement) of
which any Designated Person is directly or indirectly an owner, a co-owner or
beneficiary.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on June 10,
1998, unless extended by the Fund until 5:00 p.m., New York City time, on a date
not later than June 17, 1998. Rights will expire on the Expiration Date and
thereafter may not be exercised. Since the Expiration Date and the Pricing Date
will be the same date, Record Date Shareholders who decide to acquire Shares
during the Primary Subscription or pursuant to the Over-Subscription Privilege
will not know, when they make such decision, the purchase price for such Shares.
Any extension of the Offer will be followed as promptly as practical by an
announcement thereof. Without limiting the manner in which the Fund may choose
to make such announcement, the Fund will not, unless otherwise required by law,
have any obligation to publish, advertise or otherwise communicate any such
announcement other than by making a release to the Dow Jones News Service or
such other means of announcement as the Fund deems appro-
priate.
SUBSCRIPTION AGENT
The Subscription Agent is State Street Bank and Trust Company which
will receive, for its administrative, processing, invoicing and other services
as subscription agent, a fee estimated to be $15,000, plus reimbursement for its
out-of-pocket expenses
12
<PAGE>
related to the Offer. SIGNED SUBSCRIPTION CERTIFICATES TOGETHER WITH PAYMENT OF
THE ESTIMATED SUBSCRIPTION PRICE MUST BE SENT TO State Street Bank and Trust
Company by one of the methods described below. The Fund will accept only
Subscription Certificates actually received on a timely basis at the address
listed below:
(1) BY FIRST CLASS MAIL:
State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9573
Boston, Massachusetts 02205-9573
U.S.A.
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER
State Street Bank and Trust Company
Corporate Reorganization
70 Campanelli Drive
Braintree, Massachusetts 02184
U.S.A.
(3) BY HAND:
Securities Transfer & Reporting Services, Inc.
c/o Boston EquiServe LP
55 Broadway -- 3rd Floor
New York, New York 10006
U.S.A.
(4) BY FACSIMILE (TELECOPY)
FOR NOTICE OF GUARANTEED DELIVERY ONLY
(781) 794-6333 with the original Subscription Certificate to be sent by
method (1) above. Confirm facsimile by telephone at (781) 794-6388.
DELIVERY TO AN ADDRESS OTHER THAN THOSE SET FORTH ABOVE DOES NOT
CONSTITUTE GOOD DELIVERY.
METHOD OF EXERCISE OF RIGHTS
Rights will be evidenced by Subscription Certificates that will be
mailed to Record Date Shareholders, or if shares are held by Cede or any other
depository or nominee, to Cede or such other depository or nominee except as
discussed under "Foreign Restrictions" below. Rights may be exercised by
completing and signing the Subscription Certificate and mailing it in the
envelope provided, or otherwise delivering the completed and signed Subscription
Certificate, together with payment for the Shares as described below under
"Payment for Shares," to the Subscription Agent. Rights may also be exercised by
contacting your broker, banker or trust company, which can arrange, on your
behalf, to guarantee delivery of payment and of a properly completed and
executed Subscription Certificate (a "Notice of Guaranteed Delivery"), as set
forth below under "Payment for Shares." A fee may be charged for this service.
Fractional Shares will not be issued upon the exercise of Rights. If a Record
Date Shareholder's total ownership is fewer than two shares, such Record Date
Shareholder may subscribe for one Share. Shareholders will have no right to
rescind their subscriptions after receipt of their payment for Shares by the
Subscription Agent. Completed Subscription Certif-
icates or Notices of Guaranteed Delivery must be received by the Subscription
Agent prior to 5:00 p.m., New York City time, on the Expiration Date at the
office of the Subscription Agent at the address set forth above.
Shareholders Who Are Record Owners. Shareholders who are record owners
can choose between either option set forth under "Payment for Shares" below. If
time is of the essence, option (2) will permit delivery of the completed
Subscription Certificate and payment after the Expiration Date.
Investors Whose Shares Are Held By A Nominee. Shareholders whose shares
are held by a nominee, such as a broker or trustee, must contact that nominee to
exercise their Rights. In that case, the nominee will complete the Subscription
Certificate on behalf of the investor and arrange for proper payment by one of
the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold shares for the account of others should
notify the beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the nominee should complete
the Subscription Certificate and submit it to the Subscription Agent with the
proper payment described under "Payment for Shares" below.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date
Shareholders whose record addresses are outside the United States (for these
purposes the United States includes its territories and possessions and the
District of Columbia). The Rights to which those Subscription Certificates
relate will be held by the Subscription Agent for such Foreign Record Date
Shareholders' accounts until instructions are received to exercise the Rights.
If no instructions are received prior to the Expiration Date, such Rights will
expire.
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<PAGE>
INFORMATION AGENT
Any questions or requests for assistance may be directed to the
Information Agent at its telephone number listed below. The Information Agent
for the Offer is:
CORPORATE INVESTOR COMMUNICATIONS, INC.
111 Commerce Road
Carlstadt, New Jersey 07072-82586
TOLL FREE: 1-888-200-4398
Shareholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated to
be $3,500 plus reimbursement for its out-of-pocket expenses related to the
Offer.
PAYMENT FOR SHARES
Shareholders who acquire Shares during the Primary Subscription or
pursuant to the Over-Subscription Privilege may choose between the following
methods of payment:
(1) A shareholder can send the completed Subscription Certificate
together with payment for the Shares acquired during the Primary Subscription
and for additional Shares subscribed for pursuant to the Over-Subscription
Privilege to the Subscription Agent, calculating the total payment on the basis
of an estimated Subscription Price of $7.31 per Share (the "Estimated
Subscription Price"). To be accepted, such payment, together with the properly
executed and completed Subscription Certificate, must be received by the
Subscription Agent at one of the Subscription Agent's offices at the addresses
set forth above prior to 5:00 p.m., New York City time, on the Expiration Date.
A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES DOLLARS BY MONEY
ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES OF AMERICA, MUST BE
PAYABLE TO BULL & BEAR GLOBAL INCOME FUND, INC. AND MUST ACCOMPANY AN EXECUTED
SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
(2) Alternatively, a subscription will be accepted by the Subscription
Agent, if, prior to 5:00 p.m., New York City time on the Expiration Date, the
Subscription Agent has received a Notice of Guaranteed Delivery by facsimile
(telecopy) or otherwise from a bank, trust company, or New York Stock Exchange
member guaranteeing delivery to the Subscription Agent of (i) payment of the
full Subscription Price for the Shares subscribed for during the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege, and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a Notice of
Guaranteed Delivery if a properly completed and executed Subscription
Certificate, together with payment, is not received by the Subscription Agent by
the close of business on the third business day after the Expiration Date.
Within eight business days following the Pricing Date (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent to
each Record Date Shareholder (or, if the shareholder's shares are held by Cede
or any other depository or nominee, to Cede or such depository or nominee),
showing (i) the number of Shares acquired pursuant to the Primary Subscription,
(ii) the number of Shares, if any, acquired pursuant to the Over-Subscription
Privilege, (iii) the per Share and total purchase price for the Shares, and (iv)
any additional amount payable by such shareholder to the Fund or any excess to
be refunded by the Fund to such shareholder, in each case based on the
Subscription Price as determined on the Pricing Date. No other evidence of title
will be sent to shareholders unless delivery of a stock certificate has been
requested at the time of exercise of the Rights. See "Delivery of Stock
Certificates" below. Any additional payment required from a shareholder must be
received by the Subscription Agent within ten business days after the
Confirmation Date. Any excess payment to be refunded by the Fund to a
shareholder will be mailed by the Subscription Agent to such shareholder within
a reasonable time after the Expiration Date. No interest will be paid by the
Fund on any such excess payment. All payments by a shareholder must be in U.S.
dollars by money order or check drawn on a bank located in the United States of
America and payable to: BULL & BEAR GLOBAL INCOME FUND, INC.
The Subscription Agent will deposit all checks received by it prior to
the final due date into a segregated interest bearing account (which interest
will accrue to the benefit of the Fund regardless of whether shares are issued
or not by the Fund) pending distribution of the Shares.
Whichever of the two payment methods described above is used, issuance
and delivery of evidence of title for the Shares purchased are subject to
collection of checks and actual payment pursuant to any Notice of Guaranteed
Delivery.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR
SUBSCRIPTION AFTER RECEIPT OF THEIR PAYMENT FOR
SHARES BY THE SUBSCRIPTION AGENT.
If a shareholder who acquires Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of any
additional amounts due, the Fund reserves the right to take any or all of the
following actions: (i) sell such subscribed and unpaid-for Shares to other
shareholders, (ii) apply any payment actually received by it toward the purchase
of the greatest whole number of Shares which could be acquired by such holder
upon exercise of the Primary Subscription and/or Over-Subscription Privilege,
and/or (iii) exercise any and all other rights or remedies to which it may be
entitled, including, without
14
<PAGE>
limitation, set-offs against payments actually received by it with respect to
such subscribed Shares and/or to enforce the relevant guaranty of payment.
The method of delivery of Subscription Certificates and payment of the
Subscription Price to the Fund will be at the election and risk of the Rights
holders, but if sent by mail it is recommended that such certificates and
payment be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery to
the Fund and clearance of payment prior to 5:00 p.m. Eastern time on the
Expiration Date. Because uncertified personal checks may take at least five
business days to clear, subscribing shareholders are strongly urged to pay, or
arrange for payment, by means of certified or cashier's check or money order.
All questions concerning the timeliness, validity, form and eligibility
of any exercise of Rights will be determined by the Fund, whose determinations
will be final and binding. The Fund in its sole discretion may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion. The Fund will not be under any duty to give notification
of any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
DELIVERY OF STOCK CERTIFICATES
Stock certificates for Shares acquired during the Primary Subscription
and pursuant to the Over-Subscription Privilege will be issued only upon request
made at the time of exercise of the Rights. Stock certificates requested to be
delivered will be mailed promptly after the Confirmation Date and after payment
for the Shares subscribed for has cleared. Participants in the Fund's Dividend
Reinvestment Plan (the "Plan") will have any Shares acquired during the Primary
Subscription or pursuant to the Over-Subscription Privilege credited to their
accounts in the Plan. Stock certificates will not be issued for Shares credited
to Plan accounts. Shareholders whose shares of Common Stock are held of record
by Cede or by any other depository or nominee on their behalf or their
broker-dealers' behalf will have any Shares acquired during the Primary
Subscription or pursuant to the Over-Subscription Privilege credited to the
account of Cede or such other depository or nominee.
FEDERAL INCOME TAX CONSEQUENCES
For United States federal income tax purposes, neither the receipt nor
the exercise of the Rights by Record Date Shareholders will result in taxable
income to holders of Common Stock, and no loss will be realized if the Rights
expire without exercise. The holding period of a Right received by a Record Date
Shareholder includes the holding period of the Common Stock with respect to
which the Right is issued. A shareholder's holding period for a Share acquired
upon exercise of a Right begins with the date of exercise. A shareholder's basis
for determining gain or loss upon the sale of a Share acquired upon the exercise
of a Right will be equal to the sum of the Subscription Price per Share, any
servicing fee charged to the shareholder by the shareholder's broker, bank or
trust company and the shareholder's basis, if any, in the Rights exercised (as
discussed below). A shareholder's gain or loss recognized upon a sale of a Share
acquired upon the exercise of a Right will be a capital gain or loss (assuming
the Share is held as a capital asset at the time of sale). In the case of
non-corporate shareholders, such gain or loss will be (i) short-term gain or
loss taxed at ordinary income tax rates for Shares held one year or less or (ii)
long-term gain or loss taxed at a maximum capital gains rate of (a) 28% for
Shares held more than one year but not more than 18 months or (b) 20% for Shares
held more than 18 months. Capital gains or losses recognized by corporate
shareholders are subject to tax at the ordinary income tax rates applicable to
corporations. Shareholders should consult their own tax advisors regarding the
availability and effect of a certain tax election to mark-to-market Shares held
on January 1, 2001.
If the fair market value of the Rights on the date of distribution is
less than 15% of the fair market value of the shares of Common Stock with
respect to which they are issued, on that date the basis of a Right will be zero
unless a Record Date Shareholder elects to allocate his basis in those shares of
the Fund which he originally owned between such shares and the Rights issued in
the Offer. This allocation is based upon the relative fair market value of such
shares and the Rights as of the date of distribution of the Rights. Thus, if
such an election is made, the shareholder's basis in the shares originally owned
will be reduced by an amount equal to the basis allocated to the Rights. This
election is irrevocable and must be made in a statement attached to the
shareholder's federal income tax return for the year in which the Offer occurs.
If the fair market value of the Rights on the date of distribution is equal to
or greater than 15% of the fair market value of the shares of Common Stock with
respect to which they are issued, a Record Date Shareholder must allocate his
basis in those shares of the Fund which he originally owned between such shares
and the Rights issued in the Offer based upon their relative fair market values
on the date of distribution. However, if a shareholder does not exercise the
Rights, no loss will be recognized and no portion of the shareholder's basis in
the shares will be allocated to the unexercised Rights. If a shareholder
exercises the Rights, the basis of any Shares acquired through exercise of the
Rights will be increased by the basis allocated to such Rights. Accordingly,
shareholders should consult their own tax advisors regarding the advisability of
making the election described above if the shareholder intends to exercise the
Rights.
The Fund will be required to backup withhold and remit to the U.S.
Treasury 31% of reportable payments paid on an account if the holder of the
account fails to provide the Fund with a taxpayer identification number,
provides an incorrect taxpayer identification number or otherwise fails to
certify that such holder is not subject to backup withholding. Certain
shareholders of the Fund, such as corporations and tax-exempt entities, are
exempt from backup withholding. Backup withholding is not an
15
<PAGE>
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability provided the
required information is furnished to the Internal Revenue Service.
The foregoing is a general summary of the material United States
federal tax consequences of the receipt and exercise of Rights by Record Date
Shareholders that are United States persons within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code"), and any other persons who would
be subject to U.S. federal income tax upon the sale or exchange of the Shares
acquired upon the exercise of the Rights. The discussion is based upon
applicable provisions of the Code, U.S. Treasury regulations and other
authorities currently in effect, and does not cover state, local or foreign
taxes. The Code, regulations and administrative and judicial interpretations
thereof are subject to change, possibly with retroactive effect. Shareholders
should consult their tax advisors regarding specific questions as to federal,
state, local or foreign taxes. See "Taxes" in the SAI.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
Shareholders that hold their shares through employee benefit plans that
are subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (including corporate savings and 401(k) plans, Keogh Plans of
self-employed individuals and Individual Retirement Accounts (collectively,
"Benefit Plans")) should be aware of the complexity of the rules and regulations
governing Benefit Plans and the penalties for noncompliance, and should consult
their counsel and tax advisors regarding the consequences under ERISA and the
Code of their exercise of the Rights.
CERTAIN EFFECTS OF THE OFFER
Upon the completion of the Offer, shareholders who do not fully
exercise their Rights will own a smaller proportional interest in the Fund than
would be the case if the Offer had not been made. In addition, because the
Subscription Price per Share will be less than the then current net asset value
per share of the Fund's Common Stock, the Offer will result in a dilution of net
asset value per share for all shareholders, which will disproportionately affect
shareholders who do not exercise their Rights. Although it is not possible to
state precisely the amount of such decrease in net asset value because it is not
known at the date of this Prospectus how many Shares will be subscribed for, or
what the Subscription Price will be, such dilution might be substantial. For
example, assuming all Rights are exercised at the Estimated Subscription Price,
including up to an additional 25% of the Shares which may be issued to satisfy
over-subscriptions, the Fund's current net asset value of $7.86 per share would
be reduced by approximately $0.38 or 4.8%, taking into account the expenses of
the Offer.
CERTAIN IMPACT ON FEES
The Investment Manager will benefit from the Offer because investment
management fees are based on the net assets of the Fund. See "The Investment
Manager." It is not possible to state precisely the amount of additional
compensation the Investment Manager will receive as a result of the Offer
because it is not known how many Shares will be subscribed for and because the
pro-
ceeds of the Offer will be invested in additional portfolio securities which
will fluctuate in value. However, assuming all Rights are exercised at the
Estimated Subscription Price, including up to an additional 25% of the Shares
which may be issued to satisfy over-subscriptions, the annual compensation to be
received by the Investment Manager would be increased by approximately $94,735.
Three of the Fund's directors who voted to authorize the Offer are "interested
persons" of the Fund within the meaning of the 1940 Act because of their
position with the Investment Manager. These directors could benefit indirectly
from the Offer because of their affiliation. The other two directors are not
"interested persons" of the Fund. See "Officers and Directors" in the SAI.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the SEC's registration form, undertaken to
suspend the Offer until it amends this Prospectus, if subsequent to May 5, 1998
(the effective date of the Fund's Registration Statement), the Fund's net asset
value declines more than 10% from its net asset value as of that date.
Accordingly, the Expiration Date would be extended and the Fund would notify
Record Date Shareholders of any such decline and permit Record Date Shareholders
to cancel their exercise of Rights.
IMPORTANT DATES TO REMEMBER
- -------------------------------------------------------------------------------
EVENT DATE*
- -------------------------------------------------------------------------------
Record Date May 20, 1998
- -------------------------------------------------------------------------------
Subscription Period May 20, 1998 to June 10, 1998*
- -------------------------------------------------------------------------------
(i) Subscription Certificates and Payment for Shares or
(ii) Notice of Guaranteed Delivery Due June 10, 1998*
- -------------------------------------------------------------------------------
Expiration and Pricing Date June 10, 1998*
- -------------------------------------------------------------------------------
Subscription Certificates and
Payment for Guarantees of Delivery Due June 16, 1998*
- -------------------------------------------------------------------------------
Confirmation to Participants June 22, 1998*
- -------------------------------------------------------------------------------
Final Payment for Shares July 7, 1998*
- -------------------------------------------------------------------------------
* Unless the Offer is extended to a date not later than June 17, 1998.
