The investment objective of Bull & Bear Municipal Income Fund ("Fund") is to
obtain for its shareholders the highest possible income exempt from Federal
income tax that is consistent with the preservation of principal. The Fund
invests principally in a diversified portfolio of municipal securities of
varying maturities, depending on the Investment Manager's evaluation of current
and anticipated market conditions. There is no assurance that the Fund will
achieve its objective.
Dividends are declared daily and paid monthly.
-------------------------------------------------------------------------------
NEWSPAPER LISTING. Shares of the Fund are sold at the
net asset value per share which is shown daily in the
mutual fund section of newspapers under the "Bull &
Bear Group" heading.
-------------------------------------------------------------------------------
This prospectus contains information you should know about the Fund before
you invest. PLEASE KEEP IT FOR FUTURE REFERENCE. The Fund's Statement of
Additional Information, dated April 15, 1996, has been filed with the Securities
and Exchange Commission and is incorporated by reference in this prospectus. It
is available at no charge by calling 1-800-847-4200.
Shares of the Fund are not bank deposits or obligations of, or guaranteed or
endorsed by any bank or any affiliate of any bank, and are not Federally insured
by, obligations of or otherwise supported by the U.S. Government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EXPENSE TABLE. The tables and example below are designed to help you understand
the various costs and expenses that you will bear directly or indirectly as an
investor in the Fund. A $2 monthly account fee is charged if your average
monthly balance is less than $500, except for accounts in the Automatic
Investment Program.
SHAREHOLDER TRANSACTION EXPENSES
SALES LOAD IMPOSED ON PURCHASES..................................NONE
SALES LOAD IMPOSED ON REINVESTED DIVIDENDS.......................NONE
DEFERRED SALES LOAD..............................................NONE
REDEMPTION FEE WITHIN 30 DAYS OF PURCHASE.......................1.00%
REDEMPTION FEE AFTER 30 DAYS OF PURCHASE.........................NONE
EXCHANGE FEES....................................................NONE
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
MANAGEMENT FEES (AFTER WAIVER)..................................0.43%
12B-1 FEES......................................................0.35%
OTHER EXPENSES..................................................1.00%
TOTAL FUND OPERATING EXPENSES (AFTER WAIVER)....................1.78%
<TABLE>
EXAMPLE 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming a $18 $56 $96 $209
5% annual return and a redemption at the end of each time period:
</TABLE>
The example set forth above assumes reinvestment of all dividends and other
distributions and uses an assumed 5% annual rate of return as required by the
Securities and Exchange Commission ("SEC"). THE EXAMPLE IS AN ILLUSTRATION ONLY
AND SHOULD NOT BE CONSIDERED AN INDICATION OF PAST OR FUTURE RETURNS AND
EXPENSES. ACTUAL RETURNS AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The percentages given for Annual Fund Operating Expenses are based on the Fund's
operating expenses and average daily net assets during its fiscal year ended
December 31, 1995. Without the Investment Manager's fee waiver, Management Fees
and Total Fund Operating Expenses would have been 0.60% and 1.95% of average net
assets, respectively. Long term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.'s ("NASD") rules regarding investment
companies. "Other Expenses" includes amounts paid to the Fund's Custodian and
Transfer Agent and reimbursable to the Investment Manager and the Distributor
for certain administrative and shareholder services, and does not include
interest expense from the Fund's bank borrowing.
FINANCIAL HIGHLIGHTS are presented below for a share of capital stock
outstanding throughout each year for the past ten years. The following
information is supplemental to the Fund's financial statements and report
thereon of Tait, Weller & Baker, independent accountants, appearing in the
December 31, 1995 Annual Report to Shareholders and incorporated by reference in
the Statement of Additional Information.
<TABLE>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
PER SHARE DATA 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period....... $15.25 $17.63 $17.06 $17.27 $16.91 $17.29 $17.44 $16.74 $18.17 $16.88
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income..................... .70 .68 .75 .89 1.02 1.01 1.11 1.22 1.26 1.32
Net realized and unrealized gain (loss) 1.78 (2.38) 1.02 .11 1.23 (.38) .40 .67 (1.43) 1.86
---- ------ ---- --- ---- ----- --- --- ------ ----
on investments..........................
Total from investment operations........ 2.48 (1.70) 1.77 1.00 2.25 .63 1.51 1.89 (.17) 3.18
---- ------ ---- ---- ---- --- ---- ---- ----- ----
Less distributions:
Distributions from net investment income.. (.69) (.68) (.75) (.89) (1.03) (1.01) (1.14) (1.19) (1.26) (1.31)
Distributions from net realized gains..... --- --- (.45) (.32) (.86) --- (.52) --- --- (.58)
----- ------ ----- ----- ----- ------ ----- ------ ------ -----
Total distributions..................... (.69) (.68) (1.20) (1.21) (1.89) (1.01) (1.66) (1.19) (1.26) (1.89)
----- ----- ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period............. $17.04 $15.25 $17.63 $17.06 $17.27 $16.91 $17.29 $17.44 $16.74 $18.17
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN................................. 16.58% (9.76)% 10.59% 6.04% 13.69% 3.88% 8.93% 11.63% (.91%) 19.63%
====== ======= ====== ===== ====== ===== ===== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's omitted).. $16,220 $15,921$21,345$20,781
$20,458$20,560$20,482 $19,241$16,141 $21,771 Ratio of expenses to average net
assets(a) (b) 1.78% 1.60% 1.61% 1.60% 1.60% 1.50% 1.35% 1.27% 1.18% 1.18% Ratio
of net investment income to average net 4.31% 4.23% 4.25% 5.19% 5.86% 5.94%
6.35% 7.11% 7.18% 7.29%
assets(C)...................................
Portfolio turnover rate...................... 172% 275% 74% 320% 511% 172% 188% 70% 62% 60%
==== ==== === ==== ==== ==== ==== === === ===
</TABLE>
(a)Ratio prior to reimbursement by the Investment Manager was 1.95%, 1.71%,
1.62%, 1.62%, 1.63%, 1.86%, and 1.76% respectively, for 1995, 1994, 1993, 1991,
1990, 1989, and 1988. (b)Ratio after the reduction of custodian fees under a
custodian agreement was 1.62%. Prior to 1995, such reductions were reflected in
the expense ratios. (c)Ratio prior to reimbursement by the Investment Manager
was 4.14%, 4.12%, 4.24%, 5.84%, 5.81%, 5.84%, and 6.62% respectively, for 1995,
1994, 1993, 1991, 1990, 1989, and 1988.
INFORMATION RELATING TO OUTSTANDING DEBT DURING THE FISCAL PERIODS SHOWN BELOW:
<TABLE>
Amount of Debt Average Amount of Average Number of Average Amount of
Fiscal Year Ended Outstanding at End Debt Outstanding Shares Outstanding Debt Per Share
December 31 of Period During the Period During the Period During the Period
<S> <C> <C> <C> <C>
1995 $0 $13,074 1,009,788 $0.01
1994 $0 $113,655 1,157,754 $0.10
1993 $0 $115,984 1,235,288 $0.09
</TABLE>
TABLE OF CONTENTS
Expense Tables....................2 How to Redeem Shares...................10
Financial Highlights..............2 Determination of Net Asset Value.......12
General...........................3 Investment Manager.....................12
The Fund's Investment Program.....4 Distribution of Shares.................12
Tax-Free versus Taxable Yields....6 Performance Information................13
Distributions and Taxes...........6 Capital Stock..........................14
How to Purchase Shares............7 Custodian and Transfer Agent...........14
Shareholder Services..............9
GENERAL
PURPOSES OF THE FUND. The Fund is for investors seeking the highest possible
income exempt from Federal income tax, but who are concerned with preservation
of principal. By investing in the Fund, you may seek these benefits, plus
diversification, liquidity, and professional management, without having to
become involved with the detailed accounting and safekeeping procedures normally
associated with direct investment in municipal securities. The Fund is not
intended for investors who wish to speculate on short term swings in the
municipal bond market, or for tax-advantaged retirement plans or tax-exempt
entities. The Fund's yield and net asset value will fluctuate with interest
rates and the market value of its portfolio securities.
CHECK WRITING PRIVILEGE FOR EASY ACCESS. Upon your request, you may write checks
on your account for $250 or more. The checks may be made payable to anyone you
wish, and there is no limit on the number of checks you may write.
CERTAIN ECONOMIES OF SIZE. Purchases or sales of municipal securities often
entail disproportionately large costs on small transactions. Due to the size and
volume of its transactions, the Fund, as compared with most individuals
investing for their own accounts, generally is able to execute transactions at
better net prices.
TAXATION OF DIVIDENDS. Income dividends you receive from the Fund are generally
derived from interest on municipal securities, the income from which is exempt
from Federal income tax, though possibly an item of tax preference ("ITP") for
purposes of the Federal alternative minimum tax ("AMT"). The Fund's income is
thus Federally tax-free to you if you are not subject to AMT. The Fund's
dividends may be subject to state and local taxes. Dividends paid from taxable
investments and capital gain distributions, if any, will be subject to Federal
income tax and may also be subject to state and local taxes.
MONTHLY DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund declares dividends from net
investment income daily and distributes such dividends to shareholders monthly.
The Fund may also realize net capital gains from the sale of securities, and it
distributes any such gains to shareholders annually. Dividends and other
distributions are reinvested in additional shares of the Fund or, at your
option, paid in cash.
YIELD INFORMATION. Please call 1-800-847-4200 or 1-212-363-1100 to obtain the
Fund's yield.
PORTFOLIO MANAGER. The Fund's Portfolio Manager is Steven A. Landis. Mr. Landis
is Senior Vice President and a member of the Investment Policy Committee of Bull
& Bear Advisers, Inc. (the "Investment Manager") with overall responsibility for
the Bull & Bear fixed income funds. Prior to joining the Investment Manager in
1995, Mr. Landis was Associate Director -- Proprietary Trading at Barclays De
Zoete Wedd Securities Inc. and Director, Bond Arbitrage at WG Trading Company.
Mr. Landis received his MBA in Finance from Columbia University.
THE FUND'S INVESTMENT PROGRAM
The Fund seeks to obtain for its shareholders the highest possible income
exempt from Federal income tax that is consistent with preservation of
principal. The Fund seeks to achieve this objective by investing principally in
a diversified portfolio of municipal securities. Municipal securities include
obligations issued by or on behalf of states, territories, and possessions of
the United States and the District of Columbia, and their political
subdivisions, agencies, and instrumentalities, the interest on which is
generally exempt from Federal income tax, though possibly an ITP for purposes of
the AMT. Such securities include municipal bonds, municipal notes and tax-free
commercial paper.
