<PAGE> 1
(LOGO)
MATHERS FUND
PROSPECTUS
APRIL 30, 1999
Investment Adviser
MATHERS AND COMPANY, INC.
Bannockburn, Illinois
Custodian
STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts
Transfer Agent
DST SYSTEMS, INC.
Kansas City, Missouri
Counsel
SIDLEY & AUSTIN
Chicago, Illinois
Auditors
ARTHUR ANDERSEN LLP
Chicago, Illinois
The investment objective of the Mathers Fund is capital appreciation over the
long term. The Fund may pursue its objective by investing in equity securities
and by engaging in certain investment strategies designed to capitalize on
potential declines in the prices of equity securities. The Fund may increase or
decrease its equity exposure using various hedging strategies and may also
invest all or any portion of its assets in fixed income securities.
A PURE NO-LOAD FUND
* No Sales Charges * No 12b-1 Charges
* No Redemption Charges * No Reinvestment Charges
---------------
Mathers Fund shares, like all mutual fund securities, have not been approved or
disapproved by the Securities and Exchange Commission, and the SEC has not
determined if this prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Risk/Return Summary.................................................... 3
Investment Objective and Principal Strategies..................... 3
Principal Risks................................................... 3
Other Risk Information............................................ 4
Fees and Expenses................................................. 5
Financial Highlights.............................................. 6
Additional Investment Policies and Risks............................... 7-8
Management of the Fund................................................. 8
Determination of Net Asset Value....................................... 9
Purchase of Shares..................................................... 9
Automatic Investment Program........................................... 9
Retirement Plans....................................................... 9-10
How to Redeem Shares...................................................10-11
Systematic Withdrawal Plan............................................. 11
Dividend Reinvestment.................................................. 11
Dividends, Distributions and Taxes.....................................11-12
Shareholder Meetings................................................... 12
Purchase Application...................................................13-14
For More Information..............................................Back Cover
</TABLE>
In this prospectus, "the fund" refers to Mathers Fund, Inc.
2
<PAGE> 3
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
The investment objective of the Mathers Fund is capital appreciation over
the long term. The fund is flexibly managed and pursues its objective by using
the following principal strategies:
o investing in equity securities, primarily common
stocks, selected for their appreciation potential;
o engaging, within prescribed limits, in short sales of equity securities,
primarily common stocks, whereby the fund borrows and sells a security it
does not own in order to profit from the potential decline in the price of
that security;
o selecting equity securities, both long and short, using fundamental
analysis of both value and growth data, and technical analysis;
o investing all or a portion of its assets in fixed
income securities, primarily U.S. Treasury
securities, when the adviser believes the risk of
owning common stocks is high; and
o varying its common stock exposure by hedging, primarily with the purchase
or short sale of stock index futures contracts.
PRINCIPAL RISKS
The fund is subject to the risks associated with investing in both equity
and fixed income securities. The fund is also subject to certain additional
risks associated with stock index futures hedging and the higher risk investment
strategy of short sales of equity securities.
EQUITY SECURITIES: To the extent that the fund's portfolio has significant
equity exposure, long and/or short, the fund is subject to the risks inherent in
the stock market, which include the following:
o unpredictable price volatility in individual stocks
and various stock indices;
o changes in interest rates, inflation and corporate profits, currency
exchange rate volatility, and other economic factors;
o individual company and/or industry
developments;
o national and international political events; and
o potential "Year 2000" financial market and
economic disruptions.
The adviser's stock selection process is not limited by the total market
value of a company's stock, so the fund may be long or short small, medium or
large capitalization issues. Stocks of companies with a relatively small number
of shares available for trading may be more risky because their share prices
tend to be more volatile, and their shares less liquid, than those of companies
with larger amounts of tradeable shares. In general, companies with small
revenue bases may have more limited management and financial resources and may
face a higher risk of business reversal than larger more established companies.
As a result, stocks of smaller companies may be more volatile than stocks of
larger companies. Additionally, stocks of companies with special or unique
characteristics, in which the fund may invest, may lose value if their unusual
company circumstances do not develop as anticipated.
Short positions in equity securities are generally considered to be more
risky than long positions, since the theoretical potential loss in a short
position is unlimited, while the maximum loss from a long position is equal to
the original purchase price.
FIXED INCOME SECURITIES: To the extent that the fund's portfolio is invested in
U.S. Treasury securities or other fixed income securities, the fund is subject
to risks which include loss of principal as interest rates rise (as a function
of the maturity date of each issue held), and each issuer's credit quality risk.
Additionally, the fund may lose the opportunity to benefit on that portion of
its portfolio invested in fixed income securities if stock prices increase.
HEDGING: The percentage fluctuation in the value of the fund's hedging positions
in stock index futures and options may be greater than those of the underlying
index, and positions in such futures and options are subject to certain other
risks, including but not limited to the following:
o an imperfect correlation between the change in market value of the long
stock positions in the fund's portfolio relative to its stock index futures
or options hedge positions, limiting the effectiveness of the hedge;
o possible temporary illiquidity in the markets for stock index futures or
options which may result in continuing exposure to adverse price movements;
and
3
<PAGE> 4
o the fact that the decision to hedge may prove incorrect and, in that case,
the fund would have been better off not hedging.
OTHER RISK INFORMATION: There are market risks inherent in any investment, and
there is no assurance that the objective of the fund will be realized. Also,
there is no assurance that the fund's portfolio will not decline in value or
that the portfolio's various investment segments will perform as expected. When
you sell your investment, you may receive more or less money than you originally
invested.
The return information below illustrates how the fund's performance can
vary and gives some indication of the risks of investing in the fund by
comparing the fund's performance with two broad based stock indices. Please keep
in mind that the fund's past performance does not represent how it will perform
in the future. The return data includes the reinvestment of all income dividends
and capital gains distributions.
[Contained here in paper format is a bar chart showing the annual returns of the
Mathers Fund from 1989 through 1998. The chart is titled "Calendar Year Total
Returns." The Y-axis reflects percentages ranging from -5.00% through +15.00%
and increases in 5% increments. The X-axis reflects the years from 1989 through
1998 and increases in 1-year increments. The data below is reflected in the
vertical bars:
<TABLE>
<CAPTION>
Year Total Return
<S> <C>
1989 + 10.41%
1990 + 10.43%
1991 + 9.45%
1992 + 3.11%
1993 + 2.13%
1994 - 5.89%
1995 + 7.01%
1996 - 0.07%
1997 + 3.01%
1998 - 5.21%]
</TABLE>
During the periods shown in the above chart, the highest
quarterly return was 5.19% (quarter ended March 1989)
and the lowest quarterly return was -3.21% (quarter
ended December 1998).
PERCENT AVERAGE ANNUAL TOTAL RETURNS
All Periods Ended 12-31-98
<TABLE>
<CAPTION>
Since Inception
1 year 5 year 10 year 8-19-65 +
------- ------ ------- ---------
<S> <C> <C> <C> <C>
MATHERS FUND - 5.21 - 0.35 3.28 11.53
S&P 500 Index* 28.72 24.09 19.21 12.28
Value Line Composite ** - 1.94 10.58 9.32 7.50
</TABLE>
+ From date of Mathers Fund initial public offering: 8-19-65.
* The S&P 500 Index is an index of 500 stocks, with each stock weighted
according to its total market value or capitalization.
** The Value Line Composite is an average comprised of approximately 1,617
stocks, with each stock having an equal weighting, regardless of its market
capitalization.
4
<PAGE> 5
FEES AND EXPENSES
Set forth below are the fees and expenses you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
The Fund is 100% no load, so you pay no sales charges (loads) to buy or
sell shares.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
The costs of operating the fund are deducted from the fund's assets, which
means you pay them indirectly. The expense information shown below is based
on amounts incurred during the fund's fiscal year ended December 31, 1998.
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<TABLE>
<S> <C>
Management Fees.......................................................................... .74%
Distribution (12b-1) Fees................................................................ None
Other Expenses........................................................................... .45%
-----
Total Fund Operating Expenses (before expense reimbursement) *....................... 1.19%
Expense Reimbursement *.................................................................. (.03%)
-----
Total Fund Operating Expenses (after expense reimbursement) *........................ 1.16%
=====
</TABLE>
* Under the fund's investment advisory agreement, the fund is entitled to
be reimbursed by the adviser for any expenses in excess of 1 1/2% of the
first $30,000,000 of the fund's average net assets plus 1% of such value in
excess of $30,000,000 for each year, in each case as determined by
valuations made as of the close of each month of the year. Pursuant to this
provision, the fund received a reimbursement of $41,301 of its expenses for
the year ended December 31, 1998.
EXAMPLE:
This example is intended to help you compare the cost of investing in the
fund, over various time periods, with the cost of investing in other mutual
funds. The example assumes that you invest an initial $10,000 in the fund
and then redeem all of your shares at the end of each holding period as
indicated below. The example also assumes that your investment has a 5%
return each year and that the fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
$122 $379 $657 $1,448
</TABLE>
5
<PAGE> 6
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund's
financial performance for the past five years. Certain information reflects
financial results for a single fund share. "Total return" shows how much an
investment in the fund would have increased (or decreased) during each period,
assuming reinvestment of all dividends and distributions. This information has
been audited by the fund's independent public accountants, Arthur Andersen LLP,
whose report, along with the fund's financial statements, is included in the
fund's annual report to shareholders. This report may be obtained upon request
from the fund without charge.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value per share ............... --
beginning of period ................ $13.06 $13.27 $13.75 $13.55 $15.11
------ ------ ------ ------ ------
Income from investment operations:
Net investment income ............... 0.58 0.53 0.40 0.601 0.563
Net realized and unrealized gains
(losses) ......................... (1.26) (0.13) (0.41) 0.349 (1.448)
------ ------ ------ ------ ------
Total from investment operations (0.68) 0.40 (0.01) 0.950 (0.885)
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment ....... (0.65) (0.61) (0.47) (0.719) (0.675)
income
Distributions from net realized
capital gains .................... 0.00 0.00 0.00 (0.031) 0.000
------ ------ ------ ------ ------
Total distributions ............ (0.65) (0.61) (0.47) (0.750) (0.675)
------ ------ ------ ------ ------
Net asset value per share
end of period ....................... $11.73 $13.06 $13.27 $13.75 $13.55
====== ====== ====== ====== ======
Ratio of total expenses to average
net assets .......................... 1.16% 1.07% 1.03% 0.98% 0.93%
Ratio of net investment income
to average net assets ............... 4.56% 3.96% 2.96% 4.25% 3.86%
Portfolio turnover rate ................. 67% 50% 38% 58% 211%
Average commission rate paid
per share ........................... 4.2(cent) 4.8(cent) 5.1(cent) -- --
Total return ............................ (5.21%) 3.01% (0.07%) 7.01% (5.89%)
Net assets, end of period
(000s omitted) ...................... $108,548 $138,404 $171,596 $232,303 $293,285
</TABLE>
6
<PAGE> 7
ADDITIONAL INVESTMENT POLICIES AND RISKS
The fund is flexibly managed, with the ability to utilize either long and/or
short equity positions in the pursuit of its investment objective. The policy of
the fund is generally to effect transactions in securities which the adviser
believes offer the possibility of increasing the fund's net asset value per
share. To the extent that the fund's portfolio has significant equity exposure,
either long or short, its net asset value per share may be subject to greater
volatility than when the portfolio contains a substantial amount of fixed income
securities.