16
<PAGE>
THE FUND
The primary investment objective of the Fund, a diversified, closed-end
management investment company, is to provide for its shareholders a high level
of income. This primary investment objective is fundamental and may not be
changed without shareholder approval. The Fund's secondary investment objective,
which may be changed by the Board of Directors of the Fund (the "Directors")
without shareholders approval, is capital appreciation. There can be no
assurance that the Fund will achieve its investment objectives.
The Fund pursues its investment objectives by investing primarily in a
global portfolio of investment grade fixed income securities. The Fund will
normally invest at least 65% of its net assets in investment grade fixed income
securities which are rated, at the time of purchase, BBB or better by Standard &
Poor's Ratings Group ("S&P"), Baa or better by Moody's Investors Service, Inc.
("Moody's") or, if unrated, are determined by the Investment Manager to be of
comparable quality. The Fund may also invest up to 35% of its assets in fixed
income securities rated BB, B, or CCC by S&P or Ba, B, or Caa by Moody's or, if
unrated, securities determined by the Investment Manager to be of comparable
quality and may invest in other securities (including common stocks, warrants,
options and securities convertible into common stock), when such investments are
consistent with its investment objectives or are acquired as part of a unit
consisting of a combination of fixed income securities and other securities. As
of March 31, 1998, the Fund had approximately 68.25% of its total assets
invested in fixed income securities with an actual or deemed investment grade
rating, approximately 26.38% of its total assets in fixed income securities with
an actual or deemed ratings below investment grade and approximately 5.37% of
its total assets in securities other than fixed income securities. The Fund
currently expects to invest predominately in the United States, Europe and Latin
America. The Fund will normally invest in at least three different countries,
but may invest in fixed income securities of only one country for temporary
defensive purposes. The Fund may use leverage from time to time to purchase or
carry securities. Such leverage is speculative and increases both investment
opportunity and investment risk.
As of March 31, 1998, the Fund held investments in 18 countries,
distributed as follows:
COUNTRY Distribution
Argentina 16.7%
Brazil 3.9%
Bulgaria 2.1%
Chile 2.6%
China 1.2%
Colombia 5.4%
Dominican Republic 1.4%
France 1.3%
Lithuania 5.4%
Japan 0.9%
Mexico 6.9%
Poland 2.4%
Qatar 1.4%
Russia 5.6%
Turkey 1.3%
United Kingdom 7.7%
United States 31.5%
Venezuela 2.3%
The Fund commenced operations as a diversified, closed-end management
investment company on February 7, 1997. Prior to that date the Fund was a
diversified series of shares designated Bull & Bear Global Income Fund (and
prior to October 29, 1992 and since September 1, 1983, Bull & Bear High Yield
Fund) of Bull & Bear Funds II, Inc., an open-end management investment company
organized in 1974 and operating under the name Bull & Bear Incorporated until
October 29, 1993.
It is the Fund's present policy, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of Common Stock. The
Fund recently adopted a managed distribution policy to distribute on a monthly
basis 0.83% of the Fund's net asset value (10% on an annual basis). This policy
is intended to provide shareholders with a stable cash flow and to reduce any
market price discount to its net asset value. There can be no assurance that the
Fund will be able to maintain its current level of dividends, and the Board of
Directors may, in its sole discretion, change the Fund's current dividend policy
or its current level of dividends in response to market or other conditions.
From the commencement of the Fund's operations as a closed-end investment
company to the adoption of the managed distribution policy described above the
Fund's shares generally traded in the market at a discount to net asset value.
Since the adoption of the managed distribution policy, the Fund's shares
generally have traded at or above net asset value.
17
<PAGE>
USE OF PROCEEDS
Assuming all Shares offered pursuant to the Primary Subscription are
sold at the Estimated Subscription Price, the net proceeds of the Offer are
estimated to be $10,766,805, after payment of the Dealer Manager's fees, the
soliciting fees and the estimated offering expenses. These expenses will be
borne by the Fund and will reduce the net asset value of the Common Stock. If
the Fund increases the number of Shares subject to the Offer by 25%, or 394,117
Shares, in order to satisfy over-subscription requests, the additional net
proceeds will be approximately $2,766,701. The Fund expects that, subject to
market conditions, substantially all of the net proceeds of the Offer will be
invested in accordance with the Fund's investment objectives and policies
approximately within two months from the date of their receipt by the Fund.
Pending such investment, the proceeds will be invested in certain short-term
debt instruments, as described under "The Fund's Investment Program." Please see
"The Fund's Investment Program." The Fund's Investment Manager is Bull & Bear
Advisers, Inc.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following special considerations
associated with an exercise of Rights and an additional investment in the Fund.
CERTAIN EFFECTS OF THE OFFER
Upon the completion of the Offer, shareholders who do not fully
exercise their Rights will own a smaller proportional interest in the Fund than
would be the case if the Offer had not been made. In addition, an immediate
dilution of the net asset value per share will be experienced by all
shareholders as a result of the Offer because the Subscription Price will be
less than the then current net asset value per share, the Fund will bear the
expenses of the Offer and the number of shares outstanding after the Offer will
have increased proportionately more than the increase in the size of the Fund's
net assets. Although it is not possible to state precisely the amount of such a
decrease in value, because it is not known at this time how many Shares will be
subscribed for or what the Subscription Price will be, such dilution might be
substantial. For example, assuming all Rights are exercised by Record Date
Shareholders at the Estimated Subscription Price of $7.31 per share (which is
93% of the Fund's net asset value per share at May 1, 1998 the Fund's net asset
value per share (after payment of the Dealer Manager and soliciting fees and
estimated offering expenses) would be reduced by approximately $0.38 per share
or 4.8%. The actual Subscription Price may be greater or less than the Estimated
Subscription Price. This dilution of net asset value per share will
disproportionately affect shareholders who do not exercise their Rights.
FOREIGN INVESTMENTS
Investors should understand and consider carefully the substantial
risks involved in investing in foreign securities. Foreign securities, which are
generally denominated in foreign currencies, and utilization of forward
contracts on foreign currencies involve certain considerations comprising both
risk and opportunity not typically associated with investing in U.S. securities.
These considerations include: fluctuations in currency exchange rates;
restrictions on foreign investment and repatriation of capital; costs of
converting foreign currencies into U.S. dollars; greater price volatility and
trading illiquidity; less public information on issuers of securities;
difficulty in enforcing legal rights outside of the United States; lack of
uniform accounting, auditing, and financial reporting standards; the possible
imposition of foreign taxes, exchange controls, and currency restrictions; and
possible political, economic, and social instability of developing as well as
developed countries including without limitation nationalization, expropriation
of assets, and war. Furthermore, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments position. Securities of many foreign
companies may be less liquid and their prices more volatile than securi-
ties issued by comparable U.S. issuers. Transactions in foreign securities may
be subject to less efficient settlement practices. These risks are often
heightened when the Fund's investments are concentrated in a small number of
countries. In addition, because transactional and custodial expenses for foreign
securities are generally higher than for domestic securities, the expense ratio
of the Fund can be expected to be higher than investment companies investing
exclusively in domestic securities. Foreign securities trading practices,
including those involving securities settlement where Fund assets may be
released prior to receipt of payment, may expose the Fund to increased risk in
the event of a failed trade or insolvency of a foreign broker/dealer. Legal
remedies for defaults and disputes may have to be pursued in foreign courts,
whose procedures differ substantially from those of U.S. courts.
Since investments in foreign securities usually involve foreign
currencies and since the Fund may temporarily hold funds in bank deposits in
foreign currencies in order to facilitate portfolio transactions, 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. For example, if the value of the U.S. dollar decreases relative to
a foreign currency in which a Fund investment is denominated or which is
temporarily held by the Fund to facilitate portfolio transactions, the value of
such Fund assets and the Fund's net asset value per share will increase, all
else being equal. Conversely, an increase in the value of the U.S. dollar
relative to such a foreign currency will result in a decline in the value of
such Fund assets and its net asset value per share. The Fund may incur
additional costs in connection with conversions of currencies and securities
into U.S. dollars. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis, or by entering into forward
contracts. The Fund generally will not enter into a forward contract with a term
of greater than one year.
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<PAGE>
The Fund may invest in securities of issuers located in emerging market
countries. The risks of investing in foreign securities may be greater with
respect to securities of issuers in, or denominated in the currencies of,
emerging market countries. The economies of emerging market countries generally
are heavily dependent upon international trade and accordingly, have been and
may continue to be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries with which they trade. The securities markets of emerging
market countries are substantially smaller, less developed, less liquid and more
volatile than the securities markets of the U.S. and other developed countries.
Disclosure and regulatory standards in many respects are less stringent in
emerging market countries than in the U.S. and other developed countries. There
also may be a lower level of monitoring and regulation of emerging markets and
the activities of investors in such markets, and enforcement of existing
regulations may be extremely limited. Investing in local markets, particularly
in emerging market countries, may require the Fund to adopt special procedures,
seek local government approvals or take other actions, each of which may involve
additional costs to the Fund. Emerging market countries may also restrict
investment opportunities in issuers in industries deemed important to national
interests.
Foreign government securities, depending on where and how they are
issued, may be subject to some of the risks discussed above with respect to
foreign securities. In addition, investments in foreign government debt
securities involve special risks. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
pay interest or repay interest or repay principal when due in accordance with
the terms of such debt, and the Fund may have limited legal recourse in the
event of default. Political conditions, especially a sovereign entity's
willingness to meet the terms of its debt obligations, are of considerable
significance.
FIXED INCOME SECURITIES
The Fund will normally invest at least 65% of its net assets in
investment grade fixed income securities. Securities rated BBB or better by S&P
or Baa or better by Moody's are investment grade but Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
for issuers of such securities to make principal and income payments than is the
case for higher-rated securities. The Fund also may invest up to 35% of its
assets in fixed income securities rated below investment grade but not lower
than CCC by S&P or Caa by Moody's. These securities are deemed by those agencies
to be in poor standing and predominantly speculative; the issuers may be in
default on such securities or deemed without capacity to make scheduled payments
of income or repay principal, involving major risk exposure to adverse
conditions. The Fund is also permitted to purchase fixed income securities that
are not rated by S&P or Moody's but that the Investment Manager determines to be
of comparable quality to that of rated securities in which the Fund may invest.
Such securities are included in percentage limitations applicable to the
comparable rated securities. The values of fixed income securities will change
as market interest rates fluctuate. During periods of falling interest rates,
the values of outstanding fixed income securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations generally will be greater for
securities with longer maturities.
Ratings of fixed income securities represent the rating agencies'
opinions regarding their quality, are not a guarantee of quality, and may be
lowered after the Fund acquires the security. The Investment Manager will
consider such an event in determining whether the Fund should continue to hold
the security but is not required to dispose of it. Credit ratings attempt to
evaluate the safety of principal and income payments and do not evaluate the
risk of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's financial condition may be better or worse than the rating indicates.
The Fund may invest in unrated securities determined by the Investment Manager
to be of comparable quality to the appropriate rating category of S&P and
Moody's. In such instances, the Fund will be more reliant on the Investment
Manager's determination of credit quality than is the case with respect to rated
securities. See the Appendix to the SAI for a further description of S&P and
Moody's ratings.
Lower rated fixed income securities generally offer a higher current
yield than that available on higher grade issues. However, lower rated
securities involve higher risks, in that they are especially subject to adverse
changes in general economic conditions and in the industries in which the
issuers are engaged, to changes in the financial condition of the issuers, and
to price fluctuations in response to changes in interest rates. During periods
of economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of principal and income and increase the possibility of default. In
addition, such issuers may not have more traditional methods of financing
available to them, and may be unable to repay debt at maturity by refinancing.
The risk of loss due to default by such issuers is significantly greater because
such securities frequently are unsecured and subordinated to the prior payment
of senior indebtedness.
The market for lower rated securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower rated securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated securities rose
dramatically, but such higher yields did not reflect the value of the income
stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructuring or default. There can be no
assurance that such price declines will not recur. The market for lower rated
securities generally is thinner and less active than that for higher quality
securities, which may limit the Fund's ability to sell such securities at fair
value in response
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to changes in the economy or financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
value and liquidity of lower rated securities, especially in a thinly traded
market.
During its fiscal year ended June 30, 1997, of its total investments
the Fund invested 86% in bonds that had received a rating from S&P or Moody's.
Of the 86% invested in bonds that had received a rating from S&P or Moody's, the
Fund had the following percentages of its total investments invested in bonds
rated: AAA--4%, AA--3%, A--4%, BBB--58%, BB--8%, B--8%; CCC--1%. Ten percent of
the Fund's total investments were in unrated bonds determined by the Investment
Manager to be of comparable quality to rated bonds in the following categories:
AAA--0%; AA--0%; A--0%; BBB--2%; BB--5%; B--3%; CCC--0%. The remaining 4% can be
classified as other fixed income securities, equities and other net assets. It
should be noted that this information reflects the dollar-weighted average
composition of the Fund's total investments (computed monthly) during the fiscal
year ended June 30, 1997 and is not necessarily representative of the Fund's
total investments or net assets as of the end of that fiscal year, the current
year or at any time in the future.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. In such
agreements, the Fund sells the underlying security to a creditworthy securities
dealer or bank and the Fund agrees to repurchase it at an agreed-upon date and
price reflecting a market rate of interest. Such agreements are considered to be
borrowings and involve leveraging which is speculative and increases both
investment opportunity and investment risk. When the Fund enters into reverse
repurchase agreements, its custodian will set aside in a segregated account cash
or liquid securities whose value is marked to market daily with a market value
at least equal to the repurchase price. If necessary, assets will be added to
the account daily so that the value of the account will not be less than the
amount of the Fund's purchase commitment. Such agreements are subject to the
risk that the benefit of purchasing a security with the proceeds of the sale by
the Fund will be less than the cost to the Fund of transacting the reverse
repurchase agreement. Such agreements will be entered into when, in the judgment
of the Investment Manager, the risk is justified by the potential advantage of
total return.
LEVERAGE
From time to time the Fund borrows money from banks (including its
custodian bank), engages in reverse repurchase agreements and issues senior
securities, which may include debt and preferred stock, to purchase and carry
securities and pays interest thereon. These practices are referred to as
leverage, are speculative, and increase both investment opportunity and
investment risk. If the investment income on securities purchased with leverage
exceeds the interest paid on the leverage, the Fund's income will be
correspondingly higher. If the investment income fails to cover the Fund's
costs, including interest on leverage, or if there are losses, the net asset
value of the Fund's shares will decrease faster than would otherwise be the
case. When the Fund is leveraged, the 1940 Act requires the Fund to have asset
coverage of at least 200% for preferred securities it has issued and 300% for
its borrowings or the debt securities it has issued. Interest on money borrowed
is an expense the Fund would not otherwise incur, and it may therefore have
little or no investment income during periods of substantial borrowings.
Use of leverage by the Fund would increase the Fund's total return to
shareholders if the Fund's returns on its investments out of the proceeds of
such leverage exceed the cost of such leverage. Although there can be no
assurance that the use of leverage will be successful, the Investment Manager
believes that the ability to employ leverage may potentially increase yields and
total returns.
Leverage is a speculative investment technique and, as such, entails
two primary risks. The first risk is that the use of leverage magnifies the
impact on the common shareholders of changes in net asset value. For example, a
fund that uses leverage of one third of its total assets (including the amount
borrowed) will show a 1.5% increase or decline in net asset value for each 1%
increase or decline in the value of its total assets. The second risk is that if
the cost of leverage exceeds the return on the securities acquired with the
proceeds of that leverage, it will diminish rather than enhance the return to
common shareholders. These two risks would generally make the Fund's total
return to common shareholders more volatile. However, if the Fund is able to
provide total returns on its assets exceeding the costs of leverage, the use of
leverage would over the longer term enhance the Fund's yields and total returns,
although there can be no assurance that this can be achieved.
The Fund has a committed bank line of credit and the interest rate is
equal to the Federal Reserve Funds Rate plus 1.00 percentage points. At December
31, 1997, there was no balance outstanding. For the six months ended December
31, 1997, the weighted average interest rate was 6.40% based on the balances
outstanding from the line of credit and reverse repurchase agreements during the
period and the weighted average amount outstanding was $7,679,271 or 20.9% of
the Fund's average total assets.
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The following table illustrates the effect of leverage on the return of
a holder of Common Stock, assuming a Fund portfolio of approximately $37
million, the annual returns set forth in such table, the use of $10 million of
reverse repurchase agreements and assuming an annual interest rate of 6.40%:
- --------------------------------------------------------------------------------
Assumed Return on Portfolio
(Net of Expenses Except Interest) -10% -5% 0% 5% 10%
- --------------------------------------------------------------------------------
Corresponding Return to
Common Stockholder................ -16.07% -9.22% -2.37% 4.48% 11.33%
- --------------------------------------------------------------------------------
The purpose of the foregoing table is to assist the investor in
understanding the effects of leverage. The figures in the table are
hypothetical, the assumed form and amount of leverage employed may be different
from and less than the amount of leverage shown, the assumed interest rate may
be higher or lower and the actual returns to a holder of Common Stock may be
greater or less than those appearing in the table.
SECURITIES LENDING
Pursuant to an agency arrangement with an affiliate of its custodian,
the Fund may lend portfolio securities or other assets through such affiliate
for a fee to other parties. The Fund's agreement requires that the loans be
continuously secured by cash, securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or any combination of cash and
such securities, as collateral equal at all times to at least the market value
of the assets lent. Including such collateral as part of the Fund's total
assets, the securities on loan are not to exceed one-third of its total assets.
There are risks to the Fund of delay in receiving additional collateral and
risks of delay in recovery of, and failure to recover, the assets lent should
the borrower fail financially or otherwise violate the terms of the lending
agreement. Loans will be made only to borrowers deemed to be of good standing.
Any loan made by the Fund will provide that it may be terminated by either party
upon reasonable notice to the other party.