The Fund may invest in municipal bonds rated at the time of purchase within
the four highest grades assigned by Fitch Investors Service, L.P. ("Fitch")
(AAA, AA, A and BBB), Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A,
and Baa), or Standard & Poor's Ratings Services ("Standard & Poor's") (AAA, AA,
A and BBB), or, if unrated, determined by the Investment Manager to be of
comparable quality. Municipal bonds rated Baa or BBB are medium grade securities
and Moody's considers securities rated Baa to have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity for such securities to make principal and interest payments
than is the case for higher grade municipal securities. The Fund may also invest
in municipal notes rated at the time of purchase within the three highest grades
assigned by Moody's (MIG1/VMIG1, MIG2/VMIG2, and MIG3/VMIG3), Fitch (F-1+, F-1,
and F-2) or Standard & Poor's (SP-1+, SP-1, and SP-2), tax-free commercial paper
rated at the time of purchase within the two highest grades assigned by Moody's
(P-1 and P-2) or the top three grades assigned by Fitch (F-1+, F-1, and F-2) or
Standard & Poor's (A-1+, A-1, and A-2) and unrated municipal notes and tax-free
commercial paper determined by the Investment Manager to be of comparable
quality. Descriptions of Fitch's, Moody's and Standard & Poor's ratings appear
in the Appendix to the Statement of Additional Information. The Fund may not
invest more than 20% of its total assets in unrated securities unless such
securities are secured by the full faith and credit of the U.S.
Government.
The Fund's portfolio will consist of long, short, and intermediate term
municipal securities. The proportion invested in each category varies depending
upon the Investment Manager's evaluation of current and anticipated market
conditions. The dollar-weighted average maturity of the Fund's portfolio is
expected to normally range from five to more than 25 years. As a matter of
fundamental investment policy, which may not be changed without shareholder
approval, at least 80% of the Fund's income during any fiscal year will be
exempt from Federal income tax. Also, as a matter of fundamental policy, the
Fund will not purchase any security if, as a result, less than 80% of the Fund's
total assets (exclusive of cash) would be invested in securities the income from
which is exempt from Federal income tax, except that the Fund may temporarily
invest more than 20% of its total assets in taxable obligations during periods
of abnormal market conditions. While at least 80% of the income from the Fund's
investments will normally be exempt from Federal income tax, such income may
nevertheless be an ITP for purposes of the AMT. Because the objective of the
Fund is to provide income exempt from Federal income tax, the Fund will invest
in taxable obligations only when the Investment Manager believes it would be in
the best interest of shareholders.
MUNICIPAL BONDS. Municipal bonds are debt obligations issued to obtain funds for
various public purposes that pay interest which is exempt from federal income
tax in the opinion of the bond issuer's counsel. Municipal bonds include general
obligation bonds and revenue bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities financed by the bonds to meet
its financial obligations and secured by the pledge, if any, of real and
personal property so financed.
Municipal bonds also include industrial development bonds ("IDBs") and
private activity bonds ("PABs"). IDBs and PABs are issued by or on behalf of
public authorities to finance various privately operated facilities, such as
airport or pollution control facilities. PABs generally are such bonds issued
after August 15, 1986 if the interest paid thereon is exempt from Federal income
tax in the opinion of the bond issuer's counsel. IDBs and PABs are in most cases
revenue bonds and thus are not payable from the unrestricted revenues of the
issuer. The credit
quality of IDBs and PABs is usually directly related to the credit standing of
the user of the facilities being financed. The percentage of such bonds in the
Fund's portfolio will vary. The Fund will not, however, invest more than 25% of
its total assets in municipal securities issued by agencies of the same state or
issued to finance a particular project. While the Fund may invest up to 50% of
its assets in IDBs, the Fund will not invest more than 25% of its assets in IDBs
whose nongovernmental users are in any one industry.
MUNICIPAL NOTES AND TAX-FREE COMMERCIAL PAPER. Municipal notes and tax-exempt
commercial paper include tax anticipation notes, bond anticipation notes,
revenue anticipation notes, and other forms of short term loans. Such notes are
issued with a short term maturity in anticipation of the receipt of tax funds,
the proceeds of bond placements and other revenues.
RISK CONSIDERATIONS. The Fund may not be suitable or appropriate for all
investors. While the Fund seeks to reduce risk by investing in a diversified
portfolio, such diversification does not eliminate risk. There is no assurance
that the Fund will achieve its investment objective. Yields on municipal
securities are dependent on a variety of factors, including the general
conditions of the municipal and fixed income security markets, the financial
condition of the issuer, the size of a particular offering, the maturity of the
obligation, the credit quality and rating of the issue, and expectations
regarding changes in tax rates. Municipal securities with longer maturities tend
to produce higher rates of interest paid and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower interest rates. An increase in interest rates will
generally reduce the value of portfolio investments, and a decline in interest
rates will generally increase the value of portfolio investments. The Fund's
ability to achieve its investment objective depends also on the continuing
ability of the issuers of municipal securities in which the Fund invests to meet
their obligations to pay interest and principal when due. Municipal securities
have also traditionally not been subject to regulation by or registration with
the SEC.
Obligations of issuers of municipal securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the U.S. Bankruptcy Code. In addition, the obligations of
such issuers may become subject to laws enacted in the future by Congress, state
legislators, or referenda extending the time for payment of principal and/or
interest, or imposing other constraints upon enforcement of such obligations or
upon municipalities to levy taxes. Litigation, if any, or other conditions may
also materially affect an issuer's ability to pay when due the principal of and
interest on its municipal securities.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements on up to 25% of its assets. In a reverse repurchase agreement, the
Fund sells a security (known as the "underlying security") to a well-established
securities dealer or a bank that is a member of the Federal Reserve System and
agrees to repurchase it at an agreed-upon date and price reflecting a market
rate of interest. When the Fund enters into a reverse repurchase agreement, its
custodian will set aside in a segregated account cash, U.S. Government
securities or other liquid, high grade debt securities with a market value at
least equal to the repurchase commitment. Reverse repurchase agreements are
considered borrowings. Such borrowing is referred to as leverage, is
speculative, and increases both investment opportunity and investment risk. Such
agreements are subject to the risk that the value of the security purchased with
the proceeds of the sale by the Fund will be less than the Fund's obligation to
repurchase the underlying security. The Investment Company Act of 1940 ("1940
Act") currently permits a mutual fund to borrow from a bank, provided that the
fund maintain asset coverage for all borrowings of at least 300%, and should
such asset coverage at any time fall below 300%, the fund reduce its borrowings
within three days (excluding Sundays and holidays) to the extent necessary so
such asset coverage be at least 300%. To reduce its borrowings the Fund might be
required to sell securities at a disadvantageous time. Interest on money
borrowed is an expense of the Fund which it would not otherwise incur, and it
may have little or no investment income during periods when its borrowings are
substantial.
WHEN-ISSUED SECURITIES. The Fund may purchase securities on a "when-issued"
basis. In such transactions the commitment to make delivery or payment is
contingent upon the issuance of the purchased securities at a future date.
Although the Fund will enter into when-issued transactions with the intention of
accepting delivery of and paying for the securities, the Fund may terminate the
commitment prior thereto for investment reasons, which
may result in a gain or loss. When-issued transactions involve a risk that
yields available on the delivery date may be higher than those received on the
commitment date. When the Fund agrees to purchase securities on a when- issued
basis, its custodian will set aside in a segregated account cash, U.S.
Government securities or other liquid, high grade debt securities with a market
value at least equal to the amount of the commitment. If necessary, assets will
be added to the account daily so that the value of the account will not be less
than the amount of the Fund's commitment. If the issuer fails to deliver the
securities, the Fund may incur a loss or miss an opportunity to make an
alternative investment.
OTHER INFORMATION. Although the Fund's policy is to invest for the long term,
its portfolio turnover rate will vary from year to year depending on market
conditions. For the fiscal years ended December 31, 1995 and December 31, 1994,
the Fund's portfolio turnover rate was 172% and 275%, respectively. Higher
turnover may result in increased transaction costs and an increase in taxable
income from realized gains. When the Investment Manager deems it advisable, the
Fund may for temporary defensive or emergency purposes, such as when interest
rates are rising sharply, hold cash or invest all or a portion of its assets in
taxable money market instruments, including obligations of the U.S. Government,
its agencies or instrumentalities; certificates of deposit, bankers'
acceptances, and other short term debt obligations of U.S. banks with total
domestic assets of at least $1 billion; and commercial paper rated F-2 or better
by Fitch, P-2 or better by Moody's or A-2 or better by Standard & Poor's.
The Fund's investment objective is fundamental and may not be changed without
shareholder approval. The Fund is also subject to fundamental investment
policies and investment restrictions, set forth in the Statement of Additional
Information, that may not be changed without shareholder approval. These
investment restrictions, among other things, permit the Fund, in addition to the
reverse repurchase agreements described above, to borrow money from banks for
temporary purposes in an amount not exceeding 10% of its assets. Unless
otherwise noted, all other investment policies may be changed by the Board of
Directors without shareholder approval.
TAX-FREE VERSUS TAXABLE YIELDS
The table below illustrates, at 1995 Federal tax rates, the yield you would
have to obtain from taxable investments to equal tax-free yields ranging from 5%
to 8%. The stated maximum tax rate does not take into account the phaseout of
deductions for personal exemptions or the limit on itemized deductions and does
not reflect state and local income taxes.
<TABLE>
TAX BRACKETS BASED ON FILING STATUS: TO EQUAL A FEDERAL TAX-FREE YIELD OF
(TAXABLE INCOME)
- ------------------------------------------ ----------------------------------------------------
JOINT SINGLE Marginal 5% 6% 7% 8%
Tax Rate
===================== ==================== ============ ============= ============ =========== ===========
A Taxable Investment Must Earn
====================================================
<S> <C> <C> <C> <C> <C> <C> <C>
$0-$38,000 $0-$22,750 15% 5.88% 7.06% 8.24% 9.41%
- --------------------- -------------------- ------------ ------------- ------------ ----------- -----------
$38,001-$91,850 $22,751-$55,100 28% 6.94% 8.33% 9.72% 11.11%
- --------------------- -------------------- ------------ ------------- ------------ ----------- -----------
$91,851-$140,000 $55,101-$115,000 31% 7.25% 8.70% 10.14% 11.59%
- --------------------- -------------------- ------------ ------------- ------------ ----------- -----------
$140,001-$250,000 $115,001-$250,000 36% 7.81% 9.38% 10.94% 12.50%
- --------------------- -------------------- ------------ ------------- ------------ ----------- -----------
Over $250,000 Over $250,000 39.6% 8.28% 9.93% 11.59% 13.25%
</TABLE>
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. Dividends from the Fund's net investment income are declared
daily and paid monthly. Distributions of substantially all of the Fund's net
realized capital gain, if any, after deducting any capital loss carryovers, are
declared and payable to shareholders of record on a date in December of each
year. Such distributions may be paid in January of the following year but will
be deemed to have been received by shareholders on December 31 for Federal
income tax purposes. The Fund may also make an additional distribu tion
following the end of its fiscal year out of undistributed income and capital
gain. You will be advised promptly after each calendar year of the dollar amount
and taxable status of the distributions you received during the year.
Dividends and other distributions will be made in additional shares of the
Fund, unless you elect to receive cash on the Account Application or so elect
subsequently by calling Investor Service Center, 1-800-847-4200. Any election
will remain in effect until you notify Investor Service Center to the contrary.
TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended,
so that it will be relieved of Federal income tax on that part of its investment
company taxable income (consisting generally of taxable net investment income
and any net short term capital gains) and net capital gain, (the excess of net
long term capital gain over net short term capital loss), if any, that is
distributed to shareholders. The Fund's distributions of net interest earned on
tax-exempt securities, designated by the Fund as "exempt-interest dividends,"
are not subject to Federal income tax. In order to pay exempt-interest
dividends, the Fund must (and intends to continue to) satisfy the requirement
that, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets consists of tax-exempt securities.
Dividends from interest earned on taxable securities and any net short term
capital gains are taxable as ordinary income whether received in cash or
additional shares. Distributions of the Fund's net capital gain, if any, when
designated as such, are taxable to shareholders as long term capital gains,
whether received in cash or additional shares and regardless of the length of
time the Fund's shares are owned. Interest on indebtedness to purchase or carry
Fund shares is not deductible for Federal income tax purposes to the extent the
Fund's distributions consist of exempt-interest dividends. Tax-exempt interest
attributable to certain PABs (including, in the case of a RIC receiving interest
on such bonds, a proportionate part of the exempt-interest dividends paid by
that RIC) is an ITP for purposes of the AMT. Exempt-interest dividends received
by a corporate shareholder may be subject to the AMT in any event. Fund
dividends may be subject to taxes of states and other taxing authorities.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information. Because other Federal, state and local tax
considerations may apply -- for example, the Fund's dividends may be wholly or
partly taxable under state and/or local laws -- you should consult your tax
adviser.
HOW TO PURCHASE SHARES
The Fund's shares are sold on a continuing basis at the net asset value per
share next determined after receipt and acceptance of an order by Investor
Service Center (see "Determination of Net Asset Value"). The minimum initial
investment is $1,000. The minimum subsequent investment is $100. The $1,000
minimum initial investment is waived if you elect to invest $100 or more each
month in the Fund through the Bull & Bear Automatic Investment Program.
BULL & BEAR AUTOMATIC INVESTMENT PROGRAM. By participating in the Bull & Bear
Automatic Investment Program, you can establish a convenient and affordable long
term investment program. Under the Program, investments of $100 or more are
transferred electronically each month into your Fund account.
o The BULL & BEAR BANK TRANSFER PLAN lets you automatically purchase Fund
shares each month by transferring a specified dollar amount from your regular
checking account, NOW account, or bank money market deposit account.
o Through the BULL & BEAR SALARY INVESTING PLAN, part or all of your salary may
be invested electronically in shares of the Fund at each pay period,
depending upon the direct deposit program of your employer.
o The BULL & BEAR GOVERNMENT DIRECT DEPOSIT PLAN allows you to deposit
automatically part or all of certain U.S. Government checks in your Fund
account. Eligible U.S. Government checks include payments for Social
Security, pension benefits, military or retirement benefits, salary,
veteran's benefits and most other recurring payments.
For more information concerning this Program, or to request the necessary
authorization form(s), please call Investor Service Center, 1-800-847-4200. You
may terminate participation in the Program at any time by written notice
received at least 10 days prior to the scheduled investment date. The Fund
reserves the right to redeem any account if participation in the Program is
terminated and the account's value is less than $500. The Program and the Plans
do not assure a profit or protect against loss in a declining market.
INITIAL INVESTMENT. The Account Application that accompanies this Prospectus
should be completed, signed and, with a check or other negotiable bank draft
payable to Municipal Income Fund, mailed to Investor Service Center, P.O. Box
419789, Kansas City, MO 64141-6789. Initial investments also may be made by
having your bank wire money, as set forth below, in order to avoid mail delays.
SUBSEQUENT INVESTMENTS. Subsequent investments may be made at any time by wiring
money as set forth below, or by mailing a check or other negotiable bank draft
($100 minimum), made payable to Municipal Income Fund, together with a Bull &
Bear FastDeposit form to Investor Service Center, P.O. Box 419789, Kansas City,
MO 64141-6789. If that form is not used, a letter should indicate the Fund and
account number to which the subsequent investment is to be credited, and name(s)
of the registered owner(s).
INVESTMENT BY TELEPHONE. You may purchase additional shares of the Fund by
telephone through the Automated Clearing House (ACH) system as long as your bank
is a member of the ACH system and you have a completed, approved authorization
on file. The funding for the purchase will be automatically deducted from the
bank account designated on your authorization. For requests received by 3:00
p.m., eastern time, the investment will normally be credited to your Fund
account within two business days. There is a minimum of $100 for each investment
by telephone. Any subsequent changes in bank information must be submitted in
writing and accompanied by a sample voided check or deposit slip. To invest by
telephone, please call 1-800-847-4200.
INVESTMENT BY WIRE. For an initial investment by wire, you must first telephone
Investor Service Center, 1-800- 847-4200, to give the name(s) under which the
account is to be registered, tax identification number, the name of the bank
sending the wire, and to be assigned a Bull & Bear Municipal Income Fund account
number. You may then purchase shares by requesting your bank to transmit
immediately available funds ("Federal funds") by wire to the Transfer Agent at:
United Missouri Bank NA, ABA #10-10-00695; for Account 98-7052-724-3 Municipal
Income Fund. Your account number and name(s) must be specified in the wire as
they are to appear on the account registration. You should then enter your
account number on your completed Account Application and promptly forward it to
Investor Service Center, P.O. Box 419789, Kansas City, MO 64141-6789. After your
first purchase of shares by wire, you may make additional wire purchases without
having to call Bull & Bear by simply following the same wiring procedures.
SHAREHOLDER ACCOUNTS. When you invest in the Fund, your account will be credited
with all full and fractional shares (to three decimal places), together with any
dividends paid in additional shares. For joint tenant accounts, any account
owner has the authority to act on the account without notice to the other
account owners. Investor Service Center in its sole discretion and for its
protection may, but is not obligated to, require the written consent of all
account owners of a joint tenant account prior to acting upon the instructions
of any account owner. Stock certificates will be issued only for full shares
when requested in writing. In order to facilitate redemptions and transfers, we
recommend that you not request certificates. You will receive quarterly
statements showing monthly dividends and confirmation statements upon purchase
or sale of shares.
WHEN ORDERS ARE EFFECTIVE. The purchase price for Fund shares is their net asset
value next determined after receipt and acceptance by Investor Service Center of
a purchase order in proper form. All checks are accepted subject to collection
at full face value in Federal funds and must be made payable to the Fund and
drawn in U.S. dollars on a U.S. bank. No third party checks will be accepted,
and the Fund reserves the right to reject any order for any reason. Accounts are
charged $30 by the Transfer Agent for submitting checks for investment which are
not honored by the investor's bank. The Fund may in its discretion waive or
lower the investment minimums.
SHAREHOLDER SERVICES
You may terminate or modify your participation in any of the Fund's special
plans or services at any time. Additional information regarding any of the
following services is available from the Fund's Distributor, Investor Service
Center, 1-800-847-4200.
CHECK WRITING PRIVILEGE FOR EASY ACCESS. Upon request, you can receive
personalized checks drawn against your Fund account through UMB Bank that may be
made payable to anyone's order in any amount of $250 or more. The Bank has the
right to refuse any checks which do not conform with its requirements. You will
be subject to the Bank's rules and regulations governing checking accounts,
including a $20 charge for refused checks, which may change without notice. When
such a check is presented for payment, the Transfer Agent, as your agent, will
cause the Fund to redeem a sufficient number of full and fractional shares in
your account to cover the amount of the check. This Check Writing Privilege
enables you to continue receiving dividends on shares redeemed by check until
such time as the check is presented to the Transfer Agent for payment. The Fund
may not honor for up to 10 days a check written by a shareholder that requires
shares recently purchased by check to be redeemed or until it is reasonably
assured of payment of the check representing the purchase. Since the value of an
account changes daily, you should not attempt to close an account by writing a
check.
DIVIDEND SWEEP PRIVILEGE. You may elect to have invested automatically either
all dividends, or all dividends and any capital gain distributions paid by the
Fund in shares of any other Bull & Bear Fund. Shares of the other Bull & Bear
Fund will be purchased at the current net asset value calculated on the payment
date. For more information concerning this Privilege and the other Bull & Bear
Funds, or to request a Dividend Sweep Authorization Form, please call Investor
Service Center, 1-800-847-4200. You may cancel this Privilege by mailing written
notification to Investor Service Center, P.O. Box 419789, Kansas City, MO
64141-6789. To select a new Fund after cancellation, you must submit a new
Authorization Form. Enrollment in or cancellation of this Privilege is generally
effective three business days following receipt. This Privilege is available
only for existing accounts and may not be used to open new accounts. The Fund
may modify or terminate this Privilege at any time or charge a service fee. No
such fee currently is contemplated.
SYSTEMATIC WITHDRAWAL PLAN. If you own Fund shares with a value of at least
$20,000 you may elect an automatic withdrawal of cash in fixed dollar, share, or
percentage amounts from your Fund account at monthly or quarterly intervals in a
minimum amount of $100. Under the Systematic Withdrawal Plan all dividends and
distributions, if any, are reinvested in the Fund.
ASSIGNMENT. Shares of the Fund may be transferred to another owner. Instructions
are available from Investor Service Center, 1-800-847-4200.
EXCHANGE PRIVILEGE. You may exchange your investment by exchanging at least $500
worth of shares of the Fund for shares of any other Bull & Bear Fund (provided
the registration is exactly the same, the shares may be sold in your state of
residence, and the exchange may otherwise legally be made). Information,
including a free prospectus, on any of the Funds listed below is available from
Investor Service Center, 11 Hanover Square, New York, NY 10005, 1-800-847-4200.
The other Fund's prospectus should be read in advance.
To exchange shares, call Investor Service Center toll-free at 1-800-847-4200
and provide the following information: account registration including address
and number; taxpayer identification number; percentage, number, or dollar value
of shares to be redeemed; name and, if different, the account number of the Bull
& Bear Fund to be purchased; and your identity and telephone number. The other
Bull & Bear Funds are:
o BULL & BEAR DOLLAR RESERVES is a high quality money market fund investing in
U.S. Government securities. Income is generally free from state income and
intangible property taxes. Free unlimited check writing ($250 minimum per
check). Pays monthly dividends.
o BULL & BEAR U.S. GOVERNMENT SECURITIES FUND invests for a high level of
current income, liquidity, and safety of principal. Free unlimited check
writing ($250 minimum per check). Pays monthly dividends.
o BULL & BEAR GLOBAL INCOME FUND seeks a high level of income from a global
portfolio of primarily investment grade fixed income securities. Free
unlimited check writing ($250 minimum per check). Pays monthly dividends.
o BULL & BEAR U.S. AND OVERSEAS FUND invests worldwide for the highest
possible total return.
o BULL & BEAR SPECIAL EQUITIES FUND invests aggressively for maximum capital
appreciation.
o BULL & BEAR GOLD INVESTORS seeks long term capital appreciation in investments
with the potential to provide a hedge against inflation and preserve the
purchasing power of the dollar.