However, no minimum or maximum percentage of the fund's assets is required
to be invested in any type of security. The fund may invest all or any portion
of its assets in U.S. Treasury bills, notes or bonds or, subject to certain
limitations, certificates of deposit, prime-rated commercial paper or repurchase
agreements (agreements under which the seller of a security agrees at the time
of sale to repurchase it at an agreed time and price) when the adviser believes
general conditions warrant such action or during periods when the adviser
believes that the risks associated with equity securities are high. At such
times, which may continue for extended periods, the fund's equity exposure may
represent a relatively low percentage of the fund's assets. For instance, during
most of 1989 through 1998, a majority of the fund's assets were invested in U.S.
Treasury securities. During this period, the equity securities held in the
fund's portfolio were often hedged to varying extents by short sales of Standard
& Poor's 500 stock index futures contracts for the purpose of protecting the
fund's assets from potential loss in a declining market.
Since May 1, 1998, the fund has had the authority to make short sales of
securities in amounts of up to 30% of the value of the fund's net assets
(determined at the time of short sale). A short sale is a transaction in which
the fund sells a security which it does not then own in order to profit from the
potential decline in the market price of that security. To meet its settlement
obligation, the fund borrows the security sold short for delivery to the buyer.
The fund then commits to return the borrowed security, typically at an
unspecified future date, by purchasing the security at its market price at the
time of replacement. Such a transaction will be profitable to the fund if the
price of the security at the time the fund purchases it is less than its price
at the time the fund sold it short. Conversely, if the price of the security is
greater at the time of purchase than at the time of the short sale, the
transaction will result in a loss. The fund must reimburse the lender for any
dividends paid on the borrowed stock while the short position is open and may
have to pay a fee to borrow certain stocks.
The fund's broker retains the proceeds of the short sale as collateral until
such time that the fund covers the short position. In general, the fund must
also pledge additional cash or liquid securities to the broker as collateral for
its obligations. Generally, brokers require initial collateral (including the
short sale proceeds) with a value equal to 150% of the value of the securities
sold short. The amount of collateral is adjusted daily upward or downward to
reflect increases or decreases in the market value of the securities sold short.
In addition, under SEC rules, until the fund covers its short position, the fund
must maintain with its custodian a segregated account, containing cash or liquid
debt or equity securities, such that the amount deposited in the segregated
account plus the amount deposited with the broker as collateral, excluding
initial proceeds from the short sale, equals the then current market value of
the security sold short.
The fund may vary its equity exposure by hedging through the purchase of
exchange-traded put and call options on stock indices and/or the purchase or
short sale of stock index futures contracts and options on such contracts. Stock
index options confer upon the holder the right to receive an amount of cash upon
exercise if the closing level of the underlying stock index is greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. A stock index futures contract provides that a person with an open
position in such a contract has the right to receive, or has the obligation to
pay, cash amounts on a daily basis during the period such position is held based
on the difference between the current price level of such contract and the price
at which the contract is originally made. An option on a stock index futures
contract gives the holder the right, but not the obligation, to acquire either a
long or short position in such futures contract at a specified price.
The total cost of outstanding stock index options (determined as of the time
of purchase) held by the fund may not exceed 5% of the fund's
7
<PAGE> 8
net assets, and the fund will not enter into stock index futures contracts or
options on such contracts if immediately thereafter the aggregate initial margin
and premiums (less the amount by which any such options are "in-the-money" at
the time of purchase) would exceed 5% of the value of the fund's total assets
after taking into account any unrealized profits and losses on such instruments.
The fund may purchase securities of unseasoned companies, where the risks
are considerably greater than with common stock of more established companies,
and securities of foreign issuers, from time to time when the adviser believes
such investments offer the possibility of capital growth. However, the fund may
not invest more than 5% of its assets in securities of companies which have a
record of less than three years continuous operation (including the operation of
any predecessor business of a company which came into existence as a result of a
merger, consolidation, reorganization or purchase of substantially all of the
assets of such predecessor business), and the fund may not invest more than 10%
of its assets in securities of foreign issuers which are not publicly traded in
the United States.
The fund may purchase corporate debentures or notes (without limitation as
to rating) and preferred stocks, particularly those which are convertible into
or carry rights to acquire common stock, and warrants when such investments
appear to offer the possibility of appreciation in value.
While the fund's objective is to seek capital appreciation over the long
term, the fund does not necessarily purchase or hold individual securities to
qualify for long-term capital gains treatment. The adviser may consider a
variety of factors other than the holding period, including but not limited to
financial market conditions, corporate developments, other investment
opportunities, fund redemptions, tax considerations and changed expectations, in
determining whether to sell a security held in the portfolio. As a result,
turnover in the fund's portfolio may be high and individual equity and fixed
income securities, and stock index futures and options, may be held for very
short time periods.
The investment objective and the other policies described under this caption
are not fundamental policies and may be changed by a vote of a majority of the
Board of Directors of the fund without a vote of shareholders.
MANAGEMENT OF THE FUND
MATHERS AND COMPANY, INC., 100 CORPORATE NORTH, SUITE 201, BANNOCKBURN,
ILLINOIS 60015, (847) 295-7400, serves as investment adviser to the fund. The
adviser is an investment counseling firm which has served as investment adviser
to the fund since its inception in 1965 and as investment adviser to other
clients since 1961. Henry G. Van der Eb, Jr., President of the adviser and
Chairman and a Director of the fund, owns all of the outstanding shares of the
adviser and is thus the controlling person of the adviser.
Mr. Van der Eb, CFA, has been primarily responsible for the day-to-day
management of the fund's portfolio for more than the last twenty years. Robert
J. Reynolds, CFA, Senior Vice President of the adviser and President and a
Director of the fund, and Anne E. Morrissy, CFA, Vice President of the adviser
and Executive Vice President, Secretary and a Director of the fund, also play
significant roles in such management.
Under its investment advisory agreement with the fund, the adviser furnishes
continuous investment advisory services and management to the fund, subject to
the authority of the fund's Board of Directors. The adviser receives an annual
advisory fee which, for 1998, approximated 0.71% of the fund's average net
assets, after expense reimbursements. Such fee would have approximated .74% of
the fund's average net assets without giving effect to expense reimbursements.
The management services the adviser provides to the fund, and the services
provided by the fund's transfer agent and the custodian, depend, in part, on the
reasonably consistent operations of computer systems. Many software programs
and, to a lesser extent, computer hardware in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. This design flaw may have a negative impact on the handling of
securities trades, pricing and accounting services. All of the software the
adviser uses is current and is prepared for the year 2000. The transfer agent
and the custodian have been actively working on necessary changes to their
computer systems to deal with the year 2000 and have informed the Fund that they
reasonably believe that their systems will be year 2000 compliant in time for
that event.
8
<PAGE> 9
DETERMINATION OF NET ASSET VALUE
The fund determines its net asset value per share by dividing the total
value of its net assets (assets less liabilities excluding capital) by the total
number of its shares then outstanding. The fund generally determines its net
asset value per share as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. Eastern time) on each day the NYSE is open for
trading. This price per share is applicable to all share transactions made prior
to that time but after the previously calculated net asset value per share.
Accordingly, the fund prices purchase orders accepted or shares tendered for
redemption prior to the close of regular NYSE trading on each trading day as of
the close of trading that day; and the fund prices purchase orders accepted or
shares tendered for redemption after that time as of the close of regular NYSE
trading on the next trading day.
The fund ordinarily values securities traded on any stock exchange or in the
NASDAQ National Market System on the basis of the last sale price as of the
close of the New York Stock Exchange on the date of valuation or, in the absence
of any sale on that date, the last reported bid price. The fund generally values
other securities at the current bid price, if market quotations are readily
available. Certain short-term securities are valued at amortized cost. Any
securities for which there are no readily available market quotations will be
valued at their fair value as determined in good faith by the Board of
Directors.
PURCHASE OF SHARES
The fund issues shares directly. The purchase price per share is the next
determined net asset value after acceptance of an application. See
"Determination of Net Asset Value".
A purchase application is enclosed on page 13. (You must complete a special
application for IRA and Keogh Plan accounts. See "Retirement Plans.") Please
mail purchase applications directly
to:
MATHERS FUND, INC.
C/O DST SYSTEMS, INC.
P.O. BOX 419103
KANSAS CITY, MISSOURI 64141
or, if next-day delivery is desired, express mail to:
MATHERS FUND, INC.
C/O DST SYSTEMS, INC.
210 WEST 10TH STREET, 8TH FLOOR
KANSAS CITY, MISSOURI 64105
You must include payment for your shares with your purchase. You may make
payment by check, payable to Mathers Fund, Inc., or, to a pre-existing account,
by federal funds wire transfer. You may wire transfer funds directly to
Investors Fiduciary Trust Company, Kansas City, MO., using the following
instructions:
INV/FID/KC, ABA NO. 101003621
MATHERS FUND A/C NO. 750-123-4
FOR CREDIT TO (SHAREHOLDER'S NAME AND
ACCOUNT NUMBER).
The fund does not accept telephone orders and reserves the right to reject
applications in whole or in part. The fund has established $1,000 as the minimum
initial purchase and $200 as the minimum for any subsequent purchase (except
through dividend reinvestment or participation in the automatic investment
program); these minimum amounts are subject to change at any time. The fund does
not issue stock certificates unless requested in writing. Please direct requests
for certificates to DST at the above address.
AUTOMATIC INVESTMENT PROGRAM
Once you have satisfied the minimum initial purchase requirement, you may
establish an automatic investment program whereby periodic investments (minimum
$50) may be made in shares of the fund by the automatic debit of your bank
account. You will be notified of the number of shares purchased and the price
following each investment. There is no obligation to continue periodic
investments and you may withdraw from the plan at any time by giving written
notice to the fund or DST at their respective addresses. No charge is made in
connection with this service. You may obtain an application form for
participation in the automatic investment program by calling (800) 962-FUND.
RETIREMENT PLANS
The fund makes available a retirement plan for self-employed individuals
(Keogh Plan), simplified employee pension plans (SEPs), and both
9
<PAGE> 10
traditional and Roth individual retirement accounts (IRAs) for all individuals.
The minimum initial investment to establish an IRA, SEP or Keogh Plan account is
$200. Unless you specify a different custodian, Investors Fiduciary Trust
Company, Kansas City, Missouri, provides the custodial service for these
accounts for an annual maintenance fee which is currently $12.00 per account and
is payable by the shareholder. If the fee is not prepaid, the fund will deduct
it from your account.
You may obtain applications and additional information concerning these
plans and accounts by calling (800) 962-FUND.
HOW TO REDEEM SHARES
You may request that the fund redeem your shares in whole or in part on any
business day prior to the close of trading on the New York Stock Exchange. Your
redemption request must be in writing and mailed to:
MATHERS FUND, INC.
C/O DST SYSTEMS, INC.
P.O. BOX 419103
KANSAS CITY, MISSOURI 64141
or, if next-day delivery, express mailed to:
MATHERS FUND, INC.
C/O DST SYSTEMS, INC.