ILLIQUID SECURITIES
The Fund may invest without limit in illiquid securities, including
securities with legal or contractual conditions or restrictions on resale.
Investing in such securities entails certain risks. The primary risk is that the
Fund may not be able to dispose of a security at the desired price at the time
it wishes to make such disposition. In addition, such securities often sell at a
discount from liquid and freely tradable securities of the same class or type,
although they are also usually purchased at an equivalent discount which
enhances yield while the securities are held by the Fund. Such securities may
also be more difficult to price accurately.
MARKET VALUE AND NET ASSET VALUE
The Fund converted from a diversified series of shares of an open-end
management investment company to a diversified, closed-end management investment
company in February 1997. Shares of closed-end investment companies are bought
and sold in the open market and may trade at either a premium to or discount
from net asset value, although they frequently trade at a discount. This is a
risk separate and distinct from the risk that the value of the Fund's portfolio
securities, and as a result its net asset value, may decrease. The Fund cannot
predict whether its shares will trade at, above or below net asset value.
Shareholders will incur brokerage and possibly other transaction costs to buy
and sell shares in the open market, provided, however, that the Investment
Manager has arranged with its affiliate, Bull & Bear Securities, Inc., that for
two years after February 7, 1997, Fund shares may be bought or sold at the
market price without commission through Bull & Bear Securities, Inc. Since the
commencement of the Fund's operations as a closed-end investment company until
the adoption of the managed distribution policy described above the Fund's
shares generally traded in the market at a discount to net asset value. Since
the adoption of the managed distribution policy, the Fund's shares generally
have traded at or above net asset value.
A decline in net asset value could affect the Fund's ability to pay
dividends, make capital gain distributions or effect any share repurchases with
respect to its Common Stock if the Fund has outstanding any preferred stock or
debt securities, because the Fund would be required by the 1940 Act to have
asset coverage immediately after such dividend, distribution or repurchase of
two hundred percent for any preferred stock and three hundred percent for any
debt securities, in each case after giving effect to such dividend, distribution
or repurchase. In addition, if the Fund's current investment income were not
sufficient to meet dividend requirements on any outstanding preferred stock, the
Fund may be required to sell a portion of its portfolio securities when it might
be disadvantageous to do so, which would reduce the net asset value attributable
to the Fund's Common Stock.
DIVIDENDS AND DISTRIBUTIONS; RETURN OF CAPITAL
It is the Fund's present policy, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of Common Stock. The
Fund recently adopted a managed distribution policy to distribute on a monthly
basis 0.83% of the Fund's net asset value (10% on an annual basis). This policy
is intended to provide shareholders with a stable cash flow and to reduce any
market price discount to its net asset value. There can be no assurance that the
Fund will be able to maintain its current level of dividends, and the Board of
Directors may, in its sole discretion, change the Fund's current dividend policy
or its
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<PAGE>
current level of dividends in response to market or other conditions. The Fund's
ability to maintain this distribution policy is a function of the yield
generated by the Fund's investments and the Fund's ability to realize capital
gains, which depends on market conditions at the time those investments are made
and on the performance of those investments. To the extent that the Fund's
portfolio investments generate returns exceeding that which is required to pay
any target level of dividends set by the Board of Directors, the Fund may decide
to retain and accumulate that portion of the Fund's return which exceeds such
dividend level any may pay applicable taxes thereon, including any federal
income or excise taxes. Alternatively, to the extent that the Fund's current
return is not sufficient to pay any target level of dividends set by the Board
of Directors, the Fund may distribute to holders of its Common Stock all or a
portion of any retained earnings or make a return of capital to maintain such
target level. Based upon current market conditions, the Investment Manager
believes that the net proceeds of the Offer may be invested in securities
producing a rate of return equal to or above the rate of return that the Fund is
currently earning on its portfolio. Accordingly, the Investment Manager believes
that earnings from new investments derived from the net proceeds of the Offer
will better enable the Fund to maintain its current level of dividends. The
Investment Manager also believes that the increase in total net assets of the
Fund resulting from a well-subscribed rights offering may result in certain
economies of scale and, accordingly, a lower expense ratio for the Fund. Based
upon information provided by the Investment Manager and current market
conditions, the Board of Directors has determined that the Offer will not result
in any material adverse change to the Fund's current dividend policy or its
ability to maintain its current level dividends. Should the Fund's annual total
return (on a net asset value basis), inclusive of earned income and capital
appreciation, be less than 10%, however, the current level of dividends per
share paid pursuant to the managed 10% distribution policy described above, may
decline. Whether the Offer is subscribed for or not, however, there can be no
assurance that the Fund can or will maintain its current dividend policy or
current level of dividends. See "Financial Highlights" and "The Offer--Purpose
of the Offer."
YEAR 2000 RISKS
Like other investment companies, financial and business organizations
around the world, the Fund will be adversely affected if the computer systems
used by Bull & Bear Advisers, Inc. and the Fund's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Fund is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems it uses and to obtain satisfactory
assurances that comparable steps are being taken by each of the Fund's major
service providers. The Fund does not expect to incur any significant costs in
order to address the Year 2000 Problem. However, at this time there can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the Fund.
THE FUND'S INVESTMENT PROGRAM
The Fund's primary and fundamental investment objective is to provide a
high level of income. The Fund's secondary, non-fundamental, investment
objective is capital appreciation. The Fund pursues its investment objectives by
investing primarily in a global portfolio of investment grade fixed income
securities. There can be no assurance that the Fund will achieve its investment
objectives.
The Fund will normally invest at least 65% of its net assets in
investment grade fixed income securities which are rated, at the time of
purchase, BBB or better by Standard & Poor's Ratings Group ("S&P"), Baa or
better by Moody's Investors Service, Inc. ("Moody's") or, if unrated, are
determined by the Investment Manager to be of comparable quality. The Fund may
also invest up to 35% of its assets in fixed income securities rated BB, B, or
CCC by S&P or Ba, B, or Caa by Moody's or, if unrated, securities determined by
the Investment Manager to be of comparable quality and may invest in other
securities (including common stocks, warrants, options and securities
convertible into common stock), when such investments are consistent with its
investment objectives or are acquired as part of a unit consisting of a
combination of fixed income securities and other securities. The Fund currently
expects to invest predominately in the United States, Europe, Latin America, and
the Pacific Rim. The Fund will normally invest in at least three different
countries, but may invest in fixed income securities of only one country for
temporary defensive purposes. Pending investment or for temporary defensive
purposes, the Fund may commit all or any portion of its assets to cash (U.S.
dollars and/or foreign currencies) or invest in money market instruments of U.S.
and foreign issuers, including repurchase agreements. In seeking to achieve the
Fund's investment objectives, the Investment Manager bases its investment
decisions on fundamental market attractiveness, interest rates and trends,
currency trends, and credit quality.
The Investment Manager undertakes several measures in seeking to
achieve the Fund's objectives:
o First, the fixed income securities purchased by the Fund will
be primarily rated at the time of purchase in the top four
categories by S&P or Moody's or, if unrated, are determined by
the Investment Manager to be of comparable quality. Ratings
are not a guarantee of quality and ratings can change after a
security is purchased by the Fund. Moreover, securities rated
Baa by Moody's are deemed by that rating agency to have
speculative characteristics.
o Second, the Investment Manager actively manages the average
maturity of the Fund's portfolio in response to expected
interest rate movements in pursuit of capital appreciation or
to protect against depreciation. Debt securities generally
change in value inversely to changes in interest rates.
Increases in interest rates generally cause the market values
of debt securities to decrease, and vice versa. Movements in
interest rates typically have a greater effect on the prices
of longer term bonds than on those with shorter maturities.
When anticipating a decline in interest rates, the Investment
Manager will attempt to lengthen the portfolio's maturity to
capitalize
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<PAGE>
on the appreciation potential of such securities. Conversely,
when anticipating rising rates, the Investment Manager will
seek to shorten the Fund's maturity to protect against capital
depreciation. The Fund's portfolio may consist of securities
with long, intermediate, and short maturities. Consistent with
seeking to maximize current income, the proportion invested in
each category can be expected to vary depending upon the
Investment Manager's evaluation of the market outlook.
o Third, the Investment Manager may employ certain investment
techniques to seek to reduce the Fund's exposure to risks
involving foreign currency exchange rates. An increase in the
value of a foreign currency relative to the U.S. dollar (the
dollar weakens) will increase the U.S. dollar value of
securities denominated in that foreign currency. Conversely, a
decline in the value of a foreign currency relative to the
U.S. dollar (the dollar strengthens) causes a decline in the
U.S. dollar value of these securities. The percentage of the
Fund's investments in foreign securities that will be hedged
back to the U.S. dollar will vary depending on anticipated
trends in currency prices and the relative attractiveness of
such techniques and other strategies.
There is, of course, no guarantee that these investment strategies will
accomplish their objectives.
U.S. AND FOREIGN GOVERNMENT SECURITIES
The U.S. Government securities in which the Fund may invest include
direct obligations of the U.S. Government (such as U.S. Treasury bills, notes
and bonds) and obligations issued by U.S. Government agencies and
instrumentalities. Agencies and instrumentalities include executive departments
of the U.S. Government and independent Federal organizations supervised by
Congress. The types of support for these obligations can range from the full
faith and credit of the United States (for example, U.S. Treasury securities) to
the creditworthiness of the issuer (for example, securities of the Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation and the
Tennessee Valley Authority). In the case of obligations not backed by the full
faith and credit of the United States, the Fund must look principally to the
agency or instrumentality issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its commitments.
Accordingly, these securities may involve more risk than securities backed by
the U.S. Government's full faith and credit.
The foreign government securities in which the Fund invests include
obligations issued or supported by national, state or provincial governments or
similar political subdivisions or obligations of supranational agencies, such as
the International Bank for Reconstruction and Development (the World Bank).
Supranational agencies rely on funds from participating countries, often
including the United States, from which they must request funds. Such requests
may not always be honored. See "Risk Factors and Special Considerations--Foreign
Investments."
SECURITIES OF PRIVATE ISSUERS
The securities of U.S. and foreign private issuers in which the Fund
invests may be denominated in U.S. dollars or other currencies, including
obligations of U.S. and foreign issuers payable in U.S. dollars outside the
United States ("Euros") and obligations of foreign issuers payable in U.S.
dollars and issued in the United States ("Yankees"). The securities of private
issuers may include corporate bonds, notes and commercial paper, as well as
certificates of deposit, time deposits, bankers' acceptances and other
obligations of U.S. banks and their branches located outside the United States,
U.S. branches of foreign banks, foreign branches of foreign banks and U.S.
agencies of foreign banks and wholly owned banking subsidiaries of foreign banks
located in the United States. The securities of private issuers also may include
common stocks and other equity securities such as warrants, options and
securities convertible into common stock, when such investments are consistent
with the Fund's investment objectives or are acquired as part of a unit
consisting of fixed income and equity securities. See "Risk Factors and Special
Consider ations--Foreign Investments."
FIXED INCOME SECURITIES
The Fund will normally invest at least 65% of its net assets in
investment grade fixed income securities. Securities rated BBB or better by S&P
or Baa or better by Moody's are investment grade but Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
for issuers of such securities to make principal and income payments than is the
case for higher-rated securities. The Fund also may invest up to 35% of its
assets in fixed income securities rated below investment grade but not lower
than CCC by S&P or Caa by Moody's. These securities are deemed by those agencies
to be in poor standing and predominantly speculative; the issuers may be in
default on such securities or deemed without capacity to make scheduled payments
of income or repay principal, involving major risk exposure to adverse
conditions. The Fund is also permitted to purchase fixed income securities that
are not rated by S&P or Moody's but that the Investment Manager determines to be
of comparable quality to that of rated securities in which the Fund may invest.
Such securities are included in percentage limitations applicable to the
comparable rated securities. Investors should be aware of and should consider
the negative impact on a portfolio of fixed income securities of a rise in
market interest rates. See "Risk Factors and Special Considerations--Fixed
Income Securities."
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<PAGE>
PREFERRED SECURITIES
The fixed income securities in which the Fund may invest includes
preferred share issues of U.S. and foreign companies. Such securities involve
greater risk of loss of income than debt securities because issuers are not
obligated to pay dividends. In addition, preferred securities are subordinate to
debt securities, and are more subject to changes in economic and industry
conditions and in the financial conditions of the issuers of such securities.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities which are bonds,
debentures, notes, preferred stocks or other fixed income securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics and
(iii) provide the potential for capital appreciation if the market price of the
underlying common stock increases.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value and generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security will sell at a premium over its conversion value determined
by the extent to which investors place value on the right to acquire the
underlying common stock while holding a fixed income security. The Fund will
exchange or convert the convertible securities held in its portfolio into shares
of the underlying common stock when, in the Investment Manager's opinion, the
investment characteristics of the underlying common shares will assist the Fund
in achieving its investment objectives. Otherwise, the Fund may hold or trade
convertible securities. In selecting convertible securities for the Fund, the
Investment Manager evaluates the investment characteristics of the convertible
security as a fixed income instrument and the investment potential of the
underlying equity security for capital appreciation. In evaluating these matters
with respect to a particular convertible security, the Investment Manager
considers numerous factors, including the economic and political outlook, the
value of the security relative to other investment alternatives, trends in the
determinants of the issuer's profits, and the issuer's management capability and
practices.
OTHER INVESTMENT PRACTICES
Hedging and Income Strategies. The Fund may purchase call options on
securities that the Investment Manager intends to include in the Fund's
portfolio in order to fix the cost of a future purchase or to attempt to enhance
return by, for example, participating in an anticipated price increase of a
security. The Fund may purchase put options to hedge against a decline in the
market value of securities held in the Fund's portfolio or to attempt to enhance
return. The Fund may write (sell) covered put and call options on securities in
which it is authorized to invest. The Fund may purchase and write straddles,
purchase and write put and call options on bond indexes, and take positions in
options on foreign currencies to hedge against the risk of foreign exchange rate
fluctuations on foreign securities the Fund holds in its portfolio or that it
intends to purchase. The Fund may purchase and sell interest rate futures
contracts, bond index futures contracts and foreign currency futures contracts,
and may purchase put and call options and write covered put and call options on
such contracts.
The Fund may enter into forward currency contracts to set the rate at
which currency exchanges will be made for contemplated or completed
transactions. The Fund may also enter into forward currency contracts in amounts
approximating the value of one or more portfolio positions to fix the U.S.
dollar value of those positions. For example, when the Investment Manager
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, the Fund may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. The Fund has no specific limitation on the
percentage of assets it may commit to foreign currency exchange contracts,
except that it will not enter into a forward contract if the amount of assets
set aside to cover the contract would impede portfolio management.
Strategies with options, financial futures, and forward currency
contracts may be limited by market conditions, regulatory limits and tax
considerations, and the Fund may not employ any of the strategies described
above. There can be no assurance that any strategy used will be successful. The
loss from investing in futures transactions is potentially unlimited. Options
and futures may fail as hedging techniques in cases where price movements of the
securities underlying the options and futures do not follow the price movements
of the portfolio securities subject to the hedge. Gains and losses on
investments in options and futures depend
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<PAGE>
on the Investment Manager's ability to predict correctly the direction of stock
prices, interest rates, and other economic factors. In addition, the Fund will
likely be unable to control losses by closing its position where a liquid
secondary market does not exist and there is no assurance that a liquid
secondary market for hedging instruments will always exist. It also may be
necessary to defer closing out hedged positions to avoid adverse tax
consequences. The percentage of the Fund's assets segregated to cover its
obligations under options, futures, or forward currency contracts could impede
effective portfolio management or meeting other current obligations. See "The
Fund's Investment Program-Options, Futures and Forward Currency Contract
Strategies" in the SAI.
Repurchase Agreements. The Fund may enter into repurchase agreements
with U.S. banks or dealers involving securities in which the Fund is authorized
to invest. A repurchase agreement is an instrument under which the Fund
purchases securities from a bank or dealer and simultaneously commits to resell
the securities to the bank or dealer at an agreed upon date and price. The
Fund's custodian maintains custody of the underlying securities until their
repurchase; thus the obligation of the bank or dealer to pay the repurchase
price is, in effect, secured by such securities. The Fund's risk is limited to
the ability of the seller to pay the agreed upon amount on the repurchase date;
if the seller defaults, the security constitutes collateral for the seller's
obligation to pay. If, however, the seller defaults and the value of the
collateral declines, the Fund may incur loss and expenses in selling the
collateral. To attempt to limit the risk in engaging in repurchase agreements,
the Fund enters into repurchase agreements only with banks and dealers believed
by the Investment Manager to present minimum credit risks in accordance with
guidelines established by the Board.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. In such agreements, the Fund sells the underlying
security to a creditworthy securities dealer or bank and the Fund agrees to
repurchase it at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and involve leveraging
which is speculative and increases both investment opportunity and investment
risk. When the Fund enters into reverse repurchase agreements, its custodian
will set aside in a segregated account cash or liquid securities whose value is
marked to the market daily with a market value at least equal to the repurchase
price. If necessary, assets will be added to the account daily so that the value
of the account will not be less than the amount of the Fund's purchase
commitment. Such agreements are subject to the risk that the benefit of
purchasing a security with the proceeds of the sale by the Fund will be less
than the cost to the Fund of transacting the reverse repurchase agreement. Such
agreements will be entered into when, in the judgment of the Investment Manager,
the risk is justified by the potential advantage of total return.
Leverage. From time to time the Fund borrows money from banks
(including its custodian bank), engages in reverse repurchase agreements and
issues senior securities, which may include debt and preferred stock, to
purchase and carry securities and pays interest thereon. These practices are
referred to as leverage, are speculative, and increase both investment
opportunity and investment risk. If the investment income on securities
purchased with leverage exceeds the interest paid on the leverage, the Fund's
income will be correspondingly higher. If the investment income fails to cover
the Fund's costs, including interest on leverage, or if there are losses, the
net asset value of the Fund's shares will decrease faster than would otherwise
be the case. When the Fund is leveraged, the 1940 Act requires the Fund to have
asset coverage of at least 200% for preferred securities it has issued and 300%
for its borrowings or the debt securities it has issued. Interest on money
borrowed is an expense the Fund would not otherwise incur, and it may therefore
have little or no investment income during periods of substantial borrowings.