Exchange requests received between 9 a.m. and 4 p.m. eastern time, on any
business day of the Fund, will be effected at the net asset values of the Fund
and the other Bull & Bear Fund as determined at the close of regular trading on
that business day. Exchange requests received between 4 p.m. and 5 p.m. eastern
time, on any business day of the Fund will be effected at the close of regular
trading on the next business day of the Fund. If you are unable to reach
Investor Service Center at the above telephone number you may, in emergencies,
call 1-212-363-1100 or communicate by fax 1-212-363-1103 or cable to the address
BULLNBEAR NEWYORK. Transfers may be difficult or impossible to implement during
periods of rapid changes in economic or market conditions. Transfer privileges
may be terminated or modified by the Fund upon 60 days' notice. For tax
purposes, transfers are treated as a redemption and purchase of shares. You may
give transfer instructions to Investor Service Center by telephone without
further documentation. If you have requested share certificates, this procedure
may be utilized only if, prior to giving telephone instructions, you deliver the
certificates to the Transfer Agent for deposit into your account.
o BULL & BEAR SECURITIES (DISCOUNT BROKERAGE ACCOUNT) TRANSFERS. If you have an
account at Bull & Bear Securities, Inc., an affiliate of the Investment
Manager and a wholly-owned subsidiary of Bull & Bear Group, Inc. offering
discount brokerage services, you may access your investment in any Bull & Bear
Fund to pay for securities purchased in your brokerage account, and use
proceeds of securities sold in your brokerage account to purchase shares of
any Bull & Bear Fund. You may request a Discount Brokerage Account Application
from Bull & Bear Securities, Inc. by calling toll-free 1-800-262-5800.
HOW TO REDEEM SHARES
LIQUIDITY. Generally, you may request that the Fund redeem your shares by
submitting a written request to Investor Service Center, P.O. Box 419789, Kansas
City, MO 64141-6789, signed by the record owner(s). If a written redemption
request is sent to the Fund, it will be forwarded to the above address. If stock
certificates have been issued for shares being redeemed, they must accompany the
written request. In addition, you may redeem shares by writing checks against
your Fund account and also expedite redemption requests by telephoning as
described below.
REDEMPTION BY TELEPHONE. You may redeem shares by telephone and receive the
proceeds through the ACH system as long as your bank is a member of the ACH
system and you have a completed, approved authorization on file. The proceeds of
your redemption will be automatically deducted from your Fund account. The
proceeds will normally be credited to your bank account within two business days
following the telephone request. The request must be received no later than 3:00
p.m., eastern time. There is a minimum of $250 for each redemption by telephone.
Any subsequent changes in bank information must be submitted in writing and
accompanied by a sample voided check or deposit slip. To initiate a redemption
by telephone, please call 1-800-847-4200.
CHECK WRITING PRIVILEGE. See "Shareholder Services" above for redemption of
shares by writing free, unlimited, personalized checks, provided by the Fund, in
amounts of $250 or more.
EXPEDITED REDEMPTION. If you are redeeming at least $1,000 worth of shares (for
which certificates have not been issued) you may obtain expedited redemption by
calling Investor Service Center, 1-800-847-4200. You may request that payment be
sent to your bank designated on the authorization by Federal funds wire (or if a
check is requested, by regular mail) or to your address of record by regular
mail.
For expedited redemption, call Investor Service Center toll-free at
1-800-847-4200 between 9 a.m. and 5 p.m. eastern time, and provide the following
information: Fund account registration including address, account number, and
taxpayer identification number; number, percentage, or dollar value of shares to
be redeemed; whether the proceeds are to be mailed to your address of record, or
mailed or wired to your bank; the bank name, address, ABA routing number, bank
account registration and account number, and a contact person's name and
telephone number; and your identity and telephone number. If you are unable to
reach Investor Service Center at the above telephone number you may, in
emergencies, call 1-212-363-1100 or communicate by fax 1-212-363-1103 or cable
to the address BULLNBEAR NEWYORK. Expedited redemptions may be difficult or
impossible to implement during periods of rapid changes in economic or market
conditions. Expedited redemption privileges may be terminated or modified by the
Fund upon 60 days' notice.
REDEMPTION PRICE AND FEES. The redemption price is the net asset value per share
next determined after receipt of the redemption request in proper form. The Fund
is designed as a long term investment, and short term trading is discouraged.
Accordingly, if shares of the Fund held for 30 days or less are redeemed or
exchanged, the Fund will deduct a redemption fee equal to one percent of the net
asset value of shares redeemed or exchanged. The fee will be retained by the
Fund and used to offset the transaction costs that short term trading imposes on
the Fund and its shareholders. If an account contains shares with different
holding periods (i.e. some shares held 30 days or less, some shares held 31 days
or more), the shares with the longest holding period will be redeemed first to
determine if the Fund's redemption fee applies. Shares acquired through the
Dividend Sweep Privilege and the reinvestment of dividends and capital gains or
redeemed under the Systematic Withdrawal Plan are exempt from the redemption
fee. Registered broker/dealers, investment advisers, banks, and insurance
companies may open accounts and redeem shares by telephone or wire and may
impose a charge for handling purchases and redemptions when acting on behalf of
others.
REDEMPTION PAYMENT. Payment for shares redeemed will be made as soon as
possible, ordinarily within 7 days after receipt of the redemption request in
proper form. The right of redemption may not be suspended, or date of payment
delayed more than 7 days, except for any period (i) when the New York Stock
Exchange is closed or trading thereon is restricted as determined by the SEC;
(ii) under emergency circumstances as determined by the SEC that make it not
reasonably practicable for the Fund to dispose of securities owned by it or
fairly to determine the value of its assets; or (iii) as the SEC may otherwise
permit. The mailing of proceeds on redemption requests involving any shares
purchased by personal, corporate or government check or ACH transfer is gener
ally subject to a fifteen day delay to allow the payment to clear. The fifteen
day clearing period does not affect the trade date on which a purchase or
redemption order is priced, or any dividends and capital gain distributions to
which you may be entitled through the date of redemption. Fund check writing
redemption checks received during the fifteen day clearing period will be
rejected and marked "uncollected." The clearing period does not apply to
purchases made by wire. Due to the relatively higher cost of maintaining small
accounts, the Fund reserves the right, upon 60 days' notice, to redeem any
account worth less than $500 except if solely from market action, unless an
investment is made to restore the minimum value.
TELEPHONE PRIVILEGES. You automatically have all telephone privileges to, among
other things, authorize an expedited redemption or transfer, unless declined on
the Account Application or otherwise in writing. Neither the Fund nor Investor
Service Center shall be liable for any loss or damage for acting in good faith
upon instructions received by telephone and believed to be genuine. The Fund
employs reasonable procedures to confirm that instructions communicated by
telephone are genuine, including requiring some form of personal identification
prior to acting upon instructions received by telephone, providing written
confirmation of such transactions, or tape recording of telephone instructions.
The Fund may modify or terminate any telephone privilege or shareholder service
(except as noted) at any time without notice.
SIGNATURE GUARANTEES. No signature guarantees are required when payment is to be
made to you at your address of record. If the proceeds of the redemption are to
be paid to a non-shareholder of record, or to an address other than your address
of record, or the shares are to be assigned, the Transfer Agent may require that
your signature be guaranteed by an entity acceptable to the Transfer Agent, such
as a commercial bank or trust company or member firm of a national securities
exchange or of the NASD. A notary public may not guarantee signatures. The
Transfer Agent may require further documentation. The Transfer Agent may
restrict the mailing
of redemption proceeds to your address of record within 60 days of such address
being changed unless you provide a signature guarantee as described above.
DETERMINATION OF NET ASSET VALUE
The value of a share of the Fund is based on the value of its net assets. The
Fund's net assets are the total of the Fund's investments and all other assets
minus any liabilities. The value of one share is determined by dividing the net
assets by the total number of shares outstanding. This is referred to as "net
asset value per share," and is determined as of the close of regular trading on
the New York Stock Exchange (currently, 4 p.m. eastern time, unless weather,
equipment failure or other factors contribute to an earlier closing) each
business day of the Fund. A business day of the Fund is any day on which the New
York Stock Exchange is open for business. The following are not business days of
the Fund: New Year's Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities and other assets of the Fund are valued primarily on the
basis of market quotations, if available. Because market quotations are often
unavailable, assets are usually valued by a method that the Board of Directors
believes accurately reflects fair value.
INVESTMENT MANAGER
Bull & Bear Advisers, Inc. (the "Investment Manager") acts as general manager
of the Fund and is responsible for various functions assumed by it including
regularly furnishing advice with respect to portfolio transactions. The
Investment Manager manages the investment and reinvestment of the assets of the
Fund, subject to the control and final direction of the Board of Directors. The
Investment Manager may allocate brokerage transactions by taking into account
the sales of shares of the Fund and the other Bull & Bear Funds. The Investment
Manager may also allocate portfolio transactions to broker/dealers that remit a
portion of their commissions as a credit against the Fund's expenses.
For its services, the Investment Manager receives a management fee, payable
monthly, based on the average daily net assets of the Fund, at the annual rate
of .60% on the first $500 million and .50% over $500 million. From time to time,
the Investment Manager may waive all or part of this fee or reimburse the Fund
monthly to improve the Fund's yield and total return. The Investment Manager
provides certain administrative services at cost to the Fund. During the fiscal
year ended December 31, 1995, the management fees paid by the Fund were .43% of
average daily net assets.
The Investment Manager is a wholly-owned subsidiary of Bull & Bear Group, Inc.
("Group"). Group, a publicly-owned company whose securities are listed on NASDAQ
and traded in the over-the-counter market, is a New York-based manager of mutual
funds and discount brokerage services. Bassett S. Winmill may be deemed a
controlling person of Group and, therefore, may be deemed a controlling person
of the Investment Manager.
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement, Investor Service Center, Inc. (the
"Distributor"), 11 Hanover Square, New York, NY 10005, acts as the Fund's
principal agent for the sale of its shares. The Investment Manager is an
affiliate of the Distributor. The Fund has also adopted a plan of distribution
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Pursuant to the Plan,
the Fund may reimburse the Distributor for expenditures incurred in connection
with the Distributor's service activities in an amount up to one-quarter of one
percent per annum of the Fund's average daily net assets and for expenditures
incurred in connection with the Distributor's distribution activities in an
amount up to one-quarter of one percent per annum of the Fund's average daily
net assets. From time to time, the Distributor may limit all or a portion of
this reimbursement to improve the Fund's yield and total return. Such
expenditures may include advertising, direct mail and promotional expenses;
fulfillment expenses including the cost of printing and mailing prospectuses and
sales literature to prospective investors; payments to third parties at the rate
of 25 basis points who sell shares of the Fund; reimbursement of and
compensation to brokers, dealers, banks, and other intermediaries for
administrative and accounting services; and telephone, office expenses,
salaries, which may include persons who are officers or employees of the
Distributor and the
Investment Manager, their affiliates, or of the Fund, and any other costs of
effectuating the Plan. In addition, the Distributor and the Investment Manager
may make similar payments from their own resources.