210 WEST 10TH STREET, 8TH FLOOR
KANSAS CITY, MISSOURI 64105
If you inadvertently send a redemption request to the fund at its
Bannockburn, Illinois address, the fund will forward the request to DST but the
effective date of redemption will be delayed until DST receives the request.
Requests for redemption by telephone, telegram, facsimile or e-mail and requests
which are subject to any special conditions or which specify an effective date
other than as described above cannot be honored.
A request for redemption must be signed by each shareholder exactly as the
shares are registered, including the signature of each joint owner. You must
have each signature on the redemption request guaranteed if (i) the redemption
request is received within 30 days after an address change, (ii) the amount
being redeemed is $25,000 or greater, or (iii) you request the proceeds of
redemption to be paid or sent to a person other than the registered holder or
holders of the shares to be redeemed or to an address other than the address of
record. You may obtain a signature guarantee from a commercial bank or trust
company in the United States or a member firm of the New York Stock Exchange. If
certificates have been issued for any of the shares to be redeemed, the
certificates, properly endorsed or accompanied by a properly executed stock
power, must accompany the request for redemption.
Additional documentation may be required for redemptions by corporations,
executors, administrators, trustees, guardians or others who hold shares in a
fiduciary or representative capacity or are not natural persons. If you have any
questions concerning the nature of such documentation, please call DST at (800)
235-7458 or the fund at (800) 962-FUND. Redemptions will not be effective or
complete until you have satisfied all of the foregoing conditions.
The redemption price is the net asset value per share next determined after
DST receives your written redemption request in proper form with all required
documentation. The amount received will depend on the market value of the fund's
investments at the time of determination of net asset value, and may be more or
less than the original cost of the shares redeemed. A check in payment for
shares redeemed will be mailed to the holder no later than the seventh day after
DST receives the redemption request in proper form and all required
documentation. However, payment of redemption proceeds may be delayed for a
period of up to 20 days after purchase pending clearance of any check delivered
in connection with the purchase of such shares.
The right to redeem shares will be suspended for any period during which the
New York Stock Exchange is closed because of financial conditions or any other
extraordinary reason and may be suspended for any period during which (i)
trading on the Exchange is restricted, (ii) the SEC has by order permitted such
suspension or (iii) an emergency, as defined by rules and regulations of the
SEC, exists as a result of which it is not reasonably practicable for the fund
to dispose of its securities or fairly to determine the value of its net assets.
10
<PAGE> 11
If the value of your account (other than a retirement account) drops to less
than $1,000 (except as a result of share price fluctuations), the fund reserves
the right to redeem the shares in that account at net asset value after
providing 30 days' written notice, unless the account is increased to a
value of $1,000.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available if you wish to withdraw a fixed
sum or percentage (minimum $200 except for IRA, SEP or Keogh Plan accounts)
monthly, quarterly, semi-annually or annually. Shares are redeemed at the net
asset value per share on or about the fifteenth day of any month specified for a
withdrawal and sent by check to your address of record. Alternatively, you may
have the proceeds wired to your bank account on any business day of the month.
The initial withdrawal request must meet all requirements for redemption as
described under "How to Redeem Shares". There is no charge for this service.
You may obtain a form for participating in this withdrawal plan by calling
(800) 962-FUND.
DIVIDEND REINVESTMENT
Unless you direct otherwise, the fund will reinvest all income dividends and
capital gains distributions automatically in full and fractional shares of the
fund, calculated to the nearest 1,000th of a share. The purchase price will be
the net asset value per share next determined after the dividend declaration,
and your shares will be credited to your account. Stock certificates are not
issued unless requested in writing. You will be advised of the number of shares
purchased and the purchase price following each investment. You may instead
elect to receive all income dividends and capital gains distributions in cash or
to reinvest capital gains distributions and receive income dividends in cash.
Unless you request a federal funds wire transfer in writing, the fund will
make all cash distributions by check delivered by U.S. mail. If the U.S. Postal
Service cannot deliver the check, or if it remains uncashed for six months, the
fund may elect to reinvest it, as well as future dividends and distributions, in
additional shares at the net asset value per share on the day of purchase of
such shares. No interest will accrue on amounts represented by uncashed
distribution or redemption checks. If you elect to have cash distributions sent
to an address other than the address of record or wire transferred, you must
make a written request to such effect (including wire transfer instructions, if
appropriate), and you must have your signature guaranteed. You may obtain a
signature guarantee from a commercial bank or trust company in the United States
or a member firm of the New York Stock Exchange. An election to reinvest or
receive dividends and distributions in cash will apply to all shares of the fund
registered under the same account number, including those previously purchased.
You may withdraw from the dividend reinvestment program and elect to receive
income dividends or all distributions in cash at any time. If you are not
participating in this program but desire to do so, please provide written notice
to DST. If an election to withdraw from or participate in the dividend
reinvestment program is received between a dividend declaration date and payment
date, it will become effective on the day following the payment date. The Fund
may modify or terminate its dividend reinvestment program at any time on 30
days' notice to participants.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The fund intends to distribute substantially all of its net investment
income (i.e., net income and gains exclusive of net capital gains) and net
capital gains, if any, (i.e., net long-term capital gains in excess of net
short-term capital losses and available capital loss carryover) to its
shareholders each year.
Distributions of net investment income and net capital gains will be
taxable to you, regardless of whether such distributions are paid in cash or
reinvested in additional shares of the fund. Distributions of net investment
income will be taxable as ordinary income, and will qualify for the 70%
dividends received deduction available to corporate shareholders only to the
extent of the fund's qualifying dividend income. Distributions of net capital
gains will be taxable to you as gain recognized by you from the sale or exchange
of a capital asset held for more than one year, regardless of the length of time
you have owned shares of the fund. In addition, you may also be subject to state
and local tax on any distributions.
In general, a sale, exchange or redemption of shares is a taxable event and
may result in a capital gain or loss which may be long-term or short-term,
depending on how long you have
11
<PAGE> 12
owned the shares. However, any loss recognized on the sale of a share held for
six months or less is treated as long-term capital loss to the extent of any net
capital gain distributions made with respect to such share.
Any loss realized on your sale or exchange of shares of the fund will be
disallowed to the extent the shares disposed of are replaced, through the
reinvestment of dividends or otherwise, during the 61-day period beginning 30
days before and ending 30 days after the shares are sold or exchanged.
To help you prepare your taxes, after the end of each calendar year, you
will receive a statement summarizing the amount and type of distributions that
you received in the previous year.
Because everyone's tax situation is unique, you should consult your tax
adviser regarding the particular tax consequences of an investment in this fund.
SHAREHOLDER MEETINGS
The fund is not required to hold annual meetings of shareholders. Under
certain circumstances shareholders have the right to call for a meeting of
shareholders to consider the removal of one or more directors or for other
purposes.
12
<PAGE> 13
MATHERS FUND, INC. PURCHASE APPLICATION
(LOGO)
(THIS APPLICATION IS NOT VALID FOR IRA OR KEOGH ACCOUNTS)
<TABLE>
<S> <C> <C>
Regular Mail: Express or Overnight Mail: Call (800) 962-FUND
Mathers Fund, Inc. Mathers Fund, Inc. with any questions
C/o Dst Systems, Inc. C/o Dst Systems, Inc.
P.O. Box 419103 210 West 10th Street, 8th Floor Minimum Initial Investment $1,000
Kansas City, Mo 64141 Kansas City, Mo 64105
I hereby apply for the purchase of $ ________ in full and fractional shares
of Mathers Fund, Inc. Capital Stock, in accordance with your current prospectus
dated April 30, 1999 (a copy of which I have received) and the terms and
instructions below and on the reverse side of this application (which I have
read). All applications must be accompanied by payment. Checks should be made
payable to MATHERS FUND, INC.
- ---------------------------------------------------------------------------------------------------------------------
1. REGISTRATION -- Please Print
[ ] Individual or ------------------------------------------ -----------------------------------
Joint Owners Name Social security number
------------------------------------------
Name of joint owner (see note below)
[ ] Gift to -----------------------------------
Minors ------------------------------------------ Minor's social security number
Name of custodian (one name only)
-----------------------------------
[ ] Corporation, ------------------------------------------ Minor's state of residence
Partnership, Name of minor (one name only)
Trust, Other -----------------------------------
(circle one) ------------------------------------------ Social security or tax I.D. number
Name of corporation or other entity
-----------------------------------
------------------------------------------ If a trust, include date of trust
Name(s) of trustees
- ------------------------------------------------------------------- [ ] U.S. citizen/resident alien
Street or P.O. Box or
[ ] Non-resident alien:
- ------------------------------------------------------------------- -----------------------------------
City State Zip Code Please specify country of tax
residency.)
( )
- -------------------------------------------------------------------
Daytime telephone number
- ---------------------------------------------------------------------------------------------------------------------
2. DISTRIBUTIONS -- Please Check One:
[ ] Income dividends and capital gains distributions automatically reinvested in additional shares.
[ ] Income dividends in cash with capital gains distributions reinvested.
[ ] Income dividends and capital gains distributions in cash.
(If no election is checked, all income dividends and capital gains distributions will be reinvested.)
- ---------------------------------------------------------------------------------------------------------------------
3. SIGNATURES AND CERTIFICATIONS
NOTE: If shares are to be registered jointly, all owners must sign but only one
social security number should be given. Any registration in the names of two or
more co-owners will, unless otherwise specified, be as joint tenants with right
of survivorship and not as tenants in common. Shares may be registered in the
name of a custodian for a minor in accordance with the Uniform Gift to Minors
Act (UGMA) and any applicable state law. For a custodian registration, give
social security number of minor. If signing in other than individual capacity,
please indicate title or capacity.
- ---------------------------------------------------------------------------------------------------------------------
Under penalties of perjury, I certify that: (1) The number shown on this
form is my correct social security number or taxpayer identification number, and
(2) I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
that I am subject to backup withholding as a result of a failure to report all
interest or dividends, or (c) the Internal Revenue Service has notified me that
I am no longer subject to backup withholding. (Cross out (2) above if you have
been notified by the Internal Revenue Service that you are currently subject to
backup withholding because of underreporting interest or dividends on your tax
return.) The Internal Revenue Service does not require your consent to any
provision of this document other than certifications required to avoid backup
withholding.
- ---------------------------------------------------------------------------------------------------------------------
Date
------------------------ ---------------------------------- ------------------------------------------
Signature Signature of Joint Owner (If Any)
</TABLE>
CONTINUED ON THE REVERSE SIDE.
13
<PAGE> 14
GENERAL TERMS
This application is subject to acceptance by the Fund in Bannockburn,
Illinois. The passage of title to and delivery of shares purchased (including
shares later purchased through dividend reinvestment or otherwise), whether or
not certificates are issued, shall be deemed to take place in Illinois. You
certify that you have full capacity to enter into this subscription agreement.
The purchase price shall be the net asset value next determined after the time
this application is accepted by the Fund.
INSTRUCTIONS RELATING TO IRS CERTIFICATIONS
The Fund is required by law to withhold Federal income tax at a rate of 31%
("backup withholding") from your dividends, capital gain distributions and
redemption payments if you do not provide the Fund with your social security or
other taxpayer identification number ("TIN") and certify that such number is
your correct TIN. In addition, the Fund is required to withhold from your
dividends and capital gain distributions (but not redemption payments) if you
fail to certify to the Fund that you are not subject to backup withholding.