Use of leverage by the Fund would increase the Fund's total return to
shareholders if the Fund's returns on its investments out of the proceeds of
such leverage exceed the cost of such leverage. Although there can be no
assurance that the use of leverage will be successful, the Investment Manager
believes the ability to employ leverage may potentially increase yields and
total returns.
See "Risk Factors and Special Considerations -- Leverage."
The Fund has a committed bank line of credit and the interest rate is
equal to the Federal Reserve Funds Rate plus 1.00 percentage points. At December
31, 1997, there was no balance outstanding. For the six months ended December
31, 1997, the weighted average interest rate was 6.40% based on the balances
outstanding from the line of credit and reverse repurchase agreements during the
period and the weighted average amount outstanding was $7,679,271 or 20.9% of
the Fund's weighted average total assets
Private Placements and Rule 144A Securities. The Fund may purchase
securities in private placements or pursuant to the Rule 144A exemption from
Federal registration requirements. Because an active trading market may not
exist for such securities, the sale of such securities may be subject to delay
and greater discounts than the sale of registered securities. Investing in such
securities could have the effect of increasing the level of Fund illiquidity to
the extent that qualified institutional buyers become less interested in buying
these securities.
When-Issued Securities. The Fund may purchase securities on a
"when-issued" basis. In such transactions delivery and payment occur at a date
subsequent to the date of the commitment to make the purchase. Although the Fund
will enter into when-issued transactions with the intention of acquiring the
securities, the Fund may sell the securities prior thereto for investment
reasons, which may result in a gain or loss. Acquiring securities in this manner
involves a risk that yields available on the delivery date may be higher than
those received in such transactions, as well as the risk of price fluctuation.
When the Fund purchases securities on a when-issued basis, its custodian will
set aside in a segregated account cash or liquid securities whose value is
marked to the market daily with a market value at least equal to the amount of
the commitment. If necessary, assets will be added to the account daily so that
the value of the account will not be less than the amount of the Fund's purchase
commitment. Failure of the issuer to deliver the security may result in the Fund
incurring a loss or missing an opportunity to make an alternative investment.
25
<PAGE>
Lending. Pursuant to an agency arrangement with an affiliate of its
custodian, the Fund may lend portfolio securities or other assets through such
affiliate for a fee to other parties. The Fund's agreement requires that the
loans be continuously secured by cash, securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times to at least the market
value of the assets lent. Including such collateral as part of the Fund's total
assets, the securities on loan are not to exceed one-third of its total assets.
There are risks to the Fund of delay in receiving additional collateral and
risks of delay in recovery of, and failure to recover, the assets lent should
the borrower fail financially or otherwise violate the terms of the lending
agreement. Loans will be made only to borrowers deemed to be of good standing.
Any loan made by the Fund will provide that it may be terminated by either party
upon reasonable notice to the other party.
Portfolio Turnover. Given the investment objectives of the Fund, the
rate of portfolio turnover will not be a limiting factor when the Investment
Manager deems changes in the composition of the portfolio appropriate, and the
investment strategy pursued by the Fund therefore includes the possibility of
short term transactions. The Fund's portfolio turnover rate will vary from year
to year depending on world market conditions. For the fiscal years ended June
30, 1997 and 1996, the portfolio's turnover rate was 475% and 585%,
respectively. Higher portfolio turnover involves correspondingly greater
transaction costs and increases the potential for short term capital gains and
taxes. See "Dividends, Distributions and Taxes."
Illiquid Securities. The Fund may invest without limit in illiquid
securities, including securities with legal or contractual conditions or
restrictions on resale. Investing in such securities entails certain risks. The
primary risk is that the Fund may not be able to dispose of a security at the
desired price at the time it wishes to make such disposition. In addition, such
securities often sell at a discount from liquid and freely tradable securities
of the same class or type, although they are also usually purchased at an
equivalent discount which enhances yield while the securities are held by the
Fund. Such securities may also be more difficult to price accurately.
Other Information. The Fund is not obligated to deal with any
particular broker, dealer or group thereof. Certain broker/dealers that the
Investment Manager and its affiliates do business with may, from time to time,
own more than 5% of the publicly traded Class A non-voting Common Stock of Bull
& Bear Group, Inc., the parent of the Investment Manager, and may provide
clearing services to Bull & Bear Securities, Inc., a broker/dealer affiliate of
the Investment Manager.
The Fund's primary investment objective of providing a high level of
income is fundamental and may not be changed without shareholder approval. The
Fund is also subject to certain investment restrictions, set forth in the SAI,
that are fundamental and cannot be changed without shareholder approval. The
Fund's secondary investment objective of capital appreciation and the other
investment policies described herein, unless otherwise stated, are not
fundamental and may be changed by the Directors without shareholder approval.
THE INVESTMENT MANAGER
The Investment Manager acts as general manager of the Fund, being
responsible for the various functions assumed by it, including the regular
furnishing of advice with respect to portfolio transactions. The Investment
Manager manages the investment and reinvestment of the assets of the Fund,
subject to the control and oversight of the Directors. The Investment Manager is
authorized to place portfolio transactions with Bull & Bear Securities, Inc., an
affiliate of the Investment Manager, and may allocate brokerage transactions by
taking into account the sale of shares of the Fund and other affiliated
investment companies. The Investment Manager may also allocate portfolio
transactions to broker/dealers that remit a portion of their commissions as a
credit against the Fund's expenses. For its services, the Investment Manager
receives an investment management fee, payable monthly, based on the average
weekly net assets of the Fund, at the annual rate of 7/10 of 1% of the first
$250 million, 5/8 of 1% from $250 million to $500 million, and 1/2 of 1% over
$500 million. From time to time, the Investment Manager may reimburse all or
part of this fee to improve the Fund's yield and total return. The Investment
Manager provides certain administrative services to the Fund at cost. During the
fiscal year ended June 30, 1997, the investment management fees paid by the Fund
represented 0.70% of its average daily net assets. The Investment Manager is a
wholly owned subsidiary of Bull & Bear Group, Inc. ("Group"). Group, a publicly
owned company whose securities are listed and traded on the NASDAQ Stock Market,
is a New York based manager of mutual funds and discount brokerage services.
Bassett S. Winmill may be deemed a controlling person of Group and, therefore,
may be deemed a controlling person of the Investment Manager. The address of the
Investment Manager is 11 Hanover Square, New York, New York 10005.
The Fund's Portfolio Manager is Steven A. Landis. Mr. Landis has been
principally responsible for the Fund's portfolio investment decisions since
April 1995 and is also Senior Vice President and a member of the Investment
Policy Committee of the Investment Manager with overall responsibility for the
Bull & Bear fixed income funds. Mr. Landis was formerly Associate
Director - Proprietary Trading at Barclays De Zoete Wedd Securities Inc. from
1993 to 1995 and was Director, Bond Arbitrage at WG Trading Company from 1992
to 1993.
DIVIDEND REINVESTMENT PLAN
The Directors have adopted a Dividend Reinvestment Plan (the "Plan").
Under the Plan, each dividend and capital gain distribution, if any, declared by
the Fund on outstanding shares will, unless elected otherwise by each
shareholder by notifying the Fund in writing at any time prior to the record
date for a particular dividend or distribution, be paid on the payment date
fixed by
26
<PAGE>
the Directors in additional shares in accordance with the following: whenever
the Market Price (as defined below) per share is equal to or exceeds the net
asset value per share at the time shares are valued for the purpose of
determining the number of shares equivalent to the cash dividend or capital
distribution (the "Valuation Date"), participants will be issued additional
shares equal to the amount of such dividend by the Fund's net asset value per
share. Whenever the Market Price per share is less than such net asset value on
the Valuation Date, participants will be issued additional shares equal to the
amount of such dividend divided by the Market Price. The Valuation Date is the
dividend or distribution payment date or, if that date is not an American Stock
Exchange trading day, the next trading day. For all purposes of the Plan: (a)
the Market Price of the shares on a particular date shall be the average closing
market price on the five trading days the shares traded ex-dividend on the
Exchange prior to such date or, if no sale occurred on the Exchange prior to
such date, then the mean between the closing bid and asked quotations for the
shares on the Exchange on such date, and (b) net asset value per share on a
particular date shall be as determined by or on behalf of the Fund. Upon a
shareholder's request to receive a certificate for shares, a certificate will be
issued for such shares in whole share amounts and fractional share amounts will
be paid in cash. There are no sales or other charges in connection with the
reinvestment of dividends and capital gain distributions. There can be no
assurance that the Fund will pay any dividends or distribute any realized
capital gains.
Investors Fiduciary Trust Company (the "Transfer Agent") maintains all
shareholder accounts in the Plan and furnishes written confirmations of all
transactions in the account, including information needed by shareholders for
personal and tax records. Shares in the account of each Plan participant will be
held by the Transfer Agent in non-certificated form in the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan, unless otherwise requested by a shareholder.
In the case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Transfer Agent will
administer the Plan on the basis of the number of shares certified from time to
time by the shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who participate
in the Plan.
There is no charge to participants for reinvesting dividends or capital
gain distributions payable in either stock or cash. The Transfer Agent's fees
for handing the reinvestment of such dividends and capital gain distributions
are paid by the Fund. There are no brokerage charges with respect to shares
issued directly by the Fund as a result of dividends or capital gain
distributions payable in stock or in cash. However, each participant bears a pro
rata share of brokerage commissions incurred with respect to open market
purchases in connection with the reinvestment of dividends or capital gain
distributions. The automatic reinvestment of dividends and distributions will
not relieve participants of any income tax which may be payable on such
dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend or distribution paid subsequent to written notice of the
change sent to the members of the Plan at least 30 days before the record date
for such dividend or distribution. The Plan also may be amended or terminated by
the Transfer Agent on at least 30 days' written notice to participants in the
Plan. All correspondence concerning the Plan should be directed to the Transfer
Agent at P.O. Box 419507, Kansas City, MO 64141.
TAXES
The Fund has qualified and intends to continue to qualify as a
"regulated investment company" under Subchapter M of the Code. If the Fund
complies with certain income, asset diversification and distribution
requirements, the Fund will be relieved of federal income tax on that part of
its net investment income and realized capital gain which it distributes to its
shareholders.
To qualify as a regulated investment company, the Fund must meet
certain complex tests. The loss of such status would result in the Fund being
subject to federal income tax on its taxable income and gain without regard to
dividends and distributions paid to shareholders.
Dividends out of net investment income and distributions of net
realized short-term capital gain are taxable to the recipient shareholders as
ordinary income whether paid in cash or additional shares. In the case of
corporate shareholders, such dividends and distributions are unlikely to be
eligible for the 70% dividends received deduction, since the Fund does not
anticipate investing substantially in stocks of domestic corporations.
Distributions out of net capital gain (the excess of net long term capital gain
over net short term capital loss) of which shareholders will be notified are
taxable to the recipient as long-term capital gain (whether paid in cash or
additional shares and regardless of the recipient's holding period), taxable at
a maximum rate of 28% or 20% depending on the Fund's holding period for the
assets sold that generated such net capital gain. Distributions out of net
capital gain will not be eligible for the 70% corporate dividends received
deduction. Shareholders receiving distributions in the form of additional shares
will have a cost basis in each share received equal to the fair market value of
a share of the Fund on the distribu-
tion date.
Generally, dividends paid by the Fund are treated as received in the
taxable year in which the distribution is made. However, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in such month and actually paid
during January of the following year, will be treated as received by
shareholders on December 31 of the year in which declared.
27
<PAGE>
If the Fund has net capital gain, the Fund reserves the authority to
retain and not distribute all or part of such net capital gain in any year. If
an amount of net capital gain is not distributed, a shareholder must include in
taxable income as long-term capital gain his share of such amount. However, the
Fund will pay the taxes imposed on any such undistributed net capital gain and
such shareholder will receive a credit or refund for taxes on his share of such
amount. If, for any year, the total distributions exceed the Fund's current and
accumulated earnings and profits, the excess will generally be treated as a
tax-free return of capital (up to the amount of such shareholder's tax basis in
his shares). The amount treated as a tax-free return of capital will reduce the
shareholder's adjusted basis in his shares, thereby increasing his potential
gain (or decreasing his potential loss) on the sale of his shares. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gain, such distributions will decrease the Fund's total assets
and, therefore, will have the likely effect of increasing the Fund's expense
ratio.
Dividends and other distributions may also be subject to state, local or foreign
taxes.
The Fund will be required to backup withhold an amount equal to 31% of
a shareholder's dividend or distribution of net capital gain or the proceeds of
a redemption unless such shareholder furnishes the Fund with his taxpayer
identification number (a social security number in the case of an individual)
and certifies that the number is correct and that he has not been notified by
the Internal Revenue Service that he is subject to backup withholding.
In order to make distributions, the Fund may be required to sell a
portion of its investment portfolio at a time when independent investment
judgment might not dictate such action. Such sales, if they involve stocks and
securities held for less than three months, could also adversely affect the
Fund's status as a regulated investment company since, in order for the Fund to
qualify as a regulated investment company, for each taxable year, less than 30%
of the Fund's gross income must be derived from gain realized on the sale or
other disposition of stocks or securities held for less than three months. Under
recently enacted tax legislation, the requirement described in the preceding
sentence regarding stocks and securities held for less than three months will no
longer apply to the Fund for its tax years beginning after June 30, 1998.
A notice detailing the amounts and tax status of dividends and
distributions paid by the Fund, the amount of undistributed net capital gain (if
any) and the portions of the Fund's distributions of net capital gain (if any)
that are subject to the 28% and 20% maximum tax rates will be mailed annually to
the Fund's shareholders.
The sale of shares (including transfers in connection with a redemption
or repurchase of shares) will be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss and will be long-term if such shares have
been held for more than one year. In the case of non-corporate shareholders,
such long-term capital gain or loss will be taxed at a maximum rate of (i) 28%
if such shares were held for more than one year but not more than 18 months or
(ii) 20% if such shares were held for more than 18 months. Capital gains or
losses realized upon the sale of shares held for one year or less will be taxed
at ordinary income tax rates. Capital gains or losses recognized by corporate
shareholders are subject to tax at the ordinary income tax rates applicable to
corporations. Shareholders should consult their own tax advisors regarding the
availability and effect of a certain tax election to mark-to-market shares held
on January 1, 2001. A loss on the sale of Fund shares that were held for six
months or less will be treated as a long-term (rather than a short-term) capital
loss to the extent the selling shareholder received any distributions of net
capital gain attributable to those shares.
The foregoing is a general and abbreviated summary of the provisions of
the Code applicable to an investment in the Fund. Dividends and distributions
declared by the Fund may also be subject to state, local or foreign taxes. Prior
to investing in shares of the Fund, prospective shareholders are urged to
consult their tax advisors concerning the federal, state, local or foreign tax
consequences of such investment.
REPURCHASE OF SHARES
The Fund is a closed-end, management investment company and as such its
shareholders do not have the right to redeem their shares. The Fund may
repurchase its shares from time to time if and when the Fund deems such a
repurchase advisable, although the Fund does not currently intend to repurchase
shares and no assurance can be given that the Fund will decide to repurchase
shares in the future, or, if undertaken, that such repurchases will reduce any
market discount that may develop. Pursuant to the 1940 Act, the Fund may
repurchase shares on a securities exchange (provided that the Fund has informed
the shareholders within the preceding six months of its intention to repurchase
such shares) or as otherwise permitted in accordance with Rule 23c-1 under the
1940 Act. Under that Rule, certain conditions must be met regarding, among other
things, distribution of net income from the preceding fiscal year, identity of
the seller, price paid, brokerage commissions, prior notice to the shareholders
of an intention to purchase shares and purchasing in a manner and on a basis
which does not discriminate unfairly against the other shareholders through
their interest in the Fund. While the Fund does not currently intend to
repurchase shares, its officers and directors and the Investment Manager and its
affiliates may do so from time to time.
Shares repurchased by the Fund will constitute authorized and unissued
shares of the Fund available for reissuance. The Fund may incur debt to finance
share repurchase transactions. Any gain in the value of the investments of the
Fund during the term of the borrowing that exceeds the interest paid on the
amount borrowed would cause the net asset value of its shares to increase more
rapidly than in the absence of borrowing. Conversely, any decline in the value
of the investments of the Fund would cause
28
<PAGE>
the net asset value of the Shares to decrease more rapidly than in the absence
of borrowing. Borrowing money thus creates an opportunity for greater capital
gain at the risk of greater exposure to capital loss.
When the Fund repurchases its shares for a price below their net asset
value, the net asset value of those shares that remain outstanding will be
enhanced, but this does not necessarily mean that the market price of those
outstanding shares will be affected, either positively or negatively. Further,
interest on borrowings to finance share repurchase transactions will reduce the
net income of the Fund except to the extent the gross income attributed to such
shares exceeds the costs of such borrowings.
The Fund does not currently have an established tender offer program or
an established schedule for considering tender offers. No assurance can be given
that the Directors will decide to undertake any tender offers in the future, or
if undertaken, that a tender offer would affect the market price of the Fund's
shares.
CAPITAL STOCK
The Fund's Articles of Incorporation (the "Charter") were filed on
December 12, 1996. The Fund is authorized to issue up to twenty million
(20,000,000) shares ($.01 par value). The Directors can reclassify unissued
shares as preferred stock with such terms and conditions as determined by the
Directors. The following description relates to the issued and outstanding
shares of common stock of the Fund and is subject to the terms and conditions of
any such preferred stock, if and when issued. The Fund's stock is fully paid and
non-assessable. In case of dissolution or other liquidation of the Fund,
shareholders will be entitled to receive ratably per share the net assets of the
Fund. Shareholders vote for Directors with each share entitled to one vote. Each
share of common stock entitles the holder to one vote for all purposes. Shares
have no preemptive rights.