Certain advertising and sales materials may be prepared which relate only to
the promotion of the sale of the Fund's shares, although they may mention the
other Bull & Bear Funds (e.g., with reference to the exchange privilege among
the Bull & Bear Funds) or the discount brokerage services offered by Bull & Bear
Securities, Inc. as an additional service offered to Fund shareholders and
others. The cost of such materials will be borne by the Fund. Certain other
advertising and sales materials may be prepared which relate to the promotion of
the sale of shares of the Fund and one or more other Bull & Bear Funds. In such
cases, the expenses will be allocated among the Funds involved based on the
inquiries resulting from the materials or other factors deemed appropriate by
the Board of Directors. The costs of personnel and facilities of the Distributor
to respond to inquiries by shareholders and prospective shareholders will also
be allocated based on such relative inquiries or other factors. There is no
certainty that the allocation of any of the foregoing expenses will precisely
allocate to the Fund costs commensurate with the benefits it receives, and it
may be that the other Funds and Bull & Bear Securities, Inc.
will benefit therefrom.
From time to time, the Distributor may have incurred expenses in distributing
shares of the Fund in excess of the amounts currently reimbursed by the Fund
pursuant to the Plan, which expenses may be reimbursed in the future. At
December 31, 1995, approximately $422,400 in distribution expenses had been
incurred which had not yet been reimbursed to the Distributor by the Fund which
may be reimbursed in the future. Such amount is equal to approximately 2.6% of
the Fund's net assets as of December 31, 1995. Because there is no requirement
under the Plan that the Distributor be reimbursed for all its expenses or any
requirement that the Plan be continued from year to year, such amount is not
treated as a liability of the Fund. The Fund is not charged interest or
financing charges for unreimbursed or carried over amounts. If the Plan is
terminated for any reason other than adoption of a new plan, the Fund will not
reimburse the Distributor for any expenses incurred in excess of the amount
accrued by the Fund under the Plan prior to the effective date of such
termination.
The Fund treats as an expense all amounts accrued under the Plan during a year
whether or not paid to reimburse the Distributor during the same year so that
such accruals will be available to reimburse the Distributor for expenditures in
subsequent periods. Expenditures in excess of amounts paid by the Fund during a
year are not charged as an expense for such year but are charged in subsequent
years as and if accrued and paid by the Fund. Therefore, if you purchase shares
after the expenses have been incurred you will nevertheless contribute to
payment thereof to the extent there remain carryover expenses, while
shareholders who held shares when the expenses were incurred but redeem
thereafter will not contribute to the reimbursement of any carryover expenses
outstanding at the date of redemption. If amounts are accrued but not utilized
before you redeem, you will have contributed to distribution expenditures not
actually incurred while you were a shareholder.
PERFORMANCE INFORMATION
From time to time the Fund may advertise its current yield, its compounded
yield and a tax-equivalent yield. Current yield is computed by dividing the
Fund's net investment income per share for the most recent month, determined in
accordance with SEC rules and regulations, by the net asset value per share on
the last day of such month and annualizing the result. Compounded yield is the
annualized current yield which is compounded by assuming the current income to
be reinvested. Tax-equivalent yield is the current yield you would have to
obtain from taxable investments for stated tax brackets to equal the Federal
income tax-free current yield of the Fund. The Fund may also publish a dividend
distribution rate in sales material from time to time. The dividend distribution
rate of the Fund is the current rate of distribution paid per share by the Fund
during a specified period divided by the net asset value per share at the end of
such period and annualizing the result. When considering the Fund's performance,
fluctuations in share value must be considered together with any published
dividend distribution rate. Whenever the Fund advertises its current yield,
compounded yield, tax-equivalent yield and its dividend distribution rate, it
will also advertise its "average annual total return" or "average annual
compound total return" over specified periods. For these purposes, total return
is based on an increase (or decrease) in a hypothetical $1,000 invested in the
Fund at the beginning of each of the specified periods, assuming the
reinvestment of any dividends and distributions paid by the Fund during such
periods. Advertisements may show such total return as a percentage rate or as
the value of a hypothetical investment at the end of the period. The
Fund's performance may be compared to the performance of broad groups of
comparable mutual funds, or the performance of unmanaged indexes of comparable
securities. The Fund does not impose any initial sales charge on the purchase of
its shares or redemption fee on redemptions of shares after 30 days of purchase.
The investment returns and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost. All advertised yield or total return figures are based upon
historical performance information and are not intended to indicate future
performance. The Fund's annual report to shareholders contains further
information about the Fund's performance. The annual report is available upon
request and free of charge.
CAPITAL STOCK
The Fund is a diversified series of shares issued by Bull & Bear Municipal
Securities, Inc. (the "Company"), an open-end management investment company
organized as a Maryland corporation in 1983. The Company is authorized to issue
up to 1 billion shares ($.01 par value), of which 50 million shares have been
designated Bull & Bear Municipal Income Fund as the only series presently. The
Board of Directors of the Company may establish one or more new series. The
Fund's stock is fully paid and non-assessable and is freely assignable by way of
pledge (for example, for collateral purposes), gift, settlement of an estate,
and also by an investor to another investor. In case of dissolution or other
liquidation of the Fund or the Company, shareholders will be entitled to receive
ratably per share the net assets of the Fund. Each share entitles the holder to
one vote for all purposes.
Shares have no preemptive or conversion rights.
In accordance with the General Corporation Law of the State of Maryland
applicable to open-end investment companies incorporated in Maryland and
registered under the 1940 Act, as is the Company, the Company's ByLaws provide
that there will be no annual meeting of shareholders in any year except as
required by law. This means that the Fund will not hold an annual meeting of
shareholders in years in which the only matters which would be submitted to
shareholders for their approval are the election of Directors and ratification
of the Directors' selection of accountants, although holders of 10% of the
Company's shares may call a meeting at any time. There will normally be no
meetings of shareholders for the purpose of electing Directors unless fewer than
a majority of the Directors holding office have been elected by shareholders.
Shareholder meetings will be held in years in which shareholder approval of the
Fund's investment management agreement, plan of distribution, or changes in its
fundamental investment objective, policies or restrictions is required by the
1940 Act.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02109, acts as
custodian of the Fund's assets, performs certain accounting services for the
Fund, and may appoint one or more subcustodians provided such subcustodianship
is in compliance with the rules and regulations promulgated under the 1940 Act.
The Fund's transfer and dividend disbursing agent is DST Systems, Inc., P.O.
Box 419789, Kansas City, MO 64141-6789. The Distributor provides certain
shareholder services to the Fund and is reimbursed its cost by the Fund. Such
services include receiving and responding to shareholder inquiries concerning
their accounts and processing shareholder telephone requests for transfers,
purchases, redemptions, changes of address and similar matters. The costs of
facilities, personnel and other related expenses are allocated among the Bull &
Bear Funds based on the relative number of inquiries and other factors deemed
appropriate by the Board of Directors.
[Left Side of Back Cover Page]
MUNICIPAL
INCOME
FUND
- -----------------------------------------------------
11 HANOVER SQUARE
NEW YORK, NY 10005
1-800-847-4200 1-212-363-1100
- -----------------------------------------------------
CALL TOLL-FREE FOR FUND PERFORMANCE INFORMATION, PURCHASES, EXCHANGES AMONG THE
BULL & BEAR FUNDS AND TO OBTAIN INFORMATION CONCERNING YOUR ACCOUNT.
1-800-847-4200 1-212-363-1100
- -----------------------------------------------------
Printed on recycled paper
[Right Side of Back Cover Page]
MUNICIPAL
INCOME
FUND
- ---------------------------------------------------------
INVESTING FOR THE HIGHEST
POSSIBLE INCOME EXEMPT
FROM FEDERAL INCOME TAX
THAT IS CONSISTENT WITH
PRESERVATION OF PRINCIPAL
MONTHLY DIVIDENDS
CHECK WRITING PRIVILEGES
NO EXCHANGE CHARGES
- -----------------------------------
Statement of Additional Information April 15, 1996
BULL & BEAR MUNICIPAL INCOME FUND
11 Hanover Square
New York, NY 10005
1-212-363-1100
1-800-847-4200
Bull & Bear Municipal Income Fund (the "Fund") is a diversified series of Bull &
Bear Municipal Securities, Inc. (the "Corporation"). This Statement of
Additional Information regarding the Fund is not a prospectus and should be read
in conjunction with the Fund's prospectus dated April 15, 1996. The prospectus
is available to prospective investors without charge upon request to Investor
Service Center, 11 Hanover Square, New York, NY 10005, 1-800- 847-4200.
TABLE OF CONTENTS
THE FUND'S INVESTMENT PROGRAM.................................2
INVESTMENT RESTRICTIONS.......................................2
THE INVESTMENT COMPANY COMPLEX................................3
OFFICERS AND DIRECTORS........................................3
THE INVESTMENT MANAGER........................................5
INVESTMENT MANAGEMENT AGREEMENT...............................5
YIELD AND PERFORMANCE INFORMATION.............................5
DISTRIBUTION OF SHARES........................................9
DETERMINATION OF NET ASSET VALUE.............................10
PURCHASE OF SHARES...........................................11
ALLOCATION OF BROKERAGE......................................11
DISTRIBUTIONS AND TAXES......................................12
REPORTS TO SHAREHOLDERS......................................13
CUSTODIAN AND TRANSFER AGENT.................................13
AUDITORS.....................................................13
FINANCIAL STATEMENTS.........................................13
APPENDIX.....................................................14
THE FUND'S INVESTMENT PROGRAM
Repurchase Agreements. The Fund may enter into repurchase agreements with U.S.
banks or dealers involving securities in which the Fund is authorized to invest.
A repurchase agreement is an instrument under which the Fund purchases
securities from a bank or dealer and simultaneously commits to resell the
securities to the bank or dealer at an agreed upon date and price. The Fund's
custodian maintains custody of the underlying securities until their repurchase;
thus the obligation of the bank or dealer to pay the repurchase price is, in
effect, secured by such securities. The Fund's risk is limited to the ability of
the seller to pay the agreed upon amount on the repurchase date; if the seller
defaults, the security constitutes collateral for the seller's obligation to
pay. If, however, the seller defaults and the value of the collateral declines,
the Fund may incur loss and expenses in selling the collateral. To attempt to
limit the risk in engaging in repurchase agreements, the Fund enters into
repurchase agreements only with banks and dealers believed by the Investment
Manager to present minimum credit risks in accordance with guidelines
established by the Board of Directors. The Fund will not enter into a repurchase
agreement with a maturity of more than seven days if, as a result, more than 15%
of its net assets would then be invested in such agreements and other illiquid
assets. The Fund currently intends to limit repurchase agreements to less than
5% of its total net assets.
Borrowings. Subject to the 10% limit on borrowing (see item 13 in the section
below entitled "Investment Restrictions") the Fund may incur overdrafts at its
Custodian (see section below entitled "Custodian and Transfer Agent") from time
to time in connection with redemptions and/or the purchase of portfolio
securities. In lieu of paying interest to the Custodian, the Fund may maintain
cash balances prior or subsequent to incurring such overdrafts. If aggregate
cash balances exceed overdrafts, the Custodian may credit the interest thereon
against fees.
Illiquid Assets. The Fund may not purchase or otherwise acquire any security or
invest in a repurchase agreement if, as a result, more than 15% of the Fund's
net assets would be invested in illiquid assets, including repurchase agreements
not entitling the holder to payment of principal within seven days. The term
"illiquid assets" for this purpose includes securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities.