Under the law, you are entitled to certify that you are not subject to backup
withholding unless the Internal Revenue Service (the "IRS") has notified you
that you are subject to backup withholding for failure to report interest or
dividends (and the IRS has not later notified you that you are no longer subject
to backup withholding). Any such withholding applies to all dividends and
distributions, including those which would otherwise be invested in additional
shares of the Fund.
If you do not supply the Fund with your correct TIN, you may be subject to a
$50 penalty. If you falsify information on this form or make any other false
statement which results in a failure to implement backup withholding on an
account which should be subject to backup withholding, you may be subject to a
$500 penalty and to certain criminal penalties, including fines and
imprisonment.
14
<PAGE> 15
THIS PAGE INTENTIONALLY LEFT BLANK
15
<PAGE> 16
FOR MORE INFORMATION
More information about the fund is available upon request at no charge,
including the following:
SHAREHOLDER REPORTS
Shareholder reports contain additional information about the fund's investments,
including a listing of portfolio holdings and, in the annual shareholder report,
a letter from management discussing recent market conditions, economic trends
and investment strategies that significantly affected the fund's performance
during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains details about investment policies and strategies of the fund
and certain other additional information. A current SAI is on file with the SEC
and is incorporated into this prospectus by reference. This means that the SAI
is legally considered a part of this prospectus even though it is not physically
contained with this prospectus.
You may request information about the fund* or ask questions:
BY TELEPHONE BY MAIL
(847) 295-7400 or (800) 962-FUND Mathers Fund, Inc.
100 Corporate North
BY E-MAIL Suite 201
Send your request to Bannockburn, Illinois 60015
[email protected]
Inquiries relating to the status of your account or to the requirements for
purchase or redemption of shares may be directed to:
Mathers Fund, Inc.
c/o DST Systems, Inc.
P.O. Box 419103
Kansas City, Missouri 64141
(800) 235-7458
If you wish to obtain the Mathers Fund daily price and asset mix via recorded
message, please call (800) 962-FUND after 4:30 p.m., Central time, Monday
through Friday.
This prospectus is not an offer to sell securities in any place where it would
be illegal to do so.
* You may obtain information about the fund (including the SAI) by visiting the
SEC's Public Reference Room in Washington, D.C. or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009. You may call 1-800-SEC-0330 for information on the operation of the
Public Reference Room. Reports and other information about the fund are also
available on the SEC's Internet site at http:/www.sec.gov.
Mathers Fund, Inc., SEC file number: 811-1311
<PAGE> 17
MATHERS FUND, INC.
Suite 201
100 Corporate North
Bannockburn, Illinois 60015
(800) 962-FUND
(847) 295-7400
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus.
The Prospectus provides basic information about the Fund. This Statement of
Additional Information contains information in addition to and more detailed
than that set forth in the Prospectus, and should be read in conjunction with
the Prospectus. You may obtain a copy of the Prospectus with the same date as
this Statement of Additional Information without charge by writing or calling
the Fund at the address and telephone number set forth above.
The Fund's financial statements for its fiscal year ended
December 31, 1998, included in its 1998 annual report to shareholders, are
incorporated by reference into this Statement of Additional Information. You may
also obtain a copy of this report without charge by writing or calling the Fund
at the address and telephone number set forth above.
April 30, 1999
<PAGE> 18
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
FUND HISTORY AND GENERAL INFORMATION..........................................3
INVESTMENT PRACTICES, RESTRICTIONS AND RISKS..................................3
Fixed-Income Securities..............................................3
Repurchase Agreements................................................4
Short Sales of Securities............................................4
Stock Index Options..................................................6
Stock Index Futures Contracts and
Options on Such Contracts..........................................7
Fundamental Policies................................................10
Nonfundamental Policies.............................................12
General.............................................................13
MANAGEMENT OF THE FUND.......................................................14
CODE OF ETHICS...............................................................17
PRINCIPAL HOLDERS OF THE FUND'S SHARES.......................................17
INVESTMENT ADVISER...........................................................17
INVESTMENT ADVISORY AGREEMENT................................................18
BROKERAGE....................................................................19
PURCHASE, REDEMPTION AND PRICING OF SHARES...................................20
RETIREMENT PROGRAMS..........................................................21
TAX STATUS...................................................................23
DESCRIPTION OF SHARES........................................................26
TRANSFER AGENT...............................................................27
CUSTODIAN AND INDEPENDENT ACCOUNTANTS........................................27
PERFORMANCE INFORMATION......................................................27
FINANCIAL STATEMENTS.........................................................28
ADDITIONAL INFORMATION.......................................................29
</TABLE>
- 2 -
<PAGE> 19
FUND HISTORY AND GENERAL INFORMATION
Mathers Fund, Inc. (the "Fund") was incorporated under
the laws of the State of Maryland on March 31, 1965 and commenced
operations on August 19, 1965.
The Fund is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). An investment company combines the investments of its shareholders
and purchases various securities. Through ownership of shares in the investment
company, shareholders participate in the investment performance of such
securities. As an open-end investment company, the Fund has an obligation to
redeem the shares of any shareholder by paying such shareholder the net asset
value next computed after receipt of a request in proper form for a redemption
of such shares.
INVESTMENT PRACTICES, RESTRICTIONS AND RISKS
The Fund's investment objective, how the Fund seeks to achieve
its investment objective and the principal investment strategies by which the
Fund will pursue its objective are generally set forth in the Prospectus. This
section describes in more detail certain securities in which the Fund may invest
and certain investment practices and restrictions and is intended to augment the
description found in the Prospectus.
Fixed-Income Securities
As discussed in the Prospectus, the Fund may, subject to the
limitation described in paragraph 3 under "Fundamental Policies" below, invest
all or any portion of its assets in high quality fixed-income securities, which
may include the following:
o U.S. Treasury bills, notes or bonds;
o banker's acceptances and certificates of deposit of the 50
largest commercial banks in the United States, measured by
total assets as shown by their most recent annual financial
statements;
o commercial paper rated A-l or A-2 by Standard & Poor's,
Inc. ("S&P") or P-l or P-2 by Moody's Investors Service,
Inc. ("Moody's"), or, if not rated, issued by companies
having an outstanding debt issue rated AA or better by
S&P or Aa or better by Moody's; and
o repurchase agreements with respect to the foregoing.
- 3 -
<PAGE> 20
Repurchase Agreements
The Fund will not enter into repurchase agreements except with
its custodian bank, State Street Bank and Trust Company, or invest over 10% of
its assets in repurchase agreements with maturities of over seven days.
Underlying securities subject to a repurchase agreement between the Fund and
State Street are held in a segregated account in which State Street holds assets
on behalf of the Fund and others. If State Street fails to repurchase any such
securities, the Fund could experience losses that include
o possible decline in their value while the Fund seeks to
enforce its rights,
o possible loss of all or a part of the income or proceeds
of the repurchase,
o possible loss of rights in such securities, and
o additional expenses to the Fund in enforcing its rights.
Short Sales of Securities
As discussed in the Prospectus, the Fund may, subject to the
limitation described in paragraph 10 under "Nonfundamental Policies" below,
effect short sales of securities. A short sale is a transaction in which the
Fund sells a security which it does not then own in order to profit from the
potential decline in the market price of that security. To meet its settlement
obligation, the Fund borrows the security sold short from a broker and delivers
that security to the buyer. The Fund is then obligated to return the borrowed
security to the broker, typically at an unspecified future date. At that time,
the Fund purchases an equivalent number of shares of the same shorted security
at its then current market price in order to cover the short position and effect
the return. The price at such time may be more or less than the price at which
the Fund sold the security short. The transaction will be profitable to the Fund
if the price of the security at the time it is purchased is less than its price
at the time the Fund entered into the short sale. Conversely, if the price of
the security is greater at the time of purchase than at the time of the short
sale, the transaction will result in a loss. The Fund will be obligated to
reimburse the lender for any dividends paid on the borrowed stock during the
period of the open short position and may have to pay a fee to borrow certain
stocks.
- 4 -
<PAGE> 21
The Fund's broker retains the proceeds of the short sale for
the purpose of meeting collateral requirements until such time as the Fund
closes out the short position. In general, the Fund must also pledge additional
cash or liquid securities to the broker as collateral for its obligations.
Generally, brokers require initial collateral (including the short sale
proceeds) with a value equal to 150% of the value of the securities sold short.
The amount of collateral is adjusted daily upward to reflect increases in the
market value of the securities sold short and downward to reflect decreases in
the market value of the securities sold short. In addition, pursuant to rules
imposed by the Securities and Exchange Commission (the "SEC"), until the Fund
covers its short position, the Fund will be required to maintain with its
custodian a segregated account, containing cash or liquid debt or equity
securities, such that the amount deposited in the segregated account plus the
amount deposited with the broker as collateral (excluding initial proceeds from
the short sale) equals the current market value of the security sold short. It
is possible that up to 100% of the Fund's assets will be held in such a
segregated account (or a segregated account as described under "Stock Index
Futures Contracts and Options on Such Contracts" below) or deposited with a
broker as collateral as described in the preceding sentences.
The Fund's investment adviser may sell securities short when
it believes that prices of such securities are likely to decline, thereby giving
the Fund the opportunity to potentially profit from any such decline. The Fund
anticipates that its short sales will generally involve individual equity
securities and will generally not involve short sales "against the box," which
is the sale of a security that the seller contemporaneously owns or has a right
to obtain at no added cost. The asset segregation procedures described in the
preceding paragraph need not be applied to short sales to the extent they are
"against the box."
The short sale of securities is generally considered a
speculative investment strategy, and there are risks associated with it,
including but not limited to the following: (i) the decision of whether, when
and how to utilize short selling involves the exercise of skill and judgement
and, unless the adviser correctly anticipates the price movements of securities,
it is possible that, for at least certain short sales, the Fund would have been
better off if the short sale had not been made, (ii) unlike a long purchase,
where the investor cannot lose more than the purchase price, there is no
theoretical limit to potential losses on a short sale; (iii) under certain
conditions, short sales of securities could increase the volatility of the Fund
or decrease its liquidity; (iv) possible volatility or
- 5 -
<PAGE> 22
illiquidity in the markets which could result in difficulty in closing out an
existing short position, causing a continuing exposure to adverse price
movements until the position is covered; (v) the lender of a security borrowed
and sold short may call the security back, possibly causing a premature
close-out of the short position; and (vi) the amount of any gain will be
decreased, and the amount of any loss increased, by the amount of dividends or
interest the Fund may be required to pay in connection with a short sale.
Stock Index Options
As discussed in the Prospectus, the Fund may, subject to the
limitation described in paragraph 7 under "Nonfundamental Policies" below,
purchase put and call options on stock indices for hedging purposes in
circumstances believed appropriate by the adviser. Stock index options are
issued by the Options Clearing Corporation ("OCC"). The Fund will only purchase
stock index options which are traded on a national securities exchange such as
the Chicago Board Options Exchange, Inc. Upon purchase of a stock index option,
the Fund will pay a purchase price (the "premium") and brokerage commissions and
fees (collectively, together with the premium, "transaction costs"). Such
options confer upon the holder the right to receive upon exercise an amount of
cash which is based on the difference between the exercise price of the option
and the closing level of the underlying stock index on the exercise date
multiplied by a specified dollar amount. The right to receive any cash amount
depends on the closing level of the stock index upon which the option is based
being greater than (in the case of a call) or less than (in the case of a put)
the exercise price of the option.