Anti-Takeover Provisions. The Fund presently has provisions in its
Charter and By-Laws (collectively, the "Governing Documents") which could have
the effect of limiting (i) the ability of other entities or persons to acquire
control of the Fund, (ii) the Fund's freedom to engage in certain transactions,
or (iii) the ability of the Fund's directors or shareholders to amend the
Governing Documents or effectuate changes in the Fund's management. These
provisions of the Governing Documents of the Fund may be regarded as
"anti-takeover" provisions. The Directors are divided into five classes, each
having a term of five years (except, to ensure that the term of a class of the
Fund's directors expires each year, the first class of the Fund's directors will
serve an initial one-year term and five-year terms thereafter, the second class
of its directors will serve an initial two-year term and five-year terms
thereafter, the third class will serve an initial three-year term and five-year
terms thereafter, and the fourth class will serve an initial four-year term and
five-year terms thereafter). Each year the term of one class of directors will
expire. Accordingly, only those directors in one class may be changed in any one
year, and it would require three years to change a majority of the Directors.
Such system of electing directors may have the effect of maintaining the
continuity of management and, thus, make it more difficult for the shareholders
of the Fund to change the majority of directors. A director of the Fund may be
removed only with cause by a vote of eighty percent (80%) of the shares then
entitled to vote for the election of directors. In addition, the affirmative
vote of the holders of 80% of the outstanding shares of the Fund is required to
authorize its conversion from a closed-end to an open-end investment company,
unless previously approved by a majority of the Continuing Directors (defined as
the initial Directors of the Fund and directors whose election is approved by a
majority of the Continuing Directors then on the Board), in which event such
conversion would require the affirmative vote of the holders of a majority of
the number of votes entitled to be cast thereon. In addition, the affirmative
vote of the holders of 80% of the outstanding shares of the Fund (other than
shares held by any interested stockholder or any affiliate thereof) is required
to authorize any business combination or certain issuance of securities and sale
or transfer of assets, unless approved by the vote of at least a majority of the
Continuing Directors, in which case the affirmative vote of the holders of at
least a majority of the votes entitled to be cast by holders of voting stock
(including votes of voting stock held by any interested stockholder or affiliate
thereof) is required. Reference is made to the Governing Documents, on file with
the SEC, for the full text of these provisions.
Except as otherwise provided in the Charter and notwithstanding any
other provision of the Maryland General Corporation Law to the contrary, any
action submitted to a vote by stockholders requires the affirmative vote of at
least 80% of the outstanding shares of all classes of voting stock, voting
together, in person or by proxy at a meeting at which a quorum is present,
unless such action is previously approved by the vote of a majority of the
Continuing Directors, in which case such action requires (A) if applicable, the
proportion of votes required by the 1940 Act, or (B) the lesser of (1) a
majority of all the votes entitled to be cast on the matter with the shares of
all classes of voting stock voting together, or (2) if such action may be taken
or authorized by a lesser proportion of votes under applicable law, such lesser
proportion. In the absence of action by the Continuing Directors to remove the
foregoing 80% requirement, such requirement would have the effect of making it
very difficult for stockholders to elect Directors or modify the composition of
the Board. The Fund has elected not to be governed by any provision of Section
3-602 of Subtitle 6 of the Maryland General Corporation Law relating to voting
requirements in certain business combinations.
The provisions of the Governing Documents described above could have
the effect of depriving owners of shares in the Fund of opportunities to sell
their shares at a premium over prevailing market prices, by discouraging a third
party from seeking to obtain control of the Fund in a tender offer or similar
transaction. The overall effect of these provisions is to render more difficult
the accomplishment of a merger or the assumption of control by a third party,
unless approved by the Directors.
29
<PAGE>
Set forth below is information with respect to the Common Stock as of
December 31, 1997:
Amount Held by Fund
Amount Authorized For Its Own Account Amount Outstanding
20,000,000 Shares 0 Shares 3,094,983
The number of shares outstanding as of December 31, 1997, adjusted to
give effect to the issuance of all the Shares pursuant to the Offer, including
up to 25% of the Shares available for issuance pursuant to the Over-Subscription
Privilege, would be 5,065,568.
The Fund's shares are listed and traded on the American Stock Exchange.
The average weekly trading volume of the Common Stock on the American Stock
Exchange from February 7, 1997 through December 31, 1997 was 29,811 shares. The
following table sets forth for the quarters indicated the high and low sales
prices on the American Stock Exchange per share of Common Stock and the net
asset value and the premium or discount from net asset value at which the Common
Stock was trading, expressed as a percentage of net asset value, at each of the
high and low sales prices provided.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarterly
Trading
Volume Premium (Discount)
Quarter Ended Market Price (thousands) Net Asset Value to Net Asset Value(%)
-------------------------- -------------------- --------------------------
High Low High Low High Low
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1997 $83/8 $67/8 295 $8.32 $8.36 0.7% (17.8)%
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, 1997 91/16 6 3/4 520 8.43 8.22 7.5% (17.9)%
- ----------------------------------------------------------------------------------------------------------------------------------
September 30, 1997 9 1/4 83/16 321 8.41 8.39 10.0% (2.4)%
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 9 1/4 7 1/2 265 8.52 7.83 8.6% (4.2)%
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 1998 89/16 713/16 327 7.89 7.82 8.5% (0.1)%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The last reported net asset value per share of Common Stock at the
close of business on April 24, 1998 (the last trading date on which the Fund
publicly reported its net asset value prior to the announcement of the Offer)
and May 1, 1998 (the last trading date on which the Fund publicly reported its
net asset value prior to the date of this Prospectus) was $7.85 and $7.86,
respectively, and the last reported sale price of a share of the Fund's Common
Stock on that exchange on those dates was $8.00 and $8.1875, respectively.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company, P.O. Box 419507, Kansas City, MO
64141, acts as custodian of the Fund's assets, performs certain accounting
services for the Fund, and acts as the Fund's transfer and dividend disbursing
agent.
DISTRIBUTION ARRANGEMENTS
First Albany Corporation, located at 53 State Street, Boston,
Massachusetts 02109, will act as Dealer Manager for the Offer. Under the terms
and subject to the conditions contained in a Dealer Manager Agreement, the
Dealer Manager will provide financial advisory services and marketing assistance
in connection with the Offer and will solicit the exercise of Rights by Record
Date Shareholders. The Offer is not contingent upon any number of Rights being
exercised. The Fund has agreed to pay the Dealer Manager a fee for financial
advisory and marketing services equal to 1.625% of the Subscription Price per
Share for shares issued upon exercise of the Rights and the Over-Subscription
Privilege and to pay broker-dealers, including the Dealer Manager, fees for
their soliciting efforts ("Soliciting Fees") of 2.375% of the Subscription Price
per Share for each Share issued upon exercise of the Rights and the
Over-Subscription Privilege. Soliciting Fees will be paid to the broker-dealer
designated on the applicable portion of the Subscription Certificates, or if no
broker-dealer is so designated, to the Dealer Manager.
The Fund has also agreed to reimburse the Dealer Manager up to $100,000
for its reasonable expenses incurred in connection with the Offer. The Fund has
agreed to indemnify the Dealer Manager or to contribute for losses arising out
of certain liabilities including liabilities under the Securities Act. The
Dealer Manager Agreement also provides that the Dealer Manager will not be
subject to any liability to the Fund in rendering the services contemplated by
the Agreement except in instances involving the bad faith, willful misfeasance,
or gross negligence of the Dealer Manager or the reckless disregard by the
Dealer Manager of its obligations and duties under the Agreement.
The Fund has agreed, subject to certain exceptions, not to offer or
sell, or enter into any agreement to sell, any equity or equity related
securities of the Fund or securities convertible into such securities for a
period of 180 days after the date of the Dealer Manager Agreement without the
prior consent of the Dealer Manager.
30
<PAGE>
LEGAL MATTERS
With respect to matters of United States law, the validity of the
shares offered hereby will be passed on for the Fund by Skadden, Arps, Slate,
Meagher & Flom LLP and its affiliated entities. Certain legal matters will be
passed on for the Dealer Manager by Rogers & Wells LLP, New York, New York.
EXPERTS
The financial statements of the Fund as of June 30, 1997 have been
incorporated by reference from the Annual Report of the Fund for the fiscal year
ended June 30, 1997, which Annual Report is available without charge by calling
the Fund at the number on the cover page of this Prospectus. Such financial
statements have been prepared in reliance on the report of Tait, Weller & Baker,
independent accountants, given on the authority of that firm as experts in
accounting and auditing. Tait, Weller & Baker is located at Eight Penn Center,
Suite 800, Philadelphia, PA 19103-2108.
FURTHER INFORMATION
Further information concerning these securities and their issuer may be
found in the Registration Statement of which this Prospectus constitutes a part
on file with the Securities and Exchange Commission. The Commission maintains a
World Wide Web site on the Internet at http://www.sec.gov that contains the
Prospectus, material incorporated by reference and other information regarding
registrants, such as the Fund, that file electronically with the Commission.
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
Page
THE FUND'S INVESTMENT PROGRAM................................................2
INVESTMENT RESTRICTIONS......................................................9
OFFICERS AND DIRECTORS......................................................10
THE INVESTMENT MANAGER......................................................13
INVESTMENT MANAGEMENT AGREEMENT.............................................13
DETERMINATION OF NET ASSET VALUE............................................14
ALLOCATION OF BROKERAGE.....................................................14
TAXES.......................................................................15
REPORTS TO SHAREHOLDERS.....................................................17
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT...........................17
AUDITORS....................................................................17
FINANCIAL STATEMENTS........................................................18
APPENDIX A - DESCRIPTION OF BOND RATINGS...................................A-1
31
<PAGE>
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No dealer, salesperson, or other person has been authorized to give any
information or to make any representation not contained in this prospectus. If
given or made, such informa tion or representation must not be relied upon as
having been authorized by the Fund, the Fund's Investment Manager or the Dealer
Manager. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the shares of common
stock offered by this Prospectus, nor does it constitute an offer to sell or the
solicitation of an offer to buy shares of common stock by anyone in any
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the facts
as set forth in the Prospectus or in the affairs of the Fund since the date
hereof. However, if any material change occurs while this Prospectus is required
by law to be deliv ered, this Prospectus will be amended or supplemented
accordingly.
---------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
Prospectus Summary ............................................................3
Fee Table......................................................................9
Financial Highlights..........................................................10
The Offer.....................................................................11
The Fund......................................................................17
Use of Proceeds...............................................................18
Risk Factors and Special Considerations.......................................18
The Fund's Investment Program.................................................22
The Investment Manager........................................................26
Dividend Reinvestment Plan....................................................26
Taxes.........................................................................27
Repurchase of Shares..........................................................28
Capital Stock.................................................................29
Custodian, Transfer Agent and
Dividend Disbursing Agent...................................................30
Distribution Arrangements.....................................................30
Legal Matters.................................................................31
Experts.......................................................................31
Further Information...........................................................31
Table of Contents of Statement
of Additional Information...................................................31
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- -------------------------------------------------------------------------------
BULL & BEAR
GLOBAL
INCOME
FUND, INC.
<PAGE>
---------------------------
1,576,468 SHARES OF
COMMON STOCK ISSUABLE UPON
EXERCISE OF RIGHTS TO SUBSCRIBE
TO SUCH SHARES
PROSPECTUS
May 6, 1998
---------------------------
FIRST ALBANY CORPORATION
- ------------------------------------------------------------------------------
<PAGE>
BULL & BEAR GLOBAL INCOME FUND, INC.
11 Hanover Square
New York, NY 10005
Toll-free 1-800-847-4200
STATEMENT OF ADDITIONAL INFORMATION
dated May 6, 1998
Bull & Bear Global Income Fund, Inc. (the "Fund") is a diversified,
closed-end management investment company organized as a Maryland corporation.
Until February 7, 1997, the Fund was a diversified series of shares of Bull &
Bear Funds II, Inc. (the "Corporation"), an open-end management investment
company organized in 1974 as a Maryland corporation. Prior to October 29, 1993,
the Corporation operated under the name Bull & Bear Incorporated. This Statement
of Additional Information regarding the Fund is not a prospectus and should be
read in conjunction with the Fund's prospectus dated May 6, 1998. The prospectus
is available without charge upon written request to the Fund at 11 Hanover
Square, New York, NY 10005, or by calling toll-free at 1-800-847-4200.
TABLE OF CONTENTS
THE FUND'S INVESTMENT PROGRAM...............................................2
INVESTMENT RESTRICTIONS.....................................................9
OFFICERS AND DIRECTORS.....................................................10
THE INVESTMENT MANAGER.....................................................13
INVESTMENT MANAGEMENT AGREEMENT............................................13
DETERMINATION OF NET ASSET VALUE...........................................14
ALLOCATION OF BROKERAGE....................................................14
TAXES ..................................................................15
REPORTS TO SHAREHOLDERS....................................................17
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT..........................17
AUDITORS ..................................................................17
FINANCIAL STATEMENTS.......................................................18
DESCRIPTIONS OF BOND RATINGS..............................................A-1
1
<PAGE>
THE FUND'S INVESTMENT PROGRAM
The following information supplements the information concerning the
investment objectives, policies and limitations of the Fund found in the
prospectus.
LOAN PARTICIPATIONS
The Fund may invest in loan participations in which the Fund purchases
from a lender a portion of a larger loan to a U.S. or foreign private or
governmental entity. The Fund receives a portion of the amount due the lender,
except for any servicing fees received by the lender. Investing in loan
participations may enable the Fund to obtain undivided interests in loans that
Bull & Bear Advisers, Inc. (the "Investment Manager") considers attractive, but
which would not be available to the Fund otherwise. Although normally available
without recourse to the lender, such loans may be backed by a letter of credit
and may include the right to demand accelerated payment of principal and
interest. Loan participations may be subject to credit risks of the borrower,
the lender or both. Loans to foreign borrowers may involve risks not typically
associated with domestic investments. The Fund has no current intention to
engage in loan participations in excess of 5% of total net assets of the Fund.
COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized Mortgage Obligations ("CMOs") are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. The CMOs
in which the Fund invests are collateralized by GNMA certificates or other
government mortgage-backed securities (such collateral are called mortgage
assets). Multi-class pass-through securities are interests in trusts that are
comprised of mortgage assets and that have multiple classes similar to those in
CMOs. Unless the context indicates otherwise, references herein to CMOs include
multi-class pass-through securities. Payments of principal and interest on the
mortgage assets, and any reinvestment income thereon, provide the means to pay
debt service on the CMOs or to make scheduled distributions on the multi-class
pass-through securities. Principal prepayments on the mortgage assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final distribution dates. Rising interest rates may cause prepayments to occur
at a slower than expected rate, which is known as "extension risk". Extension
risk may effectively change a security which was considered short or
intermediate term at the time of purchase into a long term security. Long term
securities generally fluctuate more widely in response to changes in interest
rates than short or intermediate term securities.
SHORT SALES
The Fund may engage in short sales if it owns or, by virtue of its
ownership of other securities, has the right to obtain securities equivalent in
kind or amount. This investment technique is known as a short sale "against the
box." In a short sale, the Fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. The
Fund will not dispose of the securities underlying a short sale while a short
sale is outstanding. The Fund intends to engage in short sales against the box
for hedging purposes. The Investment Manager expects that the Fund will engage
in short sales against the box as a hedge when the Investment Manager believes
that the price of a security may decline. The Investment Manager currently
anticipates that no more than 5% of the Fund's total assets would be involved in
short sales against the box.
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES
Regulation of the Use of Options, Futures and Forward Currency Contract
Strategies. As discussed in the prospectus, the Investment Manager may engage in
certain options strategies to attempt to enhance return or for hedging purposes.
The Investment Manager also may use securities index futures contracts, interest
rate futures contracts, foreign currency futures contracts (collectively,
"futures contracts" or "futures"), options on futures contracts and forward
currency contracts for hedging purposes or in other circumstances permitted by
the Commodity Futures Trading Commission ("CFTC"). Certain special
characteristics of and risks associated with using these instruments are
discussed below. In addition to the investment guidelines (described below)
adopted by the Fund to govern investment in these instruments, use of options,
forward currency contracts and futures by the Fund is subject to the applicable
regulations of the Securities and Exchange Commission ("SEC"), the several
options and futures exchanges upon which such instruments may be traded, the
CFTC and the various state regulatory authorities.
In addition to the products, strategies and risks described below and
in the prospectus, the Investment Manager expects to discover additional
opportunities in connection with options, futures and forward currency
contracts. These new opportunities may become available as the Investment
Manager develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new options, futures and forward currency
contracts are developed. The Investment Manager may utilize these opportunities
to the extent they are consistent with the Fund's investment objective,
permitted by the Fund's investment limitations and permitted by the applicable
regulatory authorities. The Fund's registration statement will be supplemented
to the extent that new products and strategies involve materially different
risks than those described below and in the prospectus.
2
<PAGE>
Cover for Options, Futures and Forward Currency Contract Strategies.
The Fund will not use leverage in its options, futures and forward currency
contract strategies. Accordingly, the Fund will comply with guidelines
established by the SEC with respect to these strategies and will, when required,
either (1) set aside cash or liquid assets in a segregated account with its
custodian in the prescribed amount, or (2) hold securities, currencies or other
options or futures contracts whose values are expected to offset ("cover") its
obligations thereunder. Securities, currencies or other options or futures
contracts used for cover and securities held in a segregated account cannot be
sold or closed out while the strategy is outstanding, unless they are replaced
with similar assets. As a result, there is a possibility that the use of cover
or segregation involving a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Option Income and Hedging Strategies. The Fund may purchase and write
(sell) both exchange-traded options and options traded on the over-the-counter
("OTC") market. Currently, options on debt securities are primarily traded on
the OTC market. Although many options on currencies are exchange-traded, the
majority of such options currently are traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed, which, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities or currencies underlying the option. Failure by the
dealer to do so would result in the loss of any premium paid by the Fund as well
as the loss of the expected benefit of the transaction.