Credit Ratings. Fitch Investors Service, L.P. ("Fitch"), Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Services ("S&P") are
private services that provide ratings of the credit quality of debt obligations,
including issues of municipal securities. A description of ratings assigned to
municipal bonds, municipal notes and commercial paper by Fitch, Moody's and S&P
is included in the Appendix to this Statement of Additional Information. The
Investment Manager may use these ratings in determining whether to purchase,
sell or hold a security. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, securities with
the same maturity, interest rate and rating may have different market prices.
Credit ratings attempt to evaluate the safety of principal and interest payments
and do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. Subsequent to its purchase by the Fund, an
issue of municipal securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Fund. The Investment
Manager will consider such an event in determining whether the Fund should
continue to hold the obligation.
INVESTMENT RESTRICTIONS
The following restrictions have been adopted by the Fund and may not be changed
without the approval of the lesser of (a)67% or more of the voting securities
of the Fund present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy or
(b) more than 50% of the outstanding voting securities of the Fund. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the Fund. The Fund may not:
1.Purchase any security if, as a result, more than 5% of the value of the Fund's
total assets would be invested in the securities of a single issuer, except
securities issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities. For purposes of this limitation and that set forth in (2)
below, the Fund will regard the entity which has the ultimate responsibility for
the payment of interest and principal as the issuer.
2.Purchase any security if, as a result, more than 10% of the outstanding
securities of any issuer would be held by the Fund, except securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities.
3.Purchase any security if, as a result, 25% or more of the value of the Fund's
total assets would be invested in the securities of issuers having their
principal business activities in the same industry, except that this limitation
does not apply to securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities, or to municipal securities, certificates
of deposit, or banker's acceptances.
4.Purchase any security if, as a result, more than 5% of the value of the Fund's
total assets would be invested in the securities of issuers which at the time of
purchase had been in operation for less than three years, except obligations
issued or guaranteed by the U.S. Government, or its agencies, and municipal
securities (for this purpose, the period of operation of any issuer shall
include the period of operation of any predecessor or unconditional guarantor of
such issuer).
5.Purchase equity securities, or securities convertible into equity securities.
6. Purchase securities with legal or contractual conditions on resale.
7. Purchase or sell real estate (although it may purchase municipal and other
debt securities secured by real estate or interests therein).
8. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition, or reorganization.
9. Purchase or sell commodities or commodity contracts.
10.Purchase participations or other direct interest in oil, gas, or other
mineral exploration or development programs.
11. Make short sales of securities or purchase securities on margin, except for
such short term credit as may be necessary for the clearance of purchases of
portfolio securities.
12. Make loans, although it may purchase issues of debt securities.
13. Borrow money, except for temporary purposes and then only from banks in
amounts not exceeding 10% of the market value of its assets, except that the
Fund may enter into reverse repurchase agreements on up to an additional 25% of
its assets, provided in either case that immediately thereafter there is an
asset coverage of at least 300%.
14. Mortgage, pledge, hypothecate or, in any other manner, transfer as security
for indebtedness any security owned by the Fund, except as may be necessary in
connection with permissible borrowings mentioned in (13) above, in which event
such mortgaging, pledging, or hypothecating may not exceed 15% of the Fund's
assets, valued at market.
15. Underwrite any issue of securities, except to the extent that the purchase
of municipal securities, or other permitted investments, directly from the
issuer thereof and the later disposition of such securities in accordance with
the Fund's investment program may be deemed to be an underwriting.
16.Invest in the securities of any issuer for the purpose of exercising
management or control.
17.Purchase or retain the securities of any issuer if, to the knowledge of the
Fund's management, any of the officers or directors of the Fund, or its
Investment Manager, owns beneficially more than 1/2 of 1% of such issuer's
securities, together own beneficially more than 5% of such securities.
18.Invest in puts, calls, straddles, spreads, or any combination thereof.
19.Issue any class of securities senior to any other class of securities, except
to the extent reverse repurchase agreements may be deemed to involve the
issuance of senior securities.
THE INVESTMENT COMPANY COMPLEX
The investment companies advised by affiliates of Bull & Bear Group, Inc. (the
"Investment Company Complex") are:
Bull & Bear Dollar Reserves
Bull & Bear U.S. Government Securities Fund
Bull & Bear Municipal Income Fund
Bull & Bear Global Income Fund
Bull & Bear U.S. and Overseas Fund
Bull & Bear Special Equities Fund
Bull & Bear Gold Investors
Midas Fund
OFFICERS AND DIRECTORS
The officers and Directors of the Corporation, their respective offices and
principal occupations during the last five years are set forth below. Unless
otherwise noted, the address of each is 11 Hanover Square, New York, NY 10005.
BASSETT S. WINMILL* -- Chairman of the Board. He is Chairman of the Board of
certain other investment companies advised by the Investment Manager and its
affiliates (the "Funds Complex") and of the parent of the Investment Manager,
Bull & Bear Group, Inc. ("Group"). He was born February 10, 1930. He is a member
of the New York Society of Security Analysts, the Association for Investment
Management and Research and the International Society of Financial Analysts. He
is the father of Mark C. Winmill and Thomas B. Winmill.
ROBERT D. ANDERSON* -- Vice Chairman and Director. He is Vice Chairman and a
Director of certain other investment companies in the Funds Complex and of the
Investment Manager and its affiliates. He was born December 7, 1929. He is a
member of the Board of Governors of the Mutual Fund Education Alliance, and of
its predecessor, the No-Load Mutual Fund Association. He has also been a member
of the District #12, District Business Conduct and Investment Companies
Committees of the NASD.
BRUCE B. HUBER, CLU, ChFC, MSFS -- Director. 3443 Highway 66, Neptune, NJ 07753.
He is Senior Consultant with The Berger Financial Group, LLC specializing in
financial, estate and insurance matters. From March 1995 to December 1995, he
was President of Huber Hogan Knotts Consulting, Inc. financial consultants and
insurance planners. He was born February 7, 1930. From 1988 to 1990, he was
Chairman of Bruce Huber Associates. He is also a Director of other investment
companies in the Funds Complex.
JAMES E. HUNT -- Director. One Dag Hammarskjold Plaza, New York, NY 10017. He is
a principal of Kenny, Kindler, Hunt & Howe, Inc., executive recruiting
consultants. He was born December 14, 1930. From 1976 until 1983 he was Vice
President of Russell Reynolds Associates, Inc., also executive recruiting
consultants. He is also a Director of other investment companies in the Funds
Complex.
FREDERICK A. PARKER, JR. -- Director. 219 East 69th Street, New York, NY 10021.
He is President and Chief Executive Officer of American Pure Water Corporation,
a manufacturer of water purifying equipment. He was born November 14, 1926. He
is also a Director of other investment companies in the Funds Complex.
JOHN B. RUSSELL -- Director. 334 Carolina Meadows Villa, Chapel Hill, NC 27514.
He was Executive Vice President and a Director of Dan River, Inc., a diversified
textile company, from 1969 until he retired in 1981. He was born February 9,
1923. He is a Director of Wheelock, Inc., a manufacturer of signal products, and
a consultant for the National Executive Service Corps in the health care
industry. He is also a Director of other investment companies in the Funds
Complex.
MARK C. WINMILL -- Co-President, Co-Chief Executive Officer, and Chief Financial
Officer. He is Co-President, Co-Chief Executive Officer, and Chief Financial
Officer of the Funds Complex and of Group and certain of its affiliates,
Chairman of the Investment Manager and Investor Service Center, Inc. (the
"Distributor"), and President of Bull & Bear Securities, Inc. ("BBSI"). He was
born November 26, 1957. He received his M.B.A. from the Fuqua School of Business
at Duke University in 1987. From 1983 to 1985 he was Assistant Vice President
and Director of Marketing of E.P. Wilbur & Co., Inc., a real estate development
and syndication firm and Vice President of E.P.W. Securities, its broker/dealer
subsidiary. He is a son of Bassett S. Winmill and brother of Thomas B. Winmill.
He is also a Director of certain other investment companies in the Funds
Complex.
THOMAS B. WINMILL -- Co-President, Co-Chief Executive Officer, and General
Counsel. He is Co-President, Co-Chief Executive Officer, and General Counsel of
the Funds Complex and of Group and certain of its affiliates, President of the
Investment Manager and the Distributor, and Chairman of BBSI. He was born June
25, 1959. He was associated with the law firm of Harris, Mericle & Orr from 1984
to 1987. He is a member of the New York State Bar and the SEC Rules Committee of
the Investment Company Institute. He is a son of Bassett S. Winmill and brother
of Mark C. Winmill. He is also a Director of certain other investment companies
in the Funds Complex.
STEVEN A. LANDIS -- Senior Vice President. He is Senior Vice President of the
Funds Complex, the Investment Manager and certain of its affiliates. He was born
March 1, 1955. From 1993 to 1995, he was Associate Director -- Proprietary
Trading at Barclays De Zoete Wedd Securities Inc., from 1992 to 1993 he was
Director, Bond Arbitrage at WG Trading Company, and from 1989 to 1992 he was
Vice President of Wilkinson Boyd Capital Markets.
BRETT B. SNEED, CFA -- Senior Vice President. He is Senior Vice President of the
Funds Complex, the Investment Manager and certain of its affiliates. He was born
June 11, 1941. He is a Chartered Financial Analyst, a member of the Association
for Investment Management and Research, and a member of the New York Society of
Security Analysts. From 1986 to 1988, he managed private accounts, from 1981 to
1986, he was Vice President of Morgan Stanley Asset Management, Inc. and prior
thereto was a portfolio manager and member of the Finance and Investment
Committees of American International Group, Inc., an insurance holding company.
JOSEPH LEUNG, CPA -- Treasurer and Chief Accounting Officer (since 1995). He is
Treasurer and Chief Accounting Officer of the Investment Manager and its
affiliates. From 1992 to 1995 he held various positions with Coopers & Lybrand
L.L.P., a public accounting firm. From 1991 to 1992, he was the accounting
supervisor at Retirement Systems Group, a mutual fund company. From 1987 to
1991, he held various positions with Ernst & Young, a public accounting firm. He
is a member of the American Institute of Certified Public Accountants. He was
born September 15, 1965.
WILLIAM J. MAYNARD -- Vice President and Secretary. He is Vice President and
Secretary of the Funds Complex, the Investment Manager and its affiliates. He
was born September 13, 1964. From 1991 to 1994 he was associated with the law
firm of Skadden, Arps, Slate, Meagher & Flom. He is a member of the New York
State Bar.
* Bassett S. Winmill and Robert D. Anderson are "interested persons" of the Fund
as defined by the 1940 Act, because of their positions with the Investment
Manager.
Compensation Table
<TABLE>
Name of Person, Aggregate Compensa- Pension or Retirement Estimated Annual Total Compensation
Position tion From Registrant Benefits Accrued as Benefits Upon From Registrant and
Part of Fund Expenses Retirement Fund Complex Paid to
Directors
<S> <C> <C> <C> <C>
Bassett S. Winmill None None None None
Chairman
Robert D. Anderson None None None None
Vice Chairman
Bruce B. Huber $500 None None $12,500 from 6
Director Investment Companies
James E. Hunt $500 None None $12,500 from 6
Director Investment Companies
Frederick A. Parker $500 None None $12,500 from 6
Director Investment Companies
John B. Russell $500 None None $12,500 from 6
Director Investment Companies
</TABLE>
Information in the above table is based on fees paid during the year ended
December 31, 1995.