A stock index option may be exercised only during its
remaining life and may be sold prior to expiration. The value of an option will
generally vary directly, in the case of a call, and inversely, in the case of a
put, with movements in the underlying index, and the percentage fluctuations in
the value of an option may be many times greater than those of the underlying
index. The adviser may purchase call index options as a hedge against an
increase in the price of securities generally in connection with either sales of
portfolio securities or deferrals to a later date of purchases of securities it
may desire to purchase. Put index options may be purchased as a hedge against a
decline in the price of securities generally rather than selling portfolio
securities.
Any protection provided by stock index options is effective
only against changes in the level of a stock index and not necessarily against a
change in the value of individual
- 6 -
<PAGE> 23
securities. Thus, the effectiveness of the use of stock index options as a hedge
is dependent on the extent to which price movements of individual securities
which are being hedged correlate with price movements in the underlying stock
index. Unless a stock index option can be sold or can be exercised at a profit
prior to expiration, the Fund will forfeit the entire amount of its transaction
costs, often in a relatively short period of time. Any profit that may be
realized from the sale or exercise of stock index options will be reduced by
related transaction costs.
Stock Index Futures Contracts and Options on Such Contracts
As discussed in the Prospectus, the Fund may, subject to the
limitation described in paragraph 8 under "Nonfundamental Policies" below,
purchase or sell stock index futures contracts and options on such contracts for
hedging purposes in circumstances believed to be appropriate by the adviser,
thereby altering the Fund's equity exposure without actually buying or selling
underlying equity securities. A stock index futures contract provides that a
person with an open position in such a contract has the right to receive, or has
the obligation to pay, cash amounts on a daily basis during the period such
position is open based on the daily changes in the difference between the price
at which the contract is originally made and the current level of the underlying
stock index multiplied by a specified dollar amount. An option on a stock index
futures contract gives the holder (purchaser) the right, but not the obligation,
in return for payment of the premium (option price), to acquire either a long or
a short position (a long position if the option is a call and a short position
if the option is a put) in such futures contract at a specified exercise price
at any time during the option exercise period. The writer of the stock index
futures option has the obligation upon exercise to assume the opposite position
on the stock index futures contract.
The Fund's transactions in stock index futures contracts will
be executed on U.S. boards of trade designated by the Commodity Futures Trading
Commission ("CFTC") as contract markets ("contract markets") through a futures
commission merchant (an "FCM") which is a member of the relevant contract
market. The contract markets, through their clearing houses, effectively
guarantee that the payments due with respect to stock index futures contracts
will be made so that traders need not rely solely on the solvency of individual
traders or brokers for the satisfaction of the obligations under open positions.
However, in the event of a bankruptcy of the Fund's broker, the Fund may be
unable to recover its assets -- even assets directly traceable to the Fund --
from such broker.
- 7 -
<PAGE> 24
At the time the Fund enters into a stock index futures
contract, it is required to deposit as "initial margin" a specified amount of
cash or cash equivalents per contract. Thereafter, subsequent payments of
"variation margin" are made daily to or from the FCM based upon daily changes in
the value of the contract (a process known as "marking to market"). Initial
margin is in the nature of a performance deposit which is returned to the Fund
unless it defaults in making variation margin payments. Variation margin is the
settlement made each day between the Fund and the FCM based upon fluctuations in
the price level of such contracts, which under normal market conditions directly
reflect fluctuations in the level of the stock index on which the contract is
based. A person with a long position in a stock index futures contract
(purchaser) has the right to receive payments to the extent that the market
price level of such futures contract increases above the level at which such
person acquired the long position, and will be obligated to make payments to the
extent that such market price level falls below the acquisition price level. The
converse is the case for a person with a short position in a stock index futures
contract (seller).
Upon exercise of a stock index futures option, the
simultaneous acquisition of open positions in the underlying stock index futures
contract by the person exercising the option and the writer is accomplished by
delivery for the account of the person exercising the option of the accumulated
cash balance in the writer's futures margin account which represents the amount
by which the market price of the stock index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
strike price of the stock index futures option. If the stock index futures
option is exercised on the last trading day for such option, the writer delivers
to the holder cash in an amount equal to the difference between the option
strike price and the closing level of the relevant stock index on the date the
option expires.
The Fund will not sell stock index futures contracts if,
immediately thereafter, the aggregate underlying value of all such stock index
futures contracts would exceed the total market value (or, if higher, a
volatility-adjusted value) of the Fund's portfolio of equity securities
(although it is possible that the value of all such futures contracts could
exceed such total market value or such volatility-adjusted value of portfolio
equity securities due to subsequent market movements), and the Fund will not
purchase stock index futures contracts unless it maintains
- 8 -
<PAGE> 25
with its custodian in a segregated account cash or liquid securities in an
amount equal to the market value of all such stock index futures contracts (less
the amount of initial margin deposits in respect thereof).
The Fund has obtained from the Commodity Futures Trading
Commission (the "CFTC") an exclusion from falling within the definition of a
"commodity pool operator" pursuant to the regulations under the Commodity
Exchange Act and thus has not registered as such with the CFTC.
The Fund may purchase and sell stock index futures contracts
and options on such contracts as a hedge against market fluctuations in its
portfolio of equity investments or as a means of quickly and efficiently
converting the Fund's cash into an equity position. For example, the Fund might
use stock index futures contracts to hedge against fluctuations in the general
level of stock prices which might adversely affect either the value of the
Fund's portfolio securities or the price of securities which the Fund intends to
purchase. The Fund's hedging may include sales of stock index futures contracts
as an offset against the effect of expected declines in stock prices and
purchases of stock index futures contracts as an offset against the effect of
expected increases in stock prices.
In its purchase of stock index futures contracts or options on
such contracts, the Fund may not necessarily have the contemporaneous intention
of converting such positions into specific equity securities by means of the
purchase of such securities for the Fund's portfolio, and in its sale of stock
index futures contracts or options on such contracts, the Fund may not
necessarily have the contemporaneous intention of converting such positions into
non-equity holdings by means of the sale of equity securities then held in the
Fund's portfolio.
Several risk factors are associated with trading stock index
futures contracts and options on such contracts. These risks include: (i) an
imperfect correlation, limiting the effectiveness of any hedge the Fund may
attempt in the futures markets, between the change in market value of the stocks
in the Fund's portfolio and the prices of stock index futures contracts and
options on such contracts in the Fund's portfolio due to the stocks held by the
Fund not fully replicating the stocks underlying the relevant stock index; (ii)
possible illiquidity in the markets for stock index futures contracts and
options on such contracts which could result in the Fund's inability to close
out an existing position resulting in a continuing exposure to adverse price
movements; (iii) the highly leveraged nature of stock index futures contracts
- 9 -
<PAGE> 26
and options on such contracts, resulting in extreme volatility in the value of
such contracts as a percentage of the Fund's assets committed to such positions
in the form of futures margins or option premiums; (iv) the fact that the
decision of whether, when and how to hedge involves the exercise of skill and
judgment, and unless the Fund's investment adviser correctly predicts market
movements it is possible that as to a particular hedge the Fund would have been
better off had a decision to hedge not been made; and (v) the possibility that a
stock index futures option purchased by the Fund may expire worthless, in which
case the Fund would lose the premium paid for it as well as related transaction
costs. In addition, in response to the market turbulence in October 1987,
certain contract markets have adopted rules requiring the cessation of trading
for specified periods in the event of substantial intra-day price changes and
overall daily price fluctuation limits (the maximum amount that the price of a
stock index futures contract may vary up or down from the previous day's
settlement price). The Federal Reserve Board has the authority to oversee the
levels of required margin on stock index futures contracts and options on such
contracts. The Federal Reserve Board or the CFTC, acting pursuant to delegated
authority, could require that minimum margin levels be set at levels which
exceed those historically applied by the contract markets.
The price level of a stock index futures contract should
correlate with the current level of the related stock index, after adjustment to
reflect that a person with a long open futures position will receive interest on
the funds such person otherwise would have had to use to acquire the stocks
which comprise such index but, at the same time, will receive no dividends on
the futures position as would have been the case if such person had actually
acquired such stocks. In turbulent market conditions, however, the price level
of stock index futures contracts can become disassociated from the level of the
related stock index (as, in fact, happened during October 1987), materially
impairing the usefulness of the stock index futures markets for hedging stock
positions.
Fundamental Policies
The Fund has adopted certain fundamental investment
restrictions which may not be changed without approval of the holders of the
lesser of: (i) 67% of the Fund's shares present or represented at a shareholders
meeting at which the holders of more than 50% of such shares are present or
represented, or (ii) more than 50% of the outstanding shares of the Fund. Under
its fundamental investment restrictions, the Fund may not:
- 10 -
<PAGE> 27
1. Purchase securities on margin (except that the Fund may
make margin payments in connection with transactions in stock index futures
contracts and options on such contracts and in connection with short sales of
securities), participate in a joint-trading account (the bunching of securities
transaction orders with orders of other accounts managed by the adviser not
being considered participation in a joint-trading account for this purpose), act
as an underwriter or distributor of securities other than shares of the Fund,
lend money (except by purchasing publicly distributed debt securities or
entering into repurchase agreements) or purchase or sell commodities or
commodity futures (except that the Fund may purchase or sell stock index futures
contracts and options on such contracts) or real estate (marketable securities
of companies whose business involves the purchase or sale of real estate,
including real estate investment trusts, not being considered real estate for
this purpose).
2. Borrow money or issue senior securities, except for
temporary bank borrowings (not in excess of 5% of the value of its assets) for
emergency or extraordinary purposes, or pledge any of its assets (collateral
arrangements with respect to margin for stock index futures contracts and
options on such contracts and with respect to short sales of securities not
being considered a pledge of assets for this purpose), except to secure such
borrowings and only to an extent not greater than 10% of the value of the Fund's
net assets. The Fund has not, however, employed the practices of borrowing
money, issuing senior securities or pledging any of its assets nor does it
intend to employ such practices in the absence of unforeseen circumstances.
3. Purchase debt securities other than those which are
publicly held (repurchase agreements not being considered debt securities for
this purpose).
4. Purchase securities of other investment companies, except
on the open market where no profit or commission results other than the broker's
commission, or as part of a plan of merger, consolidation or reorganization
approved by the shareholders of the Fund.
5. Make investments for the purpose of exercising control or
management of any company.
6. Purchase securities of any issuer (other than the United
States or an instrumentality of the United States) if, as a result of such
purchase, the Fund would hold more than 10% of the voting securities of any
class of such issuer or more than 5% of the Fund's assets would be invested in
securities of such issuer.
- 11 -
<PAGE> 28
7. Concentrate more than 25% of the value of its assets,
exclusive of government securities, in securities issued by companies primarily
engaged in the same industry.
8. Acquire or retain any security issued by a company, an
officer or director of which is an officer or director of the Fund or an
officer, director or other affiliated person of its investment adviser.