The Fund may purchase call options on securities (both equity and debt)
that the Investment Manager intends to include in the Fund's portfolio in order
to fix the cost of a future purchase. Call options also may be used as a means
of enhancing returns by, for example, participating in an anticipated price
increase of a security. In the event of a decline in the price of the underlying
security, use of this strategy would serve to limit the potential loss to the
Fund to the option premium paid; conversely, if the market price of the
underlying security increases above the exercise price and the Fund either sells
or exercises the option, any profit eventually realized would be reduced by the
premium paid.
The Fund may purchase put options on securities in order to hedge
against a decline in the market value of securities held in its portfolio or to
attempt to enhance return. The put option enables the Fund to sell the
underlying security at the predetermined exercise price; thus, the potential for
loss to the Fund below the exercise price is limited to the option premium paid.
If the market price of the underlying security is higher than the exercise price
of the put option, any profit the Fund realizes on the sale of the security
would be reduced by the premium paid for the put option less any amount for
which the put option may be sold.
The Fund may on certain occasions wish to hedge against a decline in
the market value of securities held in its portfolio at a time when put options
on those particular securities are not available for purchase. The Fund may
therefore purchase a put option on other carefully selected securities, the
values of which historically have a high degree of positive correlation to the
value of such portfolio securities. If the Investment Manager's judgment is
correct, changes in the value of the put options should generally offset changes
in the value of the portfolio securities being hedged. However, the correlation
between the two values may not be as close in these transactions as in
transactions in which the Fund purchases a put option on a security held in its
portfolio. If the Investment Manager's judgment is not correct, the value of the
securities underlying the put option may decrease less than the value of the
Fund's portfolio securities and therefore the put option may not provide
complete protection against a decline in the value of the Fund's portfolio
securities below the level sought to be protected by the put option.
The Fund may write covered call options on securities in which it is
authorized to invest for hedging or to increase return in the form of premiums
received from the purchasers of the options. A call option gives the purchaser
of the option the right to buy, and the writer (seller) the obligation to sell,
the underlying security at the exercise price during or at the end of the option
period. The strategy may be used to provide limited protection against a
decrease in the market price of the security, in an amount equal to the premium
received for writing the call option less any transaction costs. Thus, if the
market price of the underlying security held by the Fund declines, the amount of
such decline will be offset wholly or in part by the amount of the premium
received by the Fund. If, however, there is an increase in the market price of
the underlying security to a level in excess of the option's exercise price, and
the option is exercised, the Fund would be obligated to sell the security at
less than its market value. In addition, the Fund could lose the ability to
participate in an increase in the value of such securities above the exercise
price of the call option because such an increase would likely be offset by an
increase in the cost of closing out the call option (or could be negated if the
buyer chose to exercise the call option at an exercise price below the current
market value).
The Fund generally would give up the ability to sell any portfolio
securities used to cover the call option while the call option was outstanding.
The Fund also may write covered put options on securities in which it
is authorized to invest. A put option gives the purchaser of the option the
right to sell, and the writer (seller) the obligation to buy, the underlying
security at the exercise price during the option period. So long as the
obligation of the writer continues, the writer may be assigned an exercise
notice by the broker/dealer through whom such option was sold, requiring it to
make payment of the exercise price against delivery of the underlying security.
The operation of put
3
<PAGE>
options in other respects, including their related risks and rewards, is
substantially identical to that of call options. If the put option is not
exercised, the Fund will realize income in the amount of the premium received.
This technique could be used to enhance current return during periods of market
uncertainty. The risk in such a transaction would be that the market price of
the underlying security would decline below the exercise price less the premiums
received, in which case the Fund would expect to suffer a loss.
The Fund may purchase put and call options and write covered put and
call options on securities indexes in much the same manner as the more
traditional securities options discussed above, except that index options may
serve as a hedge against overall fluctuations in the securities markets (or a
market sector) rather than anticipated increases or decreases in the value of a
particular security. A securities index assigns values to the securities
included in the index and fluctuates with changes in such values. Settlements of
securities index options are effected with cash payments and do not involve
delivery of securities. Thus, upon settlement of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the index. The
effectiveness of hedging techniques using securities index options will depend
on the extent to which price movements in the securities index selected
correlate with price movements of the securities in which the Fund invests.
The Fund may purchase and write covered straddles on securities
indexes. A long straddle is a combination of a call and a put purchased on the
same security where the exercise price of the put is less than or equal to the
exercise price on the call. The Fund would enter into a long straddle when the
Investment Manager believes that it is likely that securities prices will be
more volatile during the term of the options than is implied by the option
pricing. A short straddle is a combination of a call and a put written on the
same security where the exercise price on the put is less than or equal to the
exercise price of the call where the same issue of the security is considered
"cover" for both the put and the call. The Fund would enter into a short
straddle when the Investment Manager believes that it is unlikely that
securities prices will be as volatile during the term of the options as is
implied by the option pricing. In such case, the Fund will set aside cash or
liquid assets in a segregated account with its custodian equivalent in value to
the amount, if any, by which the put is "in-the-money," that is, that amount by
which the exercise price of the put exceeds the current market value of the
underlying security.
Foreign Currency Options and Related Risks. The Fund may take positions
in options on foreign currencies to hedge against the risk of foreign exchange
rate fluctuations on foreign securities that the Fund holds in its portfolio or
that it intends to purchase. For example, if the Fund enters into a contract to
purchase securities denominated in a foreign currency, it could effectively fix
the maximum U.S. dollar cost of the securities by purchasing call options on
that foreign currency. Similarly, if the Fund held securities denominated in a
foreign currency and anticipated a decline in the value of that currency against
the U.S. dollar, the Fund could hedge against such a decline by purchasing a put
option on the currency involved. The Fund's ability to establish and close out
positions in such options is subject to the maintenance of a liquid secondary
market. Although many options on foreign currencies are exchange-traded, the
majority are traded on the OTC market. The Fund will not purchase or write such
options unless, in the Investment Manager's opinion, the market for them is
sufficiently liquid to ensure that the risks in connection with such options are
not greater than the risks in connection with the underlying currency. In
addition, options on foreign currencies are affected by all of those factors
that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers and other market resources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (that is, less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock market.
To the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets
until they reopen.
Special Characteristics and Risks of Options Trading. The Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If the Fund wishes to terminate its obligation to purchase
or sell securities or currencies under a put or a call option it has written,
the Fund may purchase a put or a call option of the same series (that is, an
option identical in its terms to the option previously written); this is known
as a closing purchase transaction. Conversely, in order to terminate its right
to purchase or sell specified securities or currencies under a call or put
option it has purchased, the Fund may sell an option of the same series as the
option held; this is known as a closing sale transaction. Closing transactions
essentially permit the Fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option.
4
<PAGE>
In considering the use of options to enhance returns or to hedge the
Fund's portfolio, particular note should be taken of the following:
(a) The value of an option position will reflect, among other things,
the current market price of the underlying security, securities index or
currency, the time remaining until expiration, the relationship of the exercise
price to the market price, the historical price volatility of the underlying
security, securities index or currency and general market conditions. For this
reason, the successful use of options depends upon the Investment Manager's
ability to forecast the direction of price fluctuations in the underlying
securities or currency markets or, in the case of securities index options,
fluctuations in the market sector represented by the selected index.
(b) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the current market
value of the underlying security, securities index or currency. Purchased
options that expire unexercised have no value. Unless an option purchased by the
Fund is exercised or unless a closing transaction is effected with respect to
that position, the Fund will realize a loss in the amount of the premium paid
and any transaction costs.
(c) A position in an exchange-listed option may be closed out only on
an exchange that provides a secondary market for identical options. Most
exchange-listed options relate to stocks. Although the Fund intends to purchase
or write only those exchange-traded options for which there appears to be a
liquid secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any particular time. Closing
transactions may be effected with respect to options traded in the OTC markets
(currently the primary markets for options on debt securities and a significant
market for foreign currencies) only by negotiating directly with the other party
to the option contract or in a secondary market for the option if such market
exists. Although the Fund will enter into OTC options with dealers that agree to
enter into, and that are expected to be capable of entering into, closing
transactions with the Fund, there can be no assurance that the Fund would be
able to liquidate an OTC option at a favorable price at any time prior to
expiration. In the event of insolvency of the contra-party, the Fund may be
unable to liquidate an OTC option. Accordingly, it may not be possible to effect
closing transactions with respect to certain options, which would result in the
Fund having to exercise those options that it has purchased in order to realize
any profit. With respect to options written by the Fund, the inability to enter
into a closing transaction may result in material losses to the Fund. For
example, because the Fund must maintain a covered position with respect to any
call option it writes on a security, currency or securities index, the Fund may
not sell the underlying securities or currency (or invest any cash or securities
used to cover the option) during the period it is obligated under such option.
This requirement may impair the Fund's ability to sell a portfolio security or
make an investment at a time when such a sale or investment might be
advantageous.
(d) Securities index options are settled exclusively in cash. If the
Fund writes a call option on an index, the Fund will not know in advance the
difference, if any, between the closing value of the index on the exercise date
and the exercise price of the call option itself and thus will not know the
amount of cash payable upon settlement. In addition, a holder of a securities
index option who exercises it before the closing index value for that day is
available, runs the risk that the level of the underlying index may subsequently
change.
(e) The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs and taxes; however, the
Fund also may save on commissions by using options as a hedge rather than buying
or selling individual securities in anticipation or as a result of market
movements.
Futures and Related Options Strategies. The Fund may engage in futures
strategies for hedging purposes to attempt to reduce the overall investment risk
that would normally be expected to be associated with ownership of the
securities in which it invests. This may involve, among other things, using
futures strategies to manage the effective duration of the Fund. If the
Investment Manager wishes to shorten the effective duration of the Fund, the
Fund may sell a futures contract or a call option thereon, or purchase a put
option on that futures contract. If the Investment Manager wishes to lengthen
the effective duration of the Fund, the Fund may buy a futures contract or a
call option thereon, or sell a put option.
The Fund may use interest rate futures contracts and options thereon to
hedge its portfolio against changes in the general level of interest rates and
in other circumstances permitted by the CFTC. The Fund may purchase an interest
rate futures contract when it intends to purchase debt securities but has not
yet done so. This strategy may minimize the effect of all or part of an increase
in the market price of the debt security that the Fund intends to purchase in
the future. A rise in the price of the debt security prior to its purchase may
either be offset by an increase in the value of the futures contract purchased
by the Fund or avoided by taking delivery of the debt securities under the
futures contract. Conversely, a fall in the market price of the underlying debt
security may result in a corresponding decrease in the value of the futures
position. The Fund may sell an interest rate futures contract in order to
continue to receive the income from a debt security, while endeavoring to avoid
part or all of the decline in market value of that security that would accompany
an increase in interest rates.
The Fund may purchase a call option on an interest rate futures
contract to hedge against a market advance in debt securities that the Fund
plans to acquire at a future date. The purchase of a call option on an interest
rate futures contract is analogous to the purchase of a call option on an
individual debt security, which can be used as a temporary substitute for a
position in the security itself. The Fund also may write covered put options on
interest rate futures contracts as a partial anticipatory hedge and may write
covered call options on
5
<PAGE>
interest rate futures contracts as a partial hedge against a decline in the
price of debt securities held in the Fund's portfolio. The Fund may also
purchase put options on interest rate futures contracts in order to hedge
against a decline in the value of debt securities held in the Fund's portfolio.
The Fund may sell securities index futures contracts in anticipation of
a general market or market sector decline that could adversely affect the market
value of the Fund's portfolio. To the extent that a portion of the Fund's
portfolio correlates with a given index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus provide
an alternative to the liquidation of securities positions. For example, if the
Fund correctly anticipates a general market decline and sells securities index
futures to hedge against this risk, the gain in the futures position should
offset some or all of the decline in the value of the portfolio. The Fund may
purchase securities index futures contracts if a market or market sector advance
is anticipated. Such a purchase of a futures contract would serve as a temporary
substitute for the purchase of individual securities, which securities may then
be purchased in an orderly fashion. This strategy may minimize the effect of all
or part of an increase in the market price of securities that the Fund intends
to purchase. A rise in the price of the securities should be in part or wholly
offset by gains in the futures position.
As in the case of a purchase of a securities index futures contract,
the Fund may purchase a call option on a securities index futures contract to
hedge against a market advance in securities that the Fund plans to acquire at a
future date. The Fund may write covered put options on securities index futures
as a partial anticipatory hedge and may write covered call options on securities
index futures as a partial hedge against a decline in the prices of securities
held in the Fund's portfolio. This is analogous to writing covered call options
on securities. The Fund also may purchase put options on securities index
futures contracts. The purchase of put options on securities index futures
contracts is analogous to the purchase of protective put options on individual
securities where a level of protection is sought below which no additional
economic loss would be incurred by the Fund.
The Fund may sell foreign currency futures contracts to hedge against
possible variations in the exchange rate of foreign currencies in relation to
the U.S. dollar. In addition, the Fund may sell foreign currency futures
contracts when the Investment Manager anticipates a general weakening of the
foreign currency exchange rate that could adversely affect the market value of
the Fund's foreign securities holdings or interest payments to be received in
that foreign currency. In this case, the sale of futures contracts on the
underlying currency may reduce the risk to the Fund of a reduction in market
value caused by foreign currency exchange rate variations and, by so doing,
provide an alternative to the liquidation of securities positions and resulting
transaction costs. When the Investment Manager anticipates a significant foreign
exchange rate increase while intending to invest in a security denominated in
that currency, the Fund may purchase a foreign currency futures contract to
hedge against the increased rates pending completion of the anticipated
transaction. Such a purchase would serve as a temporary measure to protect the
Fund against any rise in the foreign currency exchange rate that may add
additional costs to acquiring the foreign security position. The Fund may also
purchase call or put options on foreign currency futures contracts to obtain a
fixed foreign currency exchange rate at limited risk. The Fund may purchase a
call option on a foreign currency futures contract to hedge against a rise in
the foreign currency exchange rate while intending to invest in a security
denominated in that currency. The Fund may purchase put options on foreign
currency futures contracts as a hedge against a decline in the foreign currency
exchange rates or the value of its foreign portfolio securities. The Fund may
write a covered put option on a foreign currency futures contract as a partial
anticipatory hedge and may write a covered call option on a foreign currency
futures contract as a partial hedge against the effects of declining foreign
currency exchange rates on the value of foreign securities.
The Fund may also write put options on interest rate, securities index
or foreign currency futures contracts while, at the same time, purchasing call
options on the same interest rate, securities index or foreign currency futures
contract in order to synthetically create an interest rate, securities index or
foreign currency futures contract. The options will have the same strike prices
and expiration dates. The Fund will only engage in this strategy when it is more
advantageous to the Fund to do so as compared to purchasing the futures
contract.
The Fund may also purchase and write covered straddles on interest rate
or securities index futures contracts. A long straddle is a combination of a
call and a put purchased on the same security at the same exercise price. The
Fund would enter into a long straddle when it believes that it is likely that
securities prices will be more volatile during the term of the options than is
implied by the option pricing. A short straddle is a combination of a call and
put written on the same futures contract at the same exercise price where the
same security or futures contract is considered "cover" for both the put and the
call. The Fund would enter into a short straddle when it believes that it is
unlikely that securities prices will be as volatile during the term of the
options as is implied by the option pricing. In such case, the Fund will set
aside cash or liquid assets in a segregated account with its custodian equal in
value to the amount, if any, by which the put is "in-the-money," that is the
amount by which the exercise price of the put exceeds the current market value
of the underlying security.
Special Characteristics and Risks of Futures and Related Options
Trading. No price is paid upon entering into a futures contract. Instead, upon
entering into a futures contract, the Fund is required to deposit with its
custodian in a segregated account in the name of the futures broker through whom
the transaction is effected an amount of cash or certain liquid securities whose
value is marked to the market daily generally equal to 10% or less of the
contract value. This amount is known as "initial margin." When writing a call or
a put option on a futures contract, margin also must be deposited in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin on futures contracts does not involve borrowing to finance the
futures transactions. Rather, initial margin on futures contracts is in the
nature of a performance bond or good-faith deposit on the contract that is
returned to the Fund upon termination
6
<PAGE>
of the transaction, assuming all obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment. Additionally,
initial margin requirements may be increased generally in the future by
regulatory action. Subsequent payments, called "variation margin," to and from
the broker, are made on a daily basis as the value of the futures or options
position varies, a process known as "marking to the market." For example, when
the Fund purchases a contract and the value of the contract rises, the Fund
receives from the broker a variation margin payment equal to that increase in
value. Conversely, if the value of the futures position declines, the Fund is
required to make a variation margin payment to the broker equal to the decline
in value. Variation margin does not involve borrowing to finance the futures
transaction but rather represents a daily settlement of the Fund's obligations
to or from a clearing organization.
Buyers and sellers of futures positions and options thereon can enter
into offsetting closing transactions, similar to closing transactions on options
on securities, by selling or purchasing an offsetting contract or option.
Futures contracts or options thereon may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts or options.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or related option may
vary either up or down from the previous day's settlement price. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit. The daily limit governs only price movements
during a particular trading day and therefore does not limit potential losses,
because prices could move to the daily limit for several consecutive trading
days with little or no trading and thereby prevent prompt liquidation of
unfavorable positions. In such event, it may not be possible for the Fund to
close a position and, in the event of adverse price movements, the Fund would
have to make daily cash payments of variation margin (except in the case of
purchased options). However, if futures contracts have been used to hedge
portfolio securities, such securities will not be sold until the contracts can
be terminated. In such circumstances, an increase in the price of the
securities, if any, may partially or completely offset losses on the futures
contract. However, there is no guarantee that the price of the securities will,
in fact, correlate with the price movements in the contracts and thus provide an
offset to losses on the contracts.