No officer, Director or employee of the Fund's Investment Manager receives any
compensation from the Fund for acting as an officer, Director or employee of the
Fund. As of March 31, 1996, officers and Directors of the Fund owned less than
1% of the outstanding shares of the Fund. As of March 31, 1996, no owner of
record owned more than 5% of the outstanding shares of the Fund.
THE INVESTMENT MANAGER
The Fund's Investment Manager is Bull & Bear Advisers, Inc., 11 Hanover Square,
New York, NY 10005. The Investment Manager, a registered investment adviser, is
a wholly owned subsidiary of Group. The other principal subsidiaries of Group
include Investor Service Center, Inc., the Fund's distributor and a registered
broker/dealer, Midas Management Corporation, a registered investment adviser,
and Bull & Bear Securities, Inc., a registered broker/dealer providing discount
brokerage services.
Group is a publicly owned company whose securities are listed on NASDAQ and
traded in the over-the-counter market. Bassett S. Winmill may be deemed a
controlling person of Group on the basis of his ownership of 100% of Group's
voting stock. The Fund and its investment company affiliates had net assets of
approximately $320 million as of April 2, 1996.
INVESTMENT MANAGEMENT AGREEMENT
Under the Investment Management Agreement, the Fund assumes and pays all
expenses required for the conduct of its business including, but not limited to,
custodian and transfer agency fees, accounting and legal fees, investment
management fees, fees of disinterested Directors, association fees, printing,
salaries of certain administrative and clerical personnel, necessary office
space, all expenses relating to the registration or qualification of the shares
of the Fund under Blue Sky laws and reasonable fees and expenses of counsel in
connection with such registration and qualification, miscellaneous expenses and
such non-recurring expenses as may arise, including actions, suits or
proceedings affecting the Fund and the legal obligation which the Company may
have to indemnify its officers and Directors with respect thereto. For the
fiscal years ended December 31, 1993, 1994, and 1995 the Fund paid to the
Investment Manager aggregate investment management fees of $133,084, $112,479
and $98,069, respectively, of which $1,667, $19,178 and $28,287, respectively,
were waived by the Investment Manager pursuant to the investment management fee
waiver described below.
The Investment Manager has agreed in the Investment Management Agreement that it
will guarantee that the operating expenses of the Fund (including investment
management fees but excluding taxes, interest, brokerage commissions, expenses
incurred pursuant to a distribution plan under Rule 12b-1 of the 1940 Act, and
certain extraordinary expenses), expressed as a percentage of average daily net
assets, will not exceed for each fiscal year the lowest rate prescribed by any
state in which shares of the Fund are qualified for sale. Currently such
limitation is 2.5% of the first $30 million of the Fund's net assets, 2% of the
next $70 million of such assets, and 1.5% of such assets above $100 million.
Currently, the Investment Manager has voluntarily agreed to waive its management
fee to the extent, if any, that such expenses exceed an annual rate of 1.25% of
the average daily net assets of the Fund.
If requested by the Company's Board of Directors, the Investment Manager may
provide other services to the Fund such as, without limitation, the functions of
billing, accounting, certain shareholder communications and services,
administering state and Federal registrations, filings and controls and other
administrative services. Any services so requested and performed will be for the
account of the Fund and the costs of the Investment Manager in rendering such
services shall be reimbursed by the Fund, subject to examination by those
directors of the Fund who are not interested persons of the Investment Manager
or any affiliate thereof. For such services, the Fund reimbursed the Investment
Manager $14,449, $12,187 and $13,322 for the fiscal years ended December 31,
1993, 1994, and 1995, respectively.
The Investment Management Agreement is not assignable and terminates
automatically in the event of its assignment. The Investment Management
Agreement may also be terminated without penalty on 60 days' written notice at
the option of either party thereto or by a vote of the Fund's shareholders. The
Investment Management Agreement provides that the Investment Manager shall not
be liable to the Fund or any shareholder of the Fund for any error of judgment
or mistake of law or for any loss suffered by the Fund in connection with any
investment policy or the purchase, sale or retention of any security on the
recommendation of the Investment Manager. Nothing contained in the Investment
Management Agreement, however, shall be construed to protect the Investment
Manager against any liability to the Fund by reason of willful malfeasance, bad
faith, or gross negligence in the performance of its duties or by reason of its
reckless disregard of obligations and duties under the Investment Management
Agreement.
Group has granted the Fund a non-exclusive license to use the service mark "Bull
& Bear" under certain terms and conditions on a royalty free basis. Such license
may be withdrawn by Group in the event the investment manager of the Fund shall
not be the Investment Manager or another subsidiary of Group. If the license is
terminated, the Fund will eliminate all reference to "Bull & Bear" in its
corporate name and cease to use any of such service marks or any similar service
marks in its business.
YIELD AND PERFORMANCE INFORMATION
Advertised or published yield, distribution rate, average annual total return,
and total return figures are historical performance information and are not
intended to indicate future performance. The investment returns of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. Consequently, quotations of yield, distribution
rate, average annual total return, and total return should not be considered as
representative of what the Fund's yield or total return will be in the future.
Performance is a function of the type and quality of portfolio securities and
will reflect general market conditions and operating expenses. This Statement of
Additional Information may be in use for a full year and performance results for
periods subsequent to December 31, 1995 may vary substantially from those shown
below. Although the Fund imposes a 1% redemption fee on the redemption of shares
held for 30 days or less, all of the periods for which performance is quoted are
longer than 30 days, and therefore the 1% fee is not reflected in the
performance calculations. In addition, there is no sales charge upon
reinvestment of dividends or other distributions. The Fund may quote its
performance in various ways. Total returns, yields, and other performance
information may be quoted numerically, or in a table, graph, or similar
illustration.
Yield
Set forth below are the Fund's current yield and effective compounded yield
based on the Fund's investment income (determined in accordance with Securities
and Exchange Commission rules and regulations) for the period ending on December
31, 1995 (and the tax-equivalent yield they represent using the
applicable tax rate of 39.6% for 1995). Tax-equivalent yield is calculated by
subtracting the maximum tax rate from 1 and dividing the current and compound 30
day yield by the result (1 - .396 = .604; 3.77%/.604 = 6.24%; 3.84%/.604 =
6.36%).
Yield Tax-Equivalent Yield
Current 3.77% 6.24%
Effective Compounded 3.84% 6.36%
Yield is calculated as follows: Divide the net investment income per share
earned by the Fund during a 30-day (or one month) period by the net asset value
per share on the last day of the period and annualize the result on a
semi-annual basis by adding one to the quotient, raise the sum to the power of
six, subtract one from the result and then doubling the difference. The Fund's
net investment income per share earned during the period is based on the average
daily number of shares outstanding during the period entitled to receive
dividends and includes interest earned during the period minus expenses accrued
for the period, net of waivers. This calculation can be expressed as follows:
Yield~~~=~~~2~[~8~{a~-~b} OVER cd~+~1~) SUP 6~-~1~]
a = interest earned during the period.
b = expenses accrued for the period (net of waivers).
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
d = net asset value per share on the last day of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), interest earned on debt obligations held by the
Fund is calculated by computing the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest). For purposes of this calculation, it is assumed that each month
contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted from time to time to reflect
changes in the market value of such debt obligations.
Undeclared earned income will be subtracted from the net asset value per share
(variable "d" in the formula). Undeclared earned income is the net investment
income which, at the end of the base period, has not been declared as a
dividend, but is reasonably expected to be and is declared as a dividend shortly
thereafter.
Yield information is useful in reviewing the Fund's performance, but may not
provide a basis for comparison with bank deposits, which may be insured, or
other investments which provide a fixed yield, since an investment in the Fund
is not insured and yield and per share net asset value, which normally will
fluctuate daily, are not guaranteed. Yield for a prior period should not be
considered a representation of future return, which will change in response to
fluctuations in per share net asset value, interest rates on portfolio
investments, the quality, type and maturity of such investments, the Fund's
expenses and by the investment of a net inflow of new money at interest rates
different than those being earned from the Fund's then current holdings.
Total Return and Average Annual Total Return
Whenever the Fund advertises its yield, it will also advertise its average
annual total return (or "average annual compound total return") over specified
periods. The Fund computes its average annual total return by determining the
average annual compounded rate of return during specified periods that compares
the initial amount invested to the ending redeemable value of such investment.
This is done by dividing the ending redeemable value of a hypothetical $1,000
initial payment by $1,000 and raising the quotient to a power equal to one
divided by the number of years (or fractional portion thereof) covered by the
computation and subtracting one from the result. This calculation can be
expressed as follows: T~~=~~ (~ERV OVER P~) SUP {1 OVER n}~~-~~1
T = average annual total return.
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the beginning of the period
which assumes all dividends and other distributions by the Fund are reinvested
on the reinvestment date during the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of years.
The Fund's average annual total return for the one and five year periods ended
December 31, 1995, and for the period March 7, 1984 (commencement of operations)
through December 31, 1995 was 16.60%, 7.00%, and 9.03%, respectively, (16.46%,
6.96%, and 8.78%, respectively, without the Investment Manager's fee waiver).
The Fund's "total return" or "cumulative total return" or "cumulative growth" is
calculated by subtracting the amount of the Fund's net asset value per share at
the beginning of a stated period from the net asset value per share at the end
of the period (after giving effect to the reinvestment of all distributions
during the period), and dividing the result by the net asset value per share at
the beginning of the period. For the Fund, "total return" or "cumulative total
return" or "cumulative growth," expressed as a percentage rate and as the value
of a hypothetical $1,000 and $10,000 initial investment at the end of the
period, for the period commencing on the dates set forth and ending December 31,
1995, are set forth below:
<TABLE>
Start of Periods Average Total Ending Value Ending Value
Ending Dec. 31, 1995 Annual Return of a $1,000 of a $10,000
Return Investment Investment
=============================================================================================================================
<S> <C> <C> <C> <C>
March 7, 1984 9.03% 177.98% $2,779.80 $27,798.03
January 1, 1986 7.70% 110.04% $2,100.35 $21,003.50
January 1, 1987 6.46% 75.61% $1,756.07 $17,560.74
January 1, 1988 7.42% 77.22% $1,772.23 $17,722.28
January 1, 1989 6.83% 58.77% $1,587.68 $15,876.85
January 1, 1990 6.48% 45.71% $1,457.14 $14,571.42
January 1, 1991 7.00% 40.28% $1,402.77 $14,027.67
January 1, 1992 5.39% 23.38% $1,233.82 $12,338.15
January 1, 1993 5.18% 16.35% $1,163.53 $11,635.25
January 1, 1994 2.57% 5.22% $1,052.15 $10,521.52
January 1, 1995 16.60% 16.60% $1,165.96 $11,659.62
</TABLE>
<TABLE>
Without the Investment Manager's fee waiver.