Nonfundamental Policies
The Fund has adopted the following nonfundamental policies
which may be changed by the Fund's Board of Directors without shareholder
approval. The Fund will not:
1. Purchase any securities which are restricted from sale to
the public without registration under the Securities Act of 1933.
2. Purchase any interest in any oil, gas or any other mineral
exploration or development program or, except for options on stock indices as
set forth in paragraph 7 below, invest in put and call options.
3. Purchase any security if, as a result of such purchase, the
Fund would hold more than 10% of any class of the securities of an issuer.
4. Acquire or retain any security issued by a company if the
directors or officers of the Fund or directors, officers or other affiliated
persons of its investment adviser beneficially owning more than 1/2% of such
company's securities together own more than 5% of its securities.
5. Enter into repurchase agreements, except with State Street
Bank and Trust Company, or invest over 10% of its assets in repurchase
agreements with maturities of more than seven days.
6. Invest over 10% of its net assets in securities of foreign
issuers which are not publicly traded in the United States.
7. Purchase put and call options on stock indices if the total
cost (determined as of the time of purchase) of all such options held by the
Fund would exceed 5% of the value of the Fund's net assets considered each time
such an option is acquired.
- 12 -
<PAGE> 29
8. Enter into stock index futures contracts or options on such
contracts if immediately thereafter the aggregate initial margin and premiums
(less the amount by which any such options are "in-the-money" at the time of
purchase) would exceed 5% of the value of the Fund's total assets after taking
into account any unrealized profits and losses on such instruments.
9. Invest more than 5% of its net assets in warrants (valued
at the lower of cost or market value) or more than 2% of its net assets in
warrants not listed on the New York or American Stock Exchange (warrants
acquired by the Fund in units or attached to securities to be considered without
value for these purposes).
10. (i) Sell any securities short if immediately thereafter
the market value of all securities sold short by the Fund would exceed 30% of
the value of the Fund's net assets, or (ii) sell securities of any single issuer
short if immediately thereafter the market value of the securities of that
issuer that have been sold short by the Fund would exceed 3% of the Fund's net
assets or if the securities sold short would constitute more than 2% of a class
of the issuer's outstanding securities.
General
Any percentage limitations referred to in the above investment
restrictions are determined at the time a purchase or initial investment or
short sale is made and any subsequent change in any applicable percentage
resulting from market fluctuations does not require elimination of any security
from or short position in the Fund's portfolio.
The Fund's fundamental investment restriction as to
concentration described in paragraph 7 under "Fundamental Policies" above, does
not apply to investments in government securities (e.g., U.S. Treasury
securities) since their issuers are not members of any industry. The Fund
includes government securities in determining the value of all of its assets for
purposes of calculating the percentage of the value of its assets invested in
issuers primarily engaged in an industry.
The Fund may invest, without limitation under the
nonfundamental policy described in paragraph 6 under "Nonfundamental Policies"
above, in foreign securities that are U.S. dollar denominated and are publicly
traded in the United States and in U.S. dollar denominated American Depositary
Receipts (receipts issued by an American bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer). As of December
31, 1998, 1.2% of the Fund's net assets were
- 13 -
<PAGE> 30
invested in securities of foreign issuers. Dividends and interest on securities
of foreign issuers may be subject to foreign withholding tax, which would reduce
the Fund's income without providing a tax credit for the Fund's shareholders.
Other risks of investing in foreign securities include political, social or
economic instability in the country where the issuer is domiciled, the
difficulty of predicting international trade patterns, exchange rate
fluctuations, and, in certain countries, the possibility of expropriation or
diplomatic developments that could affect investments in those countries. In
addition, less information may be publicly available about a foreign company
than about a domestic company, foreign companies may not be subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies, and securities of some foreign companies may
be less liquid and more volatile than securities of comparable U.S. companies.
The Fund may purchase securities in underwritten prospectus
offerings, including so-called "hot" initial public offerings, but will
generally do so on the basis of fundamental valuation and/or special situation
investment considerations, and not, typically, solely on the basis of supply and
demand considerations. Generally, the Fund will participate only when the
adviser believes the securities offered are consistent with the Fund's
non-prospectus offering security selections and investment risk profile.
MANAGEMENT OF THE FUND
The Board of Directors of the Fund consists of eight
individuals, five of whom are not "interested persons" of the Fund as defined in
the Investment Company Act. The Board of Directors is responsible for managing
the Fund's business and affairs. The Board of Directors has appointed the Fund's
officers, who conduct the daily business of the Fund.
Set forth below is information about the directors and
officers of the Fund, including their ages as of April 30, 1999. Directors
deemed to be "interested persons" of the Fund for purposes of the 1940 Act are
indicated by an asterisk (*).
<TABLE>
<CAPTION>
Name, Address and Age Position(s) held with Fund
- --------------------- --------------------------
<S> <C>
Henry G. Van der Eb, Jr., CFA (53) Chairman and Director*
100 Corporate North
Bannockburn, Illinois 60015
</TABLE>
- 14 -
<PAGE> 31
<TABLE>
<S> <C>
Robert J. Reynolds, CFA (48) President and Director*
100 Corporate North
Bannockburn, Illinois 60015
Anne E. Morrissy, CFA (38) Executive Vice President
100 Corporate North and Secretary and Director*
Bannockburn, Illinois 60015
Tyler R. Cain (58) Director
3 Market Square Court
Lake Forest, Illinois 60045
Charles G. Freund (75) Director
30 Plymouth Court
Lincolnshire, Illinois 60069
Jon P. Hedrich (58) Director
1240 Thornapple Lane
Northbrook, Illinois 60062
Robert E. Kohnen (65) Director
5733 Fairmount Avenue
Downers Grove, Illinois 60516
Jack O. Vance (74) Director
Management Research, Inc.
3592 Venture Drive
Huntington Beach, CA 92649
Lawrence A. Kenyon, CPA (33) Senior Vice President and
100 Corporate North Chief Financial Officer
Bannockburn, Illinois 60015
Edith L. Cook (57) Vice President and Treasurer
100 Corporate North
Bannockburn, Illinois 60015
Heidi M. Stubner (30) Vice President
100 Corporate North
Bannockburn, Illinois 60015
</TABLE>
Mr. Van der Eb, Mr. Reynolds and Ms. Morrissy have been
employed by Mathers and Company, Inc. since 1970, 1982, and 1983,
respectively. Mr. Kenyon, Ms. Cook and Ms. Stubner have each been
employed by Mathers and Company, Inc. for more than five years.
- 15 -
<PAGE> 32
Mr. Cain has been president and sole shareholder of TRC
Trading, Inc., a private investment company, for more than the last five years.
Mr. Freund is a director of Lincoln National Direct Placement Fund, Inc. and
Lincoln Convertible Securities Fund (registered closed-end investment companies)
and Success Bancshares Inc. Prior to his retirement in 1986, Mr. Freund was
Vice President, Secretary and Treasurer of MidCon Corp., a natural gas pipeline
company.
Mr. Hedrich is a private investor. Prior to 1992, he
was President and Partner of Steiner Diamond Institutional Services. Prior to
his retirement in 1998, Mr. Kohnen was Vice President and Investment Manager of
Protection Mutual Insurance Company. Mr. Vance is Managing Director of
Management Research, Inc., a management consulting firm, and a director of
International Rectifier Corporation (semi-conductors), Semtech, Inc. and FCG
Enterprises, Inc. (management consulting). Prior to 1990, he served as Managing
Director of McKinsey and Company, a management consulting firm.
The Fund does not pay any fees to its directors who are
considered "interested persons" of the Fund or the adviser, as defined in the
1940 Act. The aggregate compensation paid by the Fund during its fiscal year
ended December 31, 1998 to the members of the Board who are non-interested
directors is set forth below. These directors are also reimbursed for their
expenses in attending board meetings. The adviser does not provide investment
advisory services to any other registered investment company, and therefore the
Fund's directors receive compensation only from the Fund. The Fund does not
maintain any deferred compensation, pension or retirement plans, and no pension
or retirement benefits are accrued as part of Fund expenses.
<TABLE>
<CAPTION>
Aggregate
Name of Non-Interested Compensation
Director of the Fund from the Fund
-------------------- -------------
<S> <C>
Karl M. Becker $9,000
Tyler R. Cain $9,000
Charles G. Freund $9,000
Jon P. Hedrich $8,000
Robert E. Kohnen $8,000
Jack O. Vance $8,000
</TABLE>
As of March 31, 1999, the directors and officers of the Fund,
as a group, beneficially owned 315,498 or 3.56% of the Fund's outstanding
shares, including the shares held in the Employees' Profit Sharing and Savings
Trust of the adviser.
- 16 -
<PAGE> 33
CODE OF ETHICS
The Fund and the adviser have adopted a Code of Ethics which
is designed to restrict their affiliated personnel from engaging in personal
investment activities in conflict with the interests of the Fund. The Code of
Ethics complies in all material respects with the recommendations set forth in
the May 9, 1994 Report of the Advisory Group on Personal Investing of the
Investment Company Institute.
PRINCIPAL HOLDERS OF THE FUND'S SHARES
As of February 16, 1999, no person owned of record or was
known by the Fund to own beneficially more than 5% of the Fund's outstanding
shares except for Edward Pauls, who owned of record 16.73% of the Fund's
outstanding shares as of such date.
INVESTMENT ADVISER
Under an investment advisory agreement with the Fund, Mathers
and Company, Inc., 100 Corporate North, Suite 201, Bannockburn, Illinois,
furnishes continuous investment advisory services and management to the Fund.
The adviser receives an annual fee of 0.75% of the first $200,000,000 of the
Fund's average net asset value, plus 0.625% of such value in excess of
$200,000,000 but not exceeding $500,000,000, plus 0.50% of such value in excess
of $500,000,000, payable monthly and determined by valuations made as of the
close of the previous month. The fees paid by the Fund to the adviser for 1998,
1997 and 1996 were $865,916, $1,123,610 and $1,451,059, respectively. Pursuant
to the expense reimbursement provision contained in the investment advisory
agreement and described under "Investment Advisory Agreement" below, the fees
paid by the Fund to the adviser for 1998 were reduced by $41,301. Absent such
expense reimbursement provision, the fees paid by the Fund to the adviser for
1998 would have been $907,217.
Mr. Van der Eb, CFA, an officer and director of the
Fund, is President and a director of the adviser, and Mr. Reynolds, CFA, is
Senior Vice President and Secretary, Ms. Morrissy, CFA, is Vice President, Mr.
Kenyon, CPA, is Vice President, Treasurer and Assistant Secretary, and Ms. Cook
is Vice President and Assistant Treasurer of the adviser. Mr. Van der Eb owns
all of the outstanding shares of the adviser and is the controlling person of
the adviser.
- 17 -
<PAGE> 34
Mr. Van der Eb has been primarily responsible for the
day-to-day management of the Fund's portfolio for more than the last ten years.
Mr. Reynolds and Ms. Morrissy also play significant roles in such management.