In considering the Fund's use of futures contracts and related options,
particular note should be taken of the following: (1) Successful use by the Fund
of futures contracts and related options will depend upon the Investment
Manager's ability to predict movements in the direction of the overall
securities, currencies and interest rate markets, which requires different
skills and techniques than predicting changes in the prices of individual
securities. Moreover, futures contracts relate not only to the current price
level of the underlying instrument or currency but also to the anticipated price
levels at some point in the future. There is, in addition, the risk that the
movements in the price of the futures contract will not correlate with the
movements in the prices of the securities or currencies being hedged. For
example, if the price of the securities index futures contract moves less than
the price of the securities that are the subject of the hedge, the hedge will
not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, the advantage may be partially offset by losses
in the futures position. In addition, if the Fund has insufficient cash, it may
have to sell assets from its portfolio to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices that
reflect a rising market. Consequently, the Fund may need to sell assets at a
time when such sales are disadvantageous to the Fund. If the price of the
futures contract moves more than the price of the underlying securities, the
Fund will experience either a loss or a gain on the futures contract that may or
may not be completely offset by movements in the price of the securities that
are the subject of the hedge.
(2) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
or futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. As a result, a correct forecast of general market trends may
not result in successful hedging through the use of futures contracts over the
short term. In addition, activities of large traders in both the futures and
securities markets involving arbitrage and other investment strategies may
result in temporary price distortions.
(3) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures
contracts. Although the Fund intends to purchase and sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract at any particular time. In
such event, it may not be possible to close a futures positions, and in the
event of adverse price movements, the Fund would continue to be required to make
variation margin payments.
(4) Like options on securities and currencies, options on futures
contracts have limited life. The ability to establish and close
7
<PAGE>
out options on futures will be subject to the development and maintenance of
liquid secondary markets on the relevant exchanges or boards of trade. There can
be no certainty that such markets for all options on futures contracts will
develop.
(5) Purchasers of options on futures contracts pay a premium at the
time of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on futures contracts, however, must post initial margin and
are subject to additional margin calls that could be substantial in the event of
adverse price movements. In addition, although the maximum amount at risk when
the Fund purchases an option is the premium paid for the option and the
transaction costs, there may be circumstances when the purchase of an option on
a futures contract would result in a loss to the Fund when the use of a futures
contract would not, such as when there is no movement in the level of the
underlying securities index value or the securities or currencies being hedged.
(6) As is the case with options, the Fund's activities in the futures
markets may result in a higher portfolio turnover rate and additional
transaction costs in the form of added brokerage commissions and taxes; however,
the Fund also may save on commissions by using futures contracts or options
thereon as a hedge rather than buying or selling individual securities or
currencies in anticipation or as a result of market movements.
Special Risks Related to Foreign Currency Futures Contracts and Related
Options. Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described above.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. Compared to
the purchase or sale of foreign currency futures contracts, the purchase of call
or put options thereon involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the option (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a foreign currency futures contract would result in a loss, such as
when there is no movement in the price of the underlying currency or futures
contract, when the purchase of the underlying futures contract would not.
Forward Currency Contracts. The Fund may use forward currency contracts
to protect against uncertainty in the level of future
foreign currency exchange rates.
The Fund may enter into forward currency contracts with respect to
specific transactions. For example, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or the Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds or anticipates purchasing, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such payment, as the case may be, by entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars or foreign currency, of the
amount of foreign currency involved in the underlying transaction. The Fund will
thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the payment is declared, and the date on which such payments are made or
received.
The Fund also may hedge by using forward currency contracts in
connection with portfolio positions to lock in the U.S. dollar value of those
positions, to increase the Fund's exposure to foreign currencies that the
Investment Manager believes may rise in value relative to the U.S. dollar, or to
shift the Fund's exposure to foreign currency fluctuations from one country to
another. For example, when the Investment Manager believes that the currency of
a particular foreign country may suffer a substantial decline relative to the
U.S. dollar or another currency, it may enter into a forward contract to sell
the amount of the former foreign currency approximating the value of some of all
of the Fund's portfolio securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used. See "Distributions and Taxes."
The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (that is, cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
the market value of the security exceeds the amount of foreign currency the Fund
is obligated to deliver. The projection of short term currency market movements
is extremely difficult and the successful execution of a short term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Fund to sustain losses on these contracts and transaction costs. Under normal
circumstances, consideration of the prospects for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Investment Manager believes
that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of the Fund will be served.
8
<PAGE>
At or before the maturity date of a forward contract requiring the Fund
to sell a currency, the Fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, the Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward currency
contract under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the first
contract and the offsetting contract.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currencies involved, the length of the contract period,
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. The use of forward currency contracts does not eliminate fluctuations
in the prices of the underlying securities the Fund owns or intends to acquire,
but it does fix a rate of exchange in advance. In addition, although forward
currency contracts limit the risk of loss due to a decline in the value of the
hedged currencies, at the same time they limit any potential gain that might
result should the value of the currencies increase.
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. The Fund may convert foreign currency 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 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.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions may not be changed
without the approval of the lesser of (a) 67% or more of the voting securities
of the Fund present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy or
(b) more than 50% of the outstanding voting securities of the Fund. Any
investment restriction which involves a maximum percentage of securities or
assets will not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the Fund. The Fund may not:
(1) Purchase a security if, as a result, more than 5% of the Fund's total
assets would be invested in the securities of any one issuer or the
Fund would own or hold 10% of the outstanding securities of that
issuer, except that up to 25% of the Fund's total assets may be
invested without regard to this limitation and provided that this
limitation does not apply to securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities or securities of
other investment companies;
(2) Purchase a security, if as a result, 25% or more of the value of the
Fund's total assets would be invested in the securities of issuers in a
single industry, provided that this limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities;
(3) Purchase or sell real estate (although it may purchase securities of
companies whose business involves the purchase or sale of
real estate);
(4) Invest in commodities or commodities futures contracts, although it may
enter into financial and foreign currency futures contracts and options
thereon, options on foreign currencies, and forward contracts on
foreign currencies;
(5) Lend its assets, except as permitted by applicable law;
(6) Underwrite the securities of other issuers except to the extent the
Fund may be deemed to be an underwriter under the Federal securities
laws in connection with the disposition of the Fund's authorized
investments; or
(7) Issue senior securities as defined in the Investment Company Act of
1940, as amended (the "1940 Act") (including borrowing money), except
as permitted by applicable law.
The Fund, notwithstanding any other investment policy or restriction
(whether or not fundamental), may invest all of its assets in the securities or
beneficial interests of a single pooled investment fund having substantially the
same investment objectives, policies and restrictions as the Fund.
The Directors have established the following non-fundamental investment
restrictions that may be changed by the Board without shareholder approval:
9
<PAGE>
(i) The Fund may not make short sales of securities or purchase securities
on margin, except (a) the Fund may buy and sell options, futures
contracts, options on futures contracts, and forward currency
contracts, (b) the Fund may obtain such short term credits as may be
necessary for the clearance of transactions, (c) the Fund may make
initial margin deposits and variation margin payments in connection
with transactions in futures contracts and options thereon, and forward
currency contracts, and (d) the Fund may sell "short against the box"
where, by virtue of its ownership of the other securities, the Fund
owns or has the right to obtain securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the
sale is made upon the same conditions;
(ii) The Fund may not purchase the securities of any investment company
except (a) by purchase in the open market where no commission or profit
to a sponsor or dealer results from such purchase, provided that
immediately after such purchase no more than: 10% of the Fund's total
assets are invested in securities issued by investment companies, 5% of
the Fund's total assets are invested in securities issued by any one
investment company, or 3% of the voting securities of any one such
investment company are owned by the Fund, or (b) when such purchase is
part of a plan of merger, consolidation, reorganization or acquisition
of assets; and
(iii) With respect to financial and foreign currency futures and related
options (including options traded on a commodities exchange), the Fund
will not purchase or sell futures contracts or related options other
than for bona fide hedging purposes if, immediately thereafter, the sum
of the amount of initial margin deposits on the Fund's existing futures
positions and related options and premiums paid for related options
would exceed 5% of the Fund's total assets.
OFFICERS AND DIRECTORS
The Directors and the officers, their respective offices, dates of
birth and principal occupations during the last five years are set forth below.
Unless otherwise noted, the address of each is 11 Hanover Square, New York, NY
10005.
BASSETT S. WINMILL* - Chairman of the Board. He is Chairman of the
Board of two of the other investment companies
advised by the Investment Manager and its affiliates (the "Funds Complex") and
of the parent of the Investment Manager, Bull & Bear
Group, Inc. ("Group"). He was born February 10, 1930. He is a member of the
New York Society of Security Analysts, the Association
for Investment Management and Research and the International Society of
Financial Analysts. He is the father of Mark C. Winmill and
Thomas B. Winmill.
PETER K. WERNER - Director. He is Director of Communications, since May
1997, and from July 1996 to May 1997, Director of Admissions, of the Governor
Dummer Academy. From March 1993 to August 1995, he was Director of Annual Giving
and Alumni Relations at the Williston Northampton School. From January 1991 to
February 1993, he was Vice President - Money Market Trading at Lehman Brothers.
His address is Governor Dummer Academy, 1 Elm Street, Byfield, Massachusetts
01922. He was born August 16, 1959.
GEORGE B. LANGA - Director. He is President of Langa Communications
Corp., a multi-media production company. His address is 187 East Market Street,
Rhinebeck, New York 12572. He was born August 31, 1962.
MARK C. WINMILL* - Director and Co-President. He is Co-President of
the Funds Complex and of Group and certain of its affiliates, and President of
Bull & Bear Securities, Inc. ("BBSI"). He was born November 26, 1957. He
received his M.B.A. from the Fuqua School of Business at Duke University in
1987. From 1983 to 1985 he was Assistant Vice President and Director of
Marketing of E.P. Wilbur & Co., Inc., a real estate development and syndication
firm and Vice President of E.P.W. Securities, its broker/dealer subsidiary. He
is a son of Bassett S. Winmill and brother of Thomas B. Winmill. He is also a
Director of other investment companies in the Funds Complex.
THOMAS B. WINMILL* - Director, Co-President, Chief Executive Officer,
and General Counsel. He is Co-President, Chief Executive Officer, and General
Counsel of the Funds Complex and of Group and certain of its affiliates, and
President of the Investment Manager and Investor Service Center, Inc. (the
"Distributor"). He was born June 25, 1959. He is a member of the New York
State Bar and the SEC Rules Committee of the Investment Company Institute. He
is a son of Bassett S. Winmill and brother of Mark C. Winmill.
He is also a Director of other investment companies in the Funds Complex.
STEVEN A. LANDIS - Senior Vice President. He is Senior Vice President
of the Funds Complex, the Investment Manager and certain of its affiliates. He
was born March 1, 1955. From 1993 to 1995, he was Associate Director -
Proprietary Trading at Barclays De Zoete Wedd Securities Inc., from 1992 to 1993
he was Director, Bond Arbitrage at WG Trading Company, and from 1989 to 1992 he
was Vice President of Wilkinson Boyd Capital Markets.
JOSEPH LEUNG, CPA - Treasurer and Chief Accounting Officer (
since 1995). He is Treasurer and Chief Accounting Officer
10
<PAGE>
of the Funds Complex, the Investment Manager and its affiliates. From 1992 to
1995 he held various positions with Coopers & Lybrand L.L.P., a public
accounting firm. From 1991 to 1992, he was the accounting supervisor at
Retirement Systems Group, a mutual fund company. From 1987 to 1991, he held
various positions with Ernst & Young, a public accounting firm. He is a member
of the American Institute of Certified Public Accountants. He was born September
15, 1965.
DEBORAH A. SULLIVAN - Chief Compliance Officer, Secretary and Vice
President. She is Chief Compliance Officer, Secretary and Vice President of the
investment companies in the Funds Complex and of the Investment Manager and its
affiliates. From 1993 through 1994 she was the Blue Sky Paralegal for SunAmerica
Asset Management Corporation and from 1992 through 1993 she was Compliance
Administrator and Blue Sky Administrator with Prudential Securities and
Prudential Mutual Fund Management, Inc. She earned her Juris Doctor at Hofstra
University School of Law. She was born June 13, 1969.
* Bassett S. Winmill, Mark C. Winmill and Thomas B. Winmill are
"interested persons" of the Fund as defined by the 1940 Act,
because of their positions and other relationships with the Investment Manager.
11
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
PENSION OR
RETIREMENT
BENEFITS ESTIMATED TOTAL COMPENSATION FROM
AGGREGATE ACCRUED AS PART ANNUAL BENEFITS REGISTRANT AND INVESTMENT
COMPENSATION OF FUND UPON COMPANY COMPLEX PAID TO
NAME OF PERSON, POSITION FROM REGISTRANT EXPENSES RETIREMENT DIRECTORS
<S> <C> <C> <C> <C>
George B. Langa $13,250 None None $13,250 from 1 Investment Company
Director
Peter K. Werner $13,250 None None $13,250 from 1 Investment Company
Director
Bassett S. Winmill $0 None None $0 from 3 Investment Companies
Director
Mark C. Winmill $0 None None $0 from 8 Investment Companies
Director
Thomas B. Winmill $0 None None $0 from 9 Investment Companies
Director
</TABLE>
No officer, Director or employee of the Investment Manager receives any
compensation from the Fund for acting as an officer, Director or employee of the
Fund. As of December 31, 1997, officers and Directors of the Fund owned less
than 1% of the outstanding shares of the Fund. As of December 31, 1997, no
shareholder of record owned more than 5% of the outstanding shares of the Fund.
12
<PAGE>
THE INVESTMENT MANAGER
The Investment Manager acts as general manager of the Fund, being
responsible for the various functions assumed by it, including the regular
furnishing of advice with respect to portfolio transactions. The other principal
subsidiaries of Group include Investor Service Center, Inc., a registered
broker/dealer, Midas Management Corporation and Rockwood Advisers, Inc.,
registered investment advisers, and BBSI, a registered broker/dealer providing
discount brokerage services.
Group is a publicly owned company whose securities are listed and
traded on the NASDAQ Stock Market. Bassett S. Winmill may be deemed a
controlling person of Group on the basis of his ownership of 100% of Group's
voting stock and, therefore, of the Investment Manager. The Fund and its
affiliated investment companies had net assets in excess of $290,000,000 as of
February 18, 1997.
INVESTMENT MANAGEMENT AGREEMENT
Under the Investment Management Agreement, the Fund assumes and pays
all expenses required for the conduct of its business including, but not limited
to, custodian and transfer agency fees, accounting and legal fees, investment
management fees, fees of disinterested Directors, association fees, printing,
salaries of certain administrative and clerical personnel, necessary office
space, all expenses relating to the registration or qualification of the shares
of the Fund under Blue Sky laws and reasonable fees and expenses of counsel in
connection with such registration and qualification, miscellaneous expenses and
such non-recurring expenses as may arise, including actions, suits or
proceedings affecting the Fund and the legal obligation which the Fund may have
to indemnify its officers and Directors with respect thereto.
For its services, the Investment Manager receives an investment
management fee, payable monthly, based on the average weekly net assets of the
Fund, at the annual rate of 7/10 of 1% of the first $250 million, 5/8 of 1% from
$250 million to $500 million, and 1/2 of 1% over $500 million. The Investment
Manager has agreed in the Investment Management Agreement that it will waive all
or part of its fee or reimburse the Fund monthly if and to the extent that the
Fund's aggregate operating expenses exceed the most restrictive limit imposed by
any state in which shares of the Fund are qualified for sale, although the Fund
is not currently subject to any such limits. Certain expenses, such as brokerage
commissions, taxes, interest, distribution fees, certain expenses attributable
to investing outside the United States and extraordinary items, are excluded
from this limitation. For the fiscal years ended June 30, 1995, 1996 and 1997,
the Fund paid to the Investment Manager investment management fees of $288,533,
$251,003 and $197,279 respectively.
If requested by the Directors, the Investment Manager may provide other
services to the Fund such as, without limitation, the functions of billing,
accounting, certain shareholder communications and services, administering state
and Federal registrations, filings and controls and other administrative
services. Any services so requested and performed will be for the account of the
Fund and the costs of the Investment Manager in rendering such services will be
reimbursed by the Fund, subject to examination by those directors of the Fund
who are not interested persons of the Investment Manager or any affiliate
thereof. For the fiscal years ended June 30, 1995, 1996 and 1997 the Fund
reimbursed the Investment Manager $16,064, $16,889 and $10,585, respectively,
for such services.
The Investment Management Agreement provides that the Investment
Manager will not be liable to the Fund or any shareholder of the Fund for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which the agreement relates. Nothing contained in
the Investment Management Agreement, however, shall be construed to protect the
Investment Manager against any liability to the Fund by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
by reason of its reckless disregard of obligations and duties under the
Investment Management Agreement.
The Investment Management Agreement will continue in effect, unless
sooner terminated as described below, for successive periods of twelve months,
provided such continuance is specifically approved at least annually by (a) the
Directors or by the holders of a majority of the outstanding voting securities
of the Fund as defined in the 1940 Act and (b) a vote of a majority of the
Directors who are not parties to the Investment Management Agreement, or
interested persons of any such party. The Investment Management Agreement may be
terminated without penalty at any time either by a vote of the Directors or the
holders of a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act, on 60 days' written notice to the Investment Manager,
or by the Investment Manager on 60 days' written notice to the Fund, and shall
immediately terminate in the event of its assignment.
Group has granted the Fund a non-exclusive license to use various
service marks, including "Bull & Bear," "Bull & Bear Performance Driven," and
"Performance Driven" under certain terms and conditions on a royalty free basis.
Such license will be withdrawn in the event the investment manager of the Fund
is not the Investment Manager or another subsidiary of Group. If the license is
terminated, the Fund will eliminate all reference to "Bull & Bear" in its
corporate name and cease to use any of such service marks or any similar service
marks in its business.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
Net asset value will normally be calculated (a) no less frequently than
weekly, (b) on the last business day of each month and (c) at any other time
determined by the Directors. Net asset value is calculated by dividing the value
of the Fund's net assets (the value of its assets less its liabilities) by the
total number of shares of its common stock outstanding. All securities for which
market quotations are readily available, which include the options and futures
in which the Fund may invest, are valued at the last sales price on the primary
exchange on which they are traded prior to the time of determination, or, if no
sales price is available at that time, at the closing price quoted for the
securities (but if bid and asked quotations are available, at the mean between
the last current bid and asked prices, rather than the quoted closing price).
Securities that are traded in the unregulated market are valued, if bid and
asked quotations are available, at the mean between the current bid and asked
prices. If bid and asked quotations are not available, then such securities are
valued as determined in good faith pursuant to procedures established by the
Directors.
ALLOCATION OF BROKERAGE
The Fund seeks to obtain prompt execution of orders at the most
favorable net prices. The Fund is not currently obligated to deal with any
particular broker, dealer or group thereof. Fund transactions in debt and OTC
securities generally are with dealers acting as principals at net prices with
little or no brokerage costs. In certain circumstances, however, the Fund may
engage a broker as agent for a commission to effect transactions for such
securities. Purchases of securities from underwriters include a commission or
concession paid to the underwriter, and purchases from dealers include a spread
between the bid and asked price. While the Investment Manager generally seeks
reasonably competitive spreads or commissions, payments of the lowest spread or
commission is not necessarily consistent with obtaining the best net results.
Accordingly, the Fund will not necessarily be paying the lowest spread or
commission available.
The Investment Manager directs portfolio transactions to broker/dealers
for execution on terms and at rates which it believes, in good faith, to be
reasonable in view of the overall nature and quality of services provided by a
particular broker/dealer, including brokerage and research services, and
allocation of commissions to the Fund's Custodian. With respect to brokerage and
research services, consideration may be given in the selection of broker/dealers
to brokerage or research provided and payment may be made of a fee higher than
that charged by another broker/dealer which does not furnish brokerage or
research services or which furnishes brokerage or research services deemed to be
of lesser value, so long as the criteria of Section 28(e) of the Securities
Exchange Act of 1934, as amended, or other applicable law are met. Section 28(e)
was adopted in 1975 and specifies that a person with investment discretion shall
not be "deemed to have acted unlawfully or to have breached a fiduciary duty"
solely because such person has caused the account to pay a higher commission
than the lowest available under certain circumstances. To obtain the benefit of
Section 28(e), the person so exercising investment discretion must make a good
faith determination that the commissions paid are "reasonable in relation to the
value of the brokerage and research services provided . . . viewed in terms of
either that particular transaction or his overall responsibilities with respect
to the accounts as to which he exercises investment discretion." Thus, although
the Investment Manager may direct portfolio transactions without necessarily
obtaining the lowest price at which such broker/dealer, or another, may be
willing to do business, the Investment Manager seeks the best value to the Fund
on each trade that circumstances in the market place permit, including the value
inherent in on-going relationships with quality brokers.
Currently, it is not possible to determine the extent to which
commissions that reflect an element of value for brokerage or research services
might exceed commissions that would be payable for execution alone, nor
generally can the value of such services to the Fund be measured, except to the
extent such services have a readily ascertainable market value. There is no
certainty that services so purchased, if any, will be beneficial to the Fund,
and it may be that other affiliated investment companies will derive benefit
therefrom. Such services being largely intangible, no dollar amount can be
attributed to benefits realized by the Fund or to collateral benefits, if any,
conferred on affiliated entities. These services may include (1) furnishing
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, (2) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). Pursuant to arrangements with certain
broker/dealers, such broker/dealers provide and pay for various computer
hardware, software and services, market pricing information, investment
subscriptions and memberships, and other third party and internal research of
assistance to the Investment Manager in the performance of its investment
decision-making responsibilities for transactions effected by such
broker/dealers for the Fund. Commission "soft dollars" may be used only for
"brokerage and research services" provided directly or indirectly by the
broker/dealer and under no circumstances will cash payments be made by such
broker/dealers to the Investment Manager. To the extent that commission "soft
dollars" do not result in the provision of any "brokerage and research services"
by a broker/dealer to whom such commissions are paid, the commissions,
nevertheless, are the property of such broker/dealer. To the extent any such
services are utilized by the Investment Manager for other than the performance
of its investment decision-making responsibilities, the Investment Manager makes
an appropriate allocation of the cost of such services according to their use.
BBSI, a wholly owned subsidiary of Group and the Investment Manager's
affiliate, provides discount brokerage services to the public as an introducing
broker clearing through unaffiliated firms on a fully disclosed basis. The
Investment Manager is authorized to
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place Fund brokerage through BBSI at its posted discount rates and indirectly
through a BBSI clearing firm. The Fund will not deal with BBSI in any
transaction in which BBSI acts as principal. The clearing firm will execute
trades in accordance with the fully disclosed clearing agreement between BBSI
and the clearing firm. BBSI will be financially responsible to the clearing firm
for all trades of the Fund until complete payment has been received by the Fund
or the clearing firm. BBSI will provide order entry services or order entry
facilities to the Investment Manager, arrange for execution and clearing of
portfolio transactions through executing and clearing brokers, monitor trades
and settlements and perform limited back-office functions including the
maintenance of all records required of it by the NASD.
In order for BBSI to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by BBSI must be reasonable
and fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. The Directors have adopted procedures in conformity with Rule 17e-1 under
the 1940 Act to ensure that all brokerage commissions paid to BBSI are
reasonable and fair. Although BBSI's posted discount rates may be lower than
those charged by full cost brokers, such rates may be higher than some other
discount brokers and certain brokers may be willing to do business at a lower
commission rate on certain trades. The Directors have determined that portfolio
transactions may be executed through BBSI if, in the judgment of the Investment
Manager, the use of BBSI is likely to result in price and execution at least as
favorable as those of other qualified broker/dealers and if, in particular
transactions, BBSI charges the Fund a rate consistent with that charged to
comparable unaffiliated customers in similar transactions. Brokerage
transactions with BBSI are also subject to such fiduciary standards as may be
imposed by applicable law. The Investment Manager's fees under its agreement
with the Fund are not reduced by reason of any brokerage commissions paid to
BBSI.
During the fiscal years ended June 30, 1995, 1996 and 1997 the Fund
paid total brokerage commissions of $958, $16,243 and $7,221 respectively. Of
such commissions $0, $10,756 and $6,596 were allocated to broker/dealers that
provided research in the years 1995, 1996 and 1997, respectively. No
transactions were directed to broker/dealers during such periods for selling
shares of the Fund or any other affiliated investment companies. During the
Fund's fiscal years ended June 30, 1995, 1996 and 1997 the Fund paid brokerage
commissions of $958, $5,487 and $625, respectively, to BBSI, representing
approximately 100%, 34% and 9%, respectively of the total commissions paid by
the Fund and involving approximately 100%, 3% and 0.47%, respectively, of the
aggregate dollar amount of transactions involving the payment of commissions.
Investment decisions for the Fund and for other affiliated investment
companies managed by the Investment Manager or its affiliates are made
independently based on each Fund's investment objectives and policies. The same
investment decision, however, may occasionally be made for two or more Funds. In
such a case, the Investment Manager may combine orders for two or more Funds for
a particular security if it appears that a combined order would reduce brokerage
commissions and/or result in a more favorable transaction price. Combined
purchase or sale orders are then averaged as to price and allocated as to amount
according to a formula deemed equitable to each Fund. While in some cases this
practice could have a detrimental effect upon the price or quantity available of
the security with respect to the Fund, the Investment Manager believes that the
larger volume of combined orders can generally result in better execution and
prices. The Fund is not obligated to deal with any particular broker, dealer or
group thereof. Certain broker/dealers that the Funds Complex does business with
may, from time to time, own more than 5% of the publicly traded Class A
non-voting Common Stock of Group, the parent of the Investment Manager, and may
provide clearing services to BBSI.
The Fund's portfolio turnover rate may vary from year to year and will
not be a limiting factor when the Investment Manager deems portfolio changes
appropriate. The portfolio turnover rate is calculated by dividing the lesser of
the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of securities in the
portfolio during the year.
TAXES
The Fund has qualified and intends to continue to qualify for treatment
as a regulated investment company ("RIC") under the Internal Revenue Code of
1986, as amended (the "Code"). To qualify for such treatment, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short term capital gain and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. Among these requirements are the following: (1) at least 90% of
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures, or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or any of the
following, that were held for less than three months - options, futures, or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures, or forward contracts thereon) that are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect thereto) ("Short-Short Limitation"), although
this limitation will no longer apply to the Fund after June 30, 1998; and (3)
the Fund's investments must satisfy certain diversification requirements. In any
year during which the applicable RIC provisions of the Code are satisfied, the
Fund will not be liable for federal income tax on its net investment income, net
short-term capital gains and net capital gains (net long-term capital gains in
excess of the sum of net short-term capital losses and capital loss carryovers
from prior years, if any) that it distributes to its shareholders.
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<PAGE>
To the extent the Fund retains its net capital gains for investment, it will be
subject under current tax rates to federal income tax at a maximum effective
rate of 35% on the amount retained. If for any taxable year the Fund does not
qualify for treatment as a RIC, all of its taxable income will be taxed at
corporate rates, and distributions to its shareholders will not be deductible by
the Fund in computing its taxable income. In addition, in the event of failure
to qualify as a RIC, the Fund's distributions, to the extent derived from the
Fund's current or accumulated earnings and profits, will constitute dividends
(eligible for the corporate dividends-received deduction) which are taxable to
shareholders as ordinary income, even though those distributions might otherwise
(at least partially) have been treated in the shareholders' hands as long-term
capital gains. If the Fund fails to qualify as a RIC for any year, it generally
must pay out its earnings and profits accumulated in that year less an interest
charge to the U.S. Treasury on 50% of such earnings and profits before it can
again qualify as a RIC.
The Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gain net income (determined on an October 31 fiscal year
basis), and (3) generally, income and gain not distributed or not subject to
corporate tax in the prior calendar year. The Fund intends to avoid imposition
of the Excise Tax by making adequate distributions.
Interest received by the Fund may be subject to income, withholding, or
other taxes imposed by foreign countries and U.S. possessions that would reduce
the yield on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors. If more than 50% of the value of the Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
the Fund will be eligible to, and may, file an election with the Internal
Revenue Service (the "IRS") that would enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions' income taxes paid by the Fund. Pursuant to the election, the
Fund would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by the shareholder, the shareholder's proportionate share of those taxes, (2)
treat the shareholder's share of those taxes and of any dividend paid by the
Fund that represents income from foreign or U.S. possessions sources as the
shareholder's own income from those sources, and (3) either deduct the taxes
deemed paid by the shareholder in computing the shareholder's taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the shareholder's federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of the
Fund's income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund's portfolio may include zero coupon bonds. Zero coupon bonds
are original issue discount ("OID") bonds that pay no current interest. OID is
the excess, if any, of the stated redemption price at maturity of a debt
instrument over the issue price of the instrument. Original issue discount on a
taxable obligation is require to be currently included in the income of the
holder of the obligation generally on a constant interest rate basis resembling
the economic accrual of interest. The tax basis of the holder of an OID debt
instrument is increased by the amount of OID thereon properly included in the
holder's gross income as determined for federal income tax purposes. Current
inclusion in gross income of the OID on a taxable debt instrument is required,
even though no cash is received at the time the OID is required to be included
in gross income. Because such income may not be matched by a corresponding cash
distribution to the Fund, the Fund may be required to borrow money or dispose of
other securities to be able to make distributions to shareholders. The extent to
which the Fund may liquidate securities at a gain may be limited by the
Short-Short Limitation discussed above (but only through June 30, 1998).
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
income or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain from disposition of the stock
(collectively, "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If the Fund invests in a PFIC and elects to treat the PFIC
as a "qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long term capital gain over net short term
capital loss), even if such amounts are not distributed to the Fund. These
amounts likely would have to be distributed to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements.
For its tax years beginning after December 31, 1997, the Fund may make
an election to annually mark-to-market certain publicly traded PFIC stock (a
"PFIC Mark-to-Market Election") as an alternative to making the above-described
election to treat the PFIC as a qualified electing fund. "Marking-to-market," in
this context, means recognizing as ordinary income or loss each year an amount
equal to the difference between the Fund's adjusted tax basis in such PFIC stock
and its fair market value. Losses will be allowed only to the extent of net
mark-to-market gain previously included by the Fund pursuant to the election for
prior taxable years. The Fund may be required to include in its taxable income
for the first taxable year in which it makes a PFIC Mark-to-Market Election an
amount equal to the interest
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charge that would otherwise accrue with respect to distributions on, or
dispositions of, the PFIC stock. This amount would not be deduct ible from the
Fund's taxable income. The PFIC Mark-to-Market Election applies to the taxable
year for which made and to all subsequent taxable years, unless the PFIC stock
ceases to be publicly traded or the Internal Revenue Service consents to
revocation of the election. By making the PFIC Mark-to-Market Election, the Fund
could ameliorate the adverse tax consequences arising from its ownership of PFIC
stock, but in any particular year may be required to recognize income in excess
of the distributions it receives from the PFIC and proceeds from the
dispositions of PFIC stock.
Some of the Fund's investment practices, such as selling (writing) and
purchasing options and futures contracts and entering into forward contracts,
involve complex rules that will determine for federal income tax purposes the
amount, timing of recognition and character of the gains and losses the Fund
realizes in connection therewith. These provisions may also require the Fund to
recognize income or gain without receiving cash with which to make distributions
in the amounts necessary to satisfy the 90% Distribution Requirement for
avoiding federal income tax and the 98% distribution requirement for avoiding
the Excise Tax. The Fund will monitor its transactions, make appropriate tax
elections and make the appropriate entries in its books and records when it
acquires any foreign currency, option, futures contract, forward contract or
hedged investment in order to mitigate the effect of these rules, prevent
disqualification of the Fund as a RIC and minimize the imposition of federal
income and excise taxes. Gains from the disposition of foreign currencies
(except certain gains that may be excluded by future regulations), and gains
from options, futures, and forward contracts derived by the Fund with respect to
its business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options, futures, and forward contracts (other than those on
foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures, and forward contracts on foreign currencies,
also will be subject to the Short-Short Limitation if they are held for less
than three months and are not directly related to the Fund's principal business
of investing in securities (or options and futures with respect thereto).
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not so qualify, it may be
forced to defer the closing out of certain options, futures, forward contracts
and foreign currency positions beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.
The foregoing discussion of federal tax consequences is based on the
United States federal tax laws in effect on the date of this Statement of
Additional Information, which are subject to change by legislative, judicial, or
administrative action, possibly with retroactive effect. The Fund may be subject
to state, local or foreign tax in jurisdictions in which it may be deemed to be
doing business. Shareholders and prospective shareholders are advised to consult
their own tax advisors with respect to the application to their particular
circumstances of the foregoing general taxation rules, and with respect to the
state, local or foreign tax consequences to them of an investment in shares of
the Fund.
REPORTS TO SHAREHOLDERS
The Fund issues, at least semi-annually, reports to its shareholders
including a list of investments held and statements of assets and liabilities,
income and expense, and changes in net assets of the Fund. The Fund's fiscal
year ends on June 30.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company, P.O. Box 419507, Kansas City, MO
64141, has been retained by the Fund to act as Custodian of the Fund's
investments and may appoint one or more subcustodians. The Custodian also
performs certain accounting services for the Fund. As part of its agreement with
the Fund, the Custodian may apply credits or charges for its services to the
Fund for, respectively, positive or deficit cash balances maintained by the Fund
with the Custodian. The Custodian is also the Fund's Transfer and Dividend
Disbursing Agent.
AUDITORS
Tait, Weller & Baker, Eight Penn Center Plaza, Suite 800, Philadelphia,
PA 19103, are the independent accountants for the Fund. Financial statements of
the Fund are audited annually.
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FINANCIAL STATEMENTS
The Fund's Financial Statements in the Annual Report for the fiscal
year ended June 30, 1997 and in the Semi-Annual Report for the six months ended
December 31, 1997 (the "Reports"), which either accompany this SAI or have
previously been provided to the person to whom this Prospectus is being sent,
are incorporated herein by reference with respect to all information other than
the information set forth in the Letter to Shareholders included therein. The
Fund will furnish, without charge, a copy of its Report upon request at 11
Hanover Square, New York, NY 10005, 1-800-847-4200.
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APPENDIX A
DESCRIPTIONS OF BOND RATINGS
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investment Service, Inc. ("Moody's"), rating
symbols and their meanings (as published by Moody's) follows:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are
protected by a large or an exceptionally stable margin and principle
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 and, together with the Aaa group, 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 of fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the longer term risks appear somewhat larger 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 safeguarded 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 a
desirable investment. Assurance of interest and principal payments of
maintenance of other terms of the contract over any 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 as "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
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.
Con (...) Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These
bonds are secured by (a) earnings of projects under construction,
(b) earnings of projects unseasoned in
operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis
of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
A-1
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Standard's & Poor's Rating Group. A brief description of the
applicable Standard Poor's Ratings Group ("S&P") rating symbols and their
meanings (as published by S&P) follows:
AAA Bonds rated "AAA" have the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest
and repay principal.
AA Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay interest and repay principal is very strong, and in
the majority of instances they differ from AAA issues only in small
degree.
A Bonds rated "A" have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB Bonds rated "BBB" are regarded as having adequate capacity to pay
interest and repay principal. Whereas they normally exhibit
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this capacity than for
bonds in higher rated categories.
Debt rated "BB," "B," "CCC," 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 current 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 that
is assigned an actual or implied "CCC" debt rating.
C The rating "C" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC-" rating. The "C"
rating category may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is being
paid.
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 S&P
believes that such payments will be made during such grace period.
The "D" rating category 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.
A-2