INVESTMENT ADVISORY AGREEMENT
The investment advisory agreement was approved by the
shareholders of the Fund on April 20, 1988. The directors last approved the
continuation of the investment advisory agreement on April 19, 1999, by the
votes of directors described in the following paragraph. Under the agreement,
the adviser, at its own expense and without reimbursement from the Fund,
furnishes office space, office facilities, equipment, personnel (including
executive officers but excluding the services of directors who are not
affiliated persons of the adviser) and clerical and bookkeeping services for
managing the assets of the Fund, and bears all sales and promotional expenses of
the Fund, other than expenses incurred in complying with laws regulating the
issuance or sale of securities. The Fund bears all other expenses of its
operations (principally transfer agent, legal, auditing, custodian, taxes,
shareholder communication expenses, registration and printing proxy material,
shareholder reports, prospectuses sent to existing shareholders and filed with
regulatory authorities, and toll-free telephone expense for use by existing
shareholders), but is entitled to be reimbursed annually by the adviser for any
expenses, other than taxes, in excess of 1-1/2% of the first $30,000,000 of its
average net asset value plus 1% of such value in excess of $30,000,000 for each
year, in each case as determined by evaluations made as of the close of each
month of the year. Brokerage commissions are not treated as expenses for
purposes of this limitation.
The agreement is not assignable and may be terminated by
either party, without penalty, on 60 days' notice. Otherwise, the agreement will
continue in effect until April 30, 2000 (unless sooner terminated), and
thereafter from year to year so long as it is approved annually (a) by vote of a
majority of the directors of the Fund who are not "interested persons" of the
Fund or of the adviser, as defined in the 1940 Act, cast in person at a meeting
called for the purpose of voting on such approval, and (b) either by the Board
of Directors or by the vote of shareholders described in the first paragraph
under "Investment Practices, Restrictions and Risks -- Fundamental Policies."
The agreement provides that the services of the adviser to the
Fund are not to be deemed exclusive and that the adviser may furnish similar
services to others so long as the services to the Fund are not impaired thereby.
The adviser has served as
- 18 -
<PAGE> 35
investment adviser to pension and profit-sharing funds, charitable foundations,
insurance company separate accounts and/or others since 1961. The adviser
maintains investment allocation policies intended to afford each of its accounts
fair treatment over time.
BROKERAGE
In placing purchase and sale orders of portfolio securities
for the Fund, the adviser's policy is to seek the best execution of orders at
the most favorable prices in light of the overall quality of brokerage and
research services provided, as described in this and the following paragraphs.
In selecting brokers to effect portfolio transactions, the determination of what
is expected to result in best execution at the most favorable price involves a
number of largely judgmental considerations. Among these are the adviser's
evaluation of the broker's efficiency and reliability in executing and clearing
transactions, block trading capability (including the broker's willingness to
position securities) and the broker's financial strength and stability. The most
favorable price to the Fund means the best net price without regard to the mix
between purchase or sale price and commission, if any. Primary market makers are
generally used for transactions in the over-the-counter market except in those
instances where the adviser believes better execution or a more favorable price
is obtainable elsewhere, such as through Instinet or other non-NASDAQ execution
services. The Fund's orders for the purchase and sale of a particular security
may be aggregated with contemporaneous orders for the accounts of other clients
of the adviser for execution as a single transaction with a broker or a dealer.
In allocating brokerage business for the Fund, the adviser
also takes into consideration the research, analytical, statistical and other
information and services provided by the broker, including but not limited to
general economic reports, performance measurement and portfolio analysis
reports, computer-based equity valuation models, reports or analyses of
particular companies or industry groups, market timing and technical information
and the availability of the brokerage firm's analysts for consultation.
Consistent with the safe harbor provided by Section 28(e) of the Securities
Exchange Act of 1934, a higher brokerage commission than might be negotiated or
be available from another broker may be paid where the adviser believes the
amount is reasonable in recognition of the overall quality and value of the
brokerage and research services provided by the broker. While the adviser
believes these services have substantial value, they are considered supplemental
to the adviser's own efforts in the performance of its duties under the
investment advisory agreement.
- 19 -
<PAGE> 36
Arrangements exist with broker-dealers whereby the adviser
obtains computerized stock quotation and news services, performance and ranking
services, portfolio analysis services and other research services in exchange
for the direction of portfolio transactions which generate dealer concessions or
brokerage (agency) commissions for such broker-dealers. From time to time, the
adviser may make other similar arrangements with brokers or dealers which agree
to provide research services in consideration of dealer concessions or brokerage
commissions. Although the adviser has not done so in the past, the adviser may
also allocate brokerage to brokers or dealers who recommend the purchase of
shares of the Fund to their clients. Consistent with the adviser's fiduciary
duties to the Fund, brokerage will be directed to such brokers or dealers
pursuant to any such arrangement only when the adviser believes that the
commissions charged are reasonable in relation to the value and overall quality
of the brokerage and research services provided. During 1998, the total amount
of Fund brokerage transactions and related brokerage commissions directed in
consideration of research services provided to the adviser were $25,931,777 and
$72,997, respectively, exclusive of dealer concessions from underwritten
offerings.
Some research services furnished by brokers and dealers
through whom the adviser effects securities transactions may be used in
servicing all of its accounts and not all such services may be used in
connection with the accounts which paid commissions to the broker providing such
services.
During 1998, 1997 and 1996, the Fund paid total brokerage
commissions of $551,077, $291,860 and $532,849, respectively, virtually all of
which was paid to firms providing research as well as brokerage services. The
Fund's annual portfolio turnover rate is set forth in the Prospectus under
"Financial Highlights." Portfolio turnover may be high in certain years. Several
factors may contribute to this, including (i) the volatility of the markets,
combined with a willingness of the adviser to respond to certain market
conditions believed by the adviser to warrant holding a security for a period
shorter than the long-term, and (ii) the adviser's willingness to invest in
fixed income securities with maturities greater than one year (which, unlike
short-term debt instruments, are included in calculating portfolio turnover)
under the circumstances described in the Prospectus.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For a general discussion of how shares of the Fund are
purchased and redeemed and how the Fund values such shares for
- 20 -
<PAGE> 37
such purposes, see "Determination of Net Asset Value," "Purchase of Shares,"
"Automatic Investment Program," "How to Redeem Shares" and "Systematic
Withdrawal Plan" in the Prospectus. Such discussions are incorporated herein by
reference.
Stock index futures contracts held by the Fund are valued at
the close-of-trading settlement price established each day by the exchange on
which they are traded, and options on stock index futures and options on cash
stock indices are valued at their daily end-of-trading closing prices on the
exchanges on which they are traded.
The Fund does not consider the U.S. Postal Service or express
mail delivery services to be its agents. Therefore, deposit in the mail or with
such services, or receipt at the post office box of DST Systems, Inc., the
Fund's transfer agent, of purchase applications (or redemption requests) does
not constitute receipt by DST or the Fund.
The Fund, at its discretion, may permit an investor to
purchase shares of the Fund at net asset value in exchange for securities held
by the investor, provided that the Fund's acquisition of such securities is
consistent with its investment policies. For purposes of determining the number
of Fund shares to be received in exchange for any accepted securities, the Fund
will value such securities in the same manner as is used by the Fund to value
its own assets. For more information on this method of purchase, please contact
the Fund at 100 Corporate North, Suite 201, Bannockburn, Illinois 60015, (800)
962-FUND.
Broker-dealers which effect purchases or sales of shares of
the Fund on behalf of their customers may impose a transaction charge on such
customers for performing such services. No such transaction charge is imposed if
shares are purchased directly from the Fund, without the employment of the
services of a broker-dealer.
RETIREMENT PROGRAMS
The Fund makes available a Retirement Plan for Self- Employed
Individuals ("Keogh Plan") with both money purchase pension plan and profit
sharing plan options, Simplified Employee Pension plans ("SEPs") and both
traditional and Roth Individual Retirement Accounts ("IRAs"). Contributions to
each are invested, and dividends and distributions are automatically reinvested,
in shares of the Fund. Generally, the maximum contribution allowable each year
to an IRA is the lesser of $2,000 and 100% of compensation includible in gross
income for the year. For a married couple, each spouse may contribute up to
$2,000 to his or
- 21 -
<PAGE> 38
her IRA for a year if the combined compensation of both spouses for the year (as
shown on their joint income tax return) is at least $4,000. The maximum annual
contribution which can be made for an employee or self-employed individual to a
Keogh Plan is the lesser of (i) $30,000 and (ii) 25% of an employee's
compensation or a self-employed individual's earned income (net earnings reduced
by Keogh Plan contributions) for the year. However, the maximum deduction
allowable each year for contributions to the profit sharing plan option of a
Keogh Plan is, generally, 15% of an employee's compensation or a self-employed
individual's earned income (net earnings reduced by Keogh Plan contributions)
for the year. Under a SEP, an employer, or self-employed individual, is
permitted to contribute a discretionary amount each year up to the lesser of
$30,000 or 15% of an employee's compensation for the year, or a self-employed
individual's earned income (net earnings reduced by SEP contributions) for the
year, into an individual IRA for each employee or self-employed individual. The
annual compensation of each employee and the earned income of each self-employed
individual which can be taken into account under the Keogh Plan and a SEP cannot
exceed $160,000 for 1998 as increased by the cost-of-living adjustments for the
calendar years after 1998 as determined by the Internal Revenue Service. A
self-employed individual may contribute to either a Keogh Plan or a SEP and, in
either case, may also contribute to an IRA. The custodial agreements for the
Keogh Plan and IRAs provide that Investors Fiduciary Trust Company, Kansas City,
Missouri, will provide the custodial service unless a different custodian is
specified.
Investors Fiduciary Trust Company receives as compensation
from the participant under the Keogh Plan an annual maintenance fee of $12.00
per participant. Special services not contemplated in the annual maintenance fee
will be rendered by Investors Fiduciary Trust Company for such additional
charges as will reasonably compensate it for the services provided. Fees may be
changed with at least 45 days' prior written notice. The annual maintenance fee
payable to Investors Fiduciary Trust Company with respect to an IRA, including
each individual IRA established under a SEP, is presently $12.00 per IRA and may
be changed at any time. Fees under any of these types of accounts remaining
unpaid may be charged against the accounts. If a custodian other than Investors
Fiduciary Trust Company is specified, fees will be determined by such custodian.
The Keogh Plan has been approved by the Internal Revenue
Service for use by self-employed persons as a plan qualified under Section
401(a) of the Internal Revenue Code. The Internal Revenue Service has also
approved the money purchase pension plan and profit sharing plan options of the
Keogh Plan as paired plans with the result that self-employed persons may adopt
either or both of such plans. Copies of the Keogh Plan may be obtained from the
- 22 -
<PAGE> 39
Fund at the address indicated below. The IRA Custodial Agreements have not been
submitted to the IRS for approval because for the traditional IRA it
incorporates IRS Form 5305-A and for the Roth IRA it incorporates IRS Form
5305-RA, which makes such submission unnecessary. The Fund makes available IRS
Form 5305-SEP for employers or self-employed persons who want to establish a
SEP.
The employer or individual, as the case may be, should consult
his or her tax adviser or attorney as to the applicability of the Keogh Plan,
SEP or a traditional or Roth IRA to his or her particular circumstances.
Additionally, since these retirement programs involve commitments covering
future years, the investment objectives of the Fund, as described in the
Prospectus and in this Statement of Additional Information, should be carefully
considered.
For further details, including the right to appoint a
successor custodian, see the Keogh Plan, Custodial Agreement and Application
Form and the regular and Roth IRA Application Form, Custodial Agreement and
Disclosure Statement which are available from the Fund, 100 Corporate North,
Suite 201, Bannockburn, Illinois 60015, (800) 962-FUND.
For a discussion of income tax withholding on certain
distributions from qualified retirement plans or tax-sheltered annuity plans,
see "Tax Status" below.
TAX STATUS
The fund has qualified, and intends to remain qualified, as a
"regulated investment company" under Subchapter M of the Code. In order to
remain qualified, the fund must, among other things, (i) derive in each taxable
year at least 90% of its gross income from dividends, interest, gains from the
sale or other disposition of stock or securities and certain other income
(including, but not limited to, gains from options and futures contracts)
derived with respect to its business of investing in stocks and securities, and
(ii) diversify its holdings so that, at the end of each quarter of its taxable
year, (a) at least 50% of the value of its assets is represented by cash, cash
items, U.S. Government securities, and other securities limited, in respect of
any one issuer, to a value not greater than 5% of the value of the fund's total
assets and 10% of the outstanding voting securities of such issuer and (b) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than the U.S. Government).
As a regulated investment company, the fund is generally not subject to
federal income tax on its income and gains distributed
- 23 -
<PAGE> 40
to shareholders, provided the fund distributes to its shareholders at least 90%
of its net investment income (i.e., net income and gains exclusive of net
capital gains) each year. In the event the fund does not qualify in any year as
a regulated investment company, its income would be taxed to the fund whether or
not distributed, and distributions to you would generally be taxable to you as
ordinary dividend income.
A non-deductible 4% excise tax will be imposed on the fund to
the extent the fund does not distribute during each calendar year at least (i)
98% of its ordinary income for such calendar year, (ii) 98% of its capital gain
net income for such calendar year, and (iii) certain other amounts not
distributed in previous years. The fund intends to distribute its income and
gains in a manner so as to avoid the imposition of such 4% excise tax.
In connection with short sales by the fund, the fund will be
subject to certain rules which may affect the character and timing of gain or
loss recognized by the fund for federal income tax purposes. Under these rules a
short sale remains open until the fund (as the short seller), delivers the
security to the broker (as the lender), and closes the transaction. Any gain or
loss realized by the fund from closing a short sale will be short-term capital
gain or loss if the fund acquires substantially identical securities after the
time the short sale is entered into but prior to closing such short sale. The
fund expects to close out all of its short sales with such after-acquired
securities. Special rules may affect the character of any gains or losses, in
certain circumstances, if the fund were to hold substantially identical
securities at the time that it enters into a short sale. However, the fund does
not intend to enter into short sales with respect to securities that it holds at
the time of entering a short sale.
Under the "mark-to-market" rules of the Code, most stock index
options, stock index futures contracts and options on such contracts will be
treated for federal income tax purposes as having been sold for their fair
market value on the last business day of the fund's taxable year. Any gain or
loss resulting from such deemed sales, and from actual sales of such options and
futures contracts, will be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss.
If the fund engages in certain hedged transactions, the Code
may treat the transaction as a deemed sale of the appreciated property which may
accelerate the gain on the hedged transaction.
In general, distributions of net investment income will
be taxable as ordinary income. In addition, distributions of net
- 24 -
<PAGE> 41
capital gain (i.e., the fund's net long-term capital gains in excess of its net
short-term capital losses and available capital loss carryover), when designated
as such by the fund, generally are treated as gain recognized by you from the
sale or exchange of a capital asset held for more than one year, regardless of
how long you have held your fund shares. In general, among other circumstances,
the fund will generate capital gain or loss upon liquidating an investment in
order to change the composition of its investment portfolio.
If the net asset value of shares is reduced below your cost by
a distribution, such distribution would be taxable to you as described in the
Prospectus even though it might be viewed in economic terms as a return of your
capital. For federal income tax purposes, your original cost continues as your
tax basis and on redemption your gain or loss is the difference between such
basis and the redemption price.
For purposes of determining your taxable income each year,
dividends declared by the fund in October, November or December of a year,
payable to you as of a record date in any such month, and paid during the
following January, will be treated for federal income tax purposes as paid by
the fund and received by shareholders as of December 31 of the calendar year
declared.
Income tax withholding at a rate of 20% is applicable to any
distribution from a qualified retirement plan, such as the Keogh Plan, or a
tax-sheltered annuity plan where the distribution is eligible for tax-free
rollover treatment but is not transferred directly to a specified retirement
vehicle such as another qualified plan or an IRA. Also, all qualified plans must
provide participants and certain other distributees with an election to have an
eligible rollover distribution transferred directly to certain specified
retirement vehicles. If a shareholder receives a distribution which is subject
to the 20% withholding requirement and wishes to roll the distribution into
another vehicle such as an IRA within 60 days, the shareholder will have to
contribute to the IRA the amount of the distribution (after withholding) plus an
amount equal to the amount withheld. The amount withheld can be applied to
reduce the shareholder's federal income tax liability and may be refunded to the
shareholder upon filing a federal income tax return if it exceeds such tax
liability. If the amount withheld is not rolled over into the IRA, it will be
subject to income taxes and, if the shareholder has not attained age 59 1/2, an
additional 10% penalty tax may apply.
The rules broadly define distributions which qualify for
rollover treatment. Shareholders who expect to receive distributions which may
qualify for rollover treatment and therefore may be subject to 20% withholding
should consult their tax advisers for a complete discussion on the impact of
these rules on such distributions.
- 25 -
<PAGE> 42
The foregoing is only a general summary of the certain
provisions of the Internal Revenue Code and current Treasury regulations
applicable to the fund and its shareholders. The Internal Revenue Code and such
regulations are subject to change by legislative or administrative action.
The tax consequences to a foreign shareholder of the fund may
be different from those described herein. Foreign shareholders are advised to
consult their tax advisers with respect to the particular tax consequences to
them of an investment in the fund.
Distributions to you may also be subject to state and local
taxes. Investors are urged to consult their tax advisers regarding the
application of federal, state and local tax laws.
DESCRIPTION OF SHARES
The Fund has an authorized capital of 100 million shares
consisting of only one class of stock -- Common Stock, $1.00 par value.
Shareholders are entitled to one vote per share, to such distributions as may be
declared by the Fund's Board of Directors out of funds legally available
therefor, and upon liquidation to participate ratably in the assets available
for distribution. There are no conversion or sinking-fund provisions applicable
to the shares, and shareholders have no preemptive rights and may not cumulate
their votes in the election of directors. The shares are redeemable and are
transferable. All shares issued and sold by the Fund will be fully paid and
non-assessable.
As a general matter, the Fund is not required to hold annual
meetings of shareholders. Under the Fund's By-Laws, an annual meeting of
shareholders is not required to be held in any year in which the Fund is not
required under the 1940 Act to submit for shareholder approval (i) the election
of directors, (ii) any investment advisory agreement, (iii) the selection of the
Fund's independent public accountants or (iv) any distribution agreement. Each
director serves until the next meeting of shareholders called for the purpose of
electing directors and until the election and qualification of his successor.
Under certain circumstances, shareholders have the right to call for a meeting
of shareholders to consider the removal of one or more directors. The Fund will
assist in shareholder communication in such matters.
- 26 -
<PAGE> 43
TRANSFER AGENT
DST Systems, Inc., P.O. Box 419103, Kansas City, Missouri
64141 (210 West 10th Street, Kansas City, Missouri 64105 by overnight mail),
serves as the Fund's transfer agent and dividend-paying agent.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, acts as custodian of the Fund. As such, the Bank
holds all securities and cash of the Fund, delivers and receives payment for
securities sold, receives and pays for securities purchased, collects income
from investments and performs other duties, all as directed by officers of the
Fund. The Bank does not exercise any supervisory function over the management of
the Fund, the purchase and sale of securities or the payment of distributions to
shareholders.
Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois
60603, certified public accountants, serves as the auditors of the Fund. The
auditors are responsible for auditing the financial statements of the Fund. The
independent accountants are selected by the vote of a majority of directors of
the Fund who are not interested persons of the Fund or the adviser. Such
selection is subject to ratification by the Fund's shareholders in such years as
the Fund is required to hold a meeting of shareholders. See "Description of
Shares."
PERFORMANCE INFORMATION
From time to time, the Fund may report its historical
performance for various periods on a total return basis in reports or other
communications to shareholders or in advertising material. Total return combines
principal changes and dividends for the periods shown. Principal changes are the
difference between the beginning and ending net asset values for a given period
and assume reinvestment of dividends. Dividends include income dividends and
capital gains distributions paid during the period. Percentage changes are
determined by subtracting the beginning net asset value from ending net asset
value (computed on a total return basis) and dividing the remainder by the
beginning net asset value.
The Fund's performance will vary from time to time and your
shares, when redeemed, may be worth more or less than their original cost. You
should not consider past results to be representative of future performance.
Factors affecting the
- 27 -
<PAGE> 44
Fund's performance include, among other things, general market conditions, the
composition of the Fund's portfolio, and operating expenses. No adjustment is
made in reporting performance for taxes payable by shareholders on reinvested
income dividends and capital gains distributions.
Comparative performance information or rankings may be used
from time to time in reports or other communications to shareholders or in
advertising material.
The compound annual rates of return of the Fund for the one,
five and ten year periods ended December 31, 1998, and since inception (August
19, 1965) through December 31, 1998, were -5.21%, -0.35%, 3.28% and 11.53%,
respectively, computed in accordance with the rules for standardized computation
of performance as established by the SEC. Such rules for standardized
computation of performance provide for determining compound annual rates of
return by taking the total return of the Fund over the period in question
calculated as described in the third preceding paragraph and "annualizing" such
total return -- i.e., computing the annual rate of return which, if earned in
each year of such period, would produce the total return actually earned over
such period.
Inasmuch as the Fund has no sales load on purchases or
reinvested dividends, no deferred sales load or redemption fee and no 12b-1
fees, no adjustments are made for such items in calculating performance.
FINANCIAL STATEMENTS
The Fund's audited balance sheet and schedule of investments
as of December 31, 1998, and the related statement of operations for the year
then ended and statements of changes in net assets for each of the two years in
the period ended December 31, 1998, and the auditors' report of Arthur Andersen
LLP dated January 15, 1999 relating to such financial statements, are
incorporated herein by reference to the Fund's 1998 Annual Report to
Shareholders. No other portion of such Annual Report is incorporated by
reference herein or is a part of the registration statement of which this
Statement of Additional Information is a part. A copy of the Annual Report to
Shareholders referred to above is provided with this Statement of Additional
Information to each person who is not a shareholder of the Fund and has not
otherwise received a copy of such Report. Shareholders of the Fund may obtain a
copy of the Report without charge by writing or telephoning the Fund at the
address and telephone number set forth on the cover page of this Statement of
Additional Information.
- 28 -
<PAGE> 45
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional
Information omit certain information contained in the Registration Statement
which the Fund has filed electronically with the SEC under the Securities Act of
1933, and reference is hereby made to the Registration Statement for further
information with respect to the Fund and the securities offered hereby.
- 29 -