- -----------------------------------------------------------------------------------------------------------------------------
Start of Periods Average Ending Value Ending Value
Ending Dec. 31, 1995 Annual Total of a $1,000 of a $10,000
Return Return Investment Investment
=============================================================================================================================
<S> <C> <C> <C> <C>
March 7, 1984 8.87% 170.50% $2,705.00 $27,049.98
January 1, 1986 7.54% 106.79% $2,067.87 $20,678.72
January 1, 1987 6.31% 73.39% $1,733.87 $17,338.71
January 1, 1988 7.29% 75.55% $1,755.53 $17,555.29
January 1, 1989 6.71% 57.59% $1,575.88 $15,758.76
January 1, 1990 6.41% 45.19% $1,451.89 $14,518.93
January 1, 1991 6.96% 40.02% $1,400.16 $14,001.60
January 1, 1992 5.34% 23.15% $1,231.51 $12,315.15
January 1, 1993 5.11% 16.14% $1,161.36 $11,613.15
January 1, 1994 2.48% 5.03% $1,050.26 $10,502.60
January 1, 1995 16.46% 16.46% $1,164.62 $11,646.16
</TABLE>
The Fund may provide the above described standard total return for a period
which ends as of not earlier than the most recent calendar quarter end and which
begins either one or five years before or at the time of commencement of the
Fund's operations. In addition, the Fund may provide nonstandardized total
return results for differing periods, such as for a recent month or quarter. For
example, the Fund's nonstandardized total return for the three months ended
December 31, 1995 was 21.78% (21.95% with the Investment Manager's fee waiver).
Nonstandardized total returns are computed as otherwise described above except
that no annualization is made.
The Fund may also provide performance information based on an initial investment
in the Fund and/or of cumulative investments of varying amounts over periods of
time. Some or all of this information may be provided either graphically or in
tabular form.
7
Source Material
From time to time, in marketing pieces and other Fund literature, the Fund's
performance may be compared to the performance of broad groups of comparable
mutual funds or unmanaged indexes of comparable securities. Evaluations of Fund
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for Fund performance information may include, but
are not limited to, the following:
Bank Rate Monitor, a weekly publication which reports yields on various bank
money market accounts and certificates of deposit.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance and other data.
Bloomberg, a computerized market data source and portfolio analysis system.
Bond Buyer Municipal Bond Index (20 year), an index of municipal bonds provided
by a national periodical reporting on municipal securities.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CDA/Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient features,
management results, income and dividend records, and price ranges.
Consumer's Digest, a bimonthly magazine that periodically features the
performance of a variety of investments, including mutual funds.
Financial Times, Europe's business newspaper, which from time to time reports
the performance of specific investment companies in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Goldman Sachs Convertible Bond Index -- currently includes 67 bonds and 33
preferred shares. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds.
Growth Fund Guide, a newsletter providing a mutual fund rating service published
for over 25 years.
IBC's Money Fund Report, a weekly publication of money market fund total net
assets, yield, and portfolio composition.
Individual Investor, a newspaper that periodically reviews mutual fund
performance and other data.
Investment Advisor, a monthly publication reviewing performance of mutual funds.
Investor's Business Daily, a nationally distributed newspaper which regularly
covers financial news.
Kiplinger's Personal Finance Magazine, a monthly publication periodically
reviewing mutual fund performance.
Lehman Brothers, Inc. "The Bond Market Report" reports on various Lehman
Brothers bond indices.
Lehman Government/Corporate Bond Index -- is a widely used index composed of
government, corporate, and mortgage backed securities.
Lehman Long Term Treasury Bond -- is composed of all bonds covered by the Lehman
Treasury Bond Index with maturities of 10 years or greater.
Lipper Analytical Services, Inc., a publication periodically reviewing mutual
funds industry-wide by means of various methods of analysis.
Merrill Lynch Pierce Fenner & Smith Taxable Bond Indices reports on a variety of
bond indices.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley Capital International EAFE Index, is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Morningstar, Mutual Fund Values, publications of Morningstar, Inc., periodically
reviewing mutual funds industry-wide by means of various methods of analysis and
textual commentary.
Mutual Fund Forecaster, a newsletter providing a mutual fund rating service.
Nasdaq Industrial Index -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter that reports on mutual fund
performance, rates funds, and discusses investment strategies for mutual fund
investors.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
special section reporting on mutual fund performance, yields, indexes, and
portfolio holdings.
Russell 3000 Index-- consists of the 3,000 largest stocks of U.S. domiciled
companies commonly traded on the New York and American Stock Exchanges or the
Nasdaq over-the-counter market, accounting for over 90% of the market value of
publicly traded stocks in the U.S.
Russell 2000 Small Company Stock Index-- consists of the smallest 2,000 stocks
within the Russell 3000; a widely used benchmark for small capitalization common
stocks.
Salomon Brothers GNMA Index -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
Salomon Brothers High-Grade Corporate Bond Index-- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
Salomon Brothers Broad Investment-Grade Bond Index-- is a market-weighted index
that contains approximately 4,700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
Salomon Brothers Market Performance tracks the Salomon Brothers bond index.
Standard & Poor's 500 Composite Stock Price Index-- is an index of 500
companies representing the U.S. stock market.
Standard & Poor's 100 Composite Stock Price Index-- is an index of 100
companies representing the U.S. stock market.
Standard & Poor's Preferred Index is an index of preferred securities.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
businesses, often featuring mutual fund performance data.
USA Today, a national newspaper that periodically reports mutual fund
performance data.
U.S. News and World Report, a national weekly that periodically reports mutual
fund performance data.
Wall Street Journal, a nationally distributed newspaper which regularly covers
financial news.
Wilshire 5000 Equity Indexes-- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index-- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
Indices prepared by the research departments of such financial organizations as
Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Bear
Stearns & Co., Inc., and Ibbotson Associates may be used, as well as information
provided by the Federal Reserve Board.
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement, Investor Service Center, Inc. acts as the
Distributor of the Fund's shares. Under the Distribution Agreement, the
Distributor shall use its best efforts, consistent with its other businesses, to
sell shares of the Fund. Fund shares are sold continuously. The Fund has also
adopted a plan of distribution (the "Plan") pursuant to Rule 12b-1 (the "Rule")
under the 1940 Act. The Plan is designed to (a) permit the Fund to reimburse the
Distributor for certain selling activities and (b) protect against any claim
that certain other expenses are an indirect expenditure by the Fund for
distribution purposes.
As to its first purpose, the Plan provides that the Fund may reimburse the
Distributor for distribution activities in an amount up to one-quarter of one
percent per annum of the Fund's average daily net assets and for service
activities up to one-quarter of one percent per annum of the Fund's average
daily net assets. Such payments may include (1) advertising, direct mail and
promotional expenses; (2) fulfillment expenses including the cost of printing
and mailing prospectuses and sales literature to prospective investors; (3)
payments to third parties who sell shares of the Fund; (4) reimbursement of
and/or compensation to brokers, dealers, banks and other intermediaries for
administrative and accounting services; and (5) telephone, office expenses,
salaries, which may include persons who are officers or employees of the
Distributor and/or the Investment Manager, their affiliates, or of the Fund, and
any other costs of effectuating the Plan. In addition, the Distributor and the
Investment Manager may make similar payments from their own resources.
As to its second purpose, the Plan provides that to the extent any of the
following payments are considered under the Rule to be "primarily intended to
result in the sale of shares" issued by the Fund, such payments are authorized
under the Plan: (1) the costs of preparation, printing and mailing of proxy
statements, all required reports and notices to shareholders, confirmations of
shares sold or redeemed, share certificates, and reports of share balances,
irrespec tive of whether such reports or notices contain or are accompanied by
material intended to result in the sale of shares of the Fund or other funds or
other investments and investment services; (2) fees and expenses of registering
shares of the Fund under Federal or state laws regulating the sale of securities
and costs of preparing, printing and mailing Prospectuses and Statements of
Additional Information; (3) fees and expenses of registering the Fund as a
broker/dealer or of registering an agent of the Fund under Federal or state laws
regulating the sale of securities; (4) fees of registering, at the request of
the Fund, agents or representatives of the Distributor or a principal
underwriter of the Fund under Federal or state laws regulating the sale of
securities, provided that no sales commission or "load" is charged on sales of
shares of the Fund; (5) all fees under the 1940 Act and the Securities Act of
1933, including fees in connection with any application for exemption relating
to or directed toward the sale of Fund shares; (6) all fees, assessments and
voluntary contributions to the Investment Company Institute or any similar
organization, whether or not designed to provide sales assistance; (7) costs of
providing shareholder services; (8) costs of responding to telephone or mail
inquiries of investors or prospective investors; and (9) any transfer agent,
legal, accounting or other professional fees and expenses. The second purpose of
the Plan also recognizes that the Distributor or the Investment Manager may make
payments for distribution expenses or the
other expenses described above from their own resources. In that regard, it is
recognized that the profits, if any, of the Investment Manager in relation to
the Fund are dependent primarily upon the investment management fees paid by the
Fund. If and to the extent that any investment management fees paid by the Fund
might, in view of the foregoing, be considered as indirectly financing selling
activities by the Fund, such payments are authorized. Should any payment
described above relating to the second purpose of the Plan be deemed by a court
or agency having jurisdiction to be payment by the Fund of expenses primarily
intended to result in the sale of shares issued by the Fund, they shall be
considered to be expenses contemplated by and included in the Plan but not
included within the one-half of one percent per annum of average daily net
assets limitation prescribed therein.
With the approval of the vote of a majority of the entire Board of Directors and
of the Plan Directors (defined below) of the Fund, the Distributor has entered
into a related agreement with Hanover Direct Advertising Company, Inc. ("Hanover
Direct"), a wholly-owned subsidiary of Group, in an attempt to obtain cost
savings on the marketing of the Fund's shares. Hanover Direct will provide
services to the Distributor on behalf of the Fund and the other Bull & Bear
Funds at standard industry rates, which includes commissions. The amount of
Hanover Direct's commissions over its cost of providing Fund marketing will be
credited to the Fund's distribution expenses and represent a saving on
marketing, to the benefit of the Fund. To the extent Hanover Direct's costs
exceed such commissions, Hanover Direct will be reimbursed its costs in the same
manner as the Distributor is reimbursed under the Plan by the Fund.
To the extent the Plan maintains a flow of subscriptions to the Fund, there
results an immediate and direct benefit to the Investment Manager by maintaining
or increasing its investment management fee revenue base, diminishing the
obligation, if any, of the Investment Manager to make a reimbursement to the
Fund under the expense guaranty described on page 5, and eliminating or reducing
the contribution, if any, made by the Investment Manager to marketing expenses.
It is the opinion of the Board of Directors that the Plan is necessary to
maintain a flow of subscriptions to offset redemptions. Redemptions of mutual
fund shares are inevitable. If redemptions are not offset by subscriptions, a
fund shrinks in size and its ability to maintain quality shareholder services
declines. Eventually, redemptions could cause a fund to become uneconomic.
Furthermore, an extended period of significant net redemptions may be
detrimental to orderly management of the portfolio. Offsetting redemptions
through sales efforts benefits shareholders by maintaining the viability of a
fund. In periods where net sales are achieved, additional benefits may accrue
relative to portfolio management and increased shareholder servicing capability.
In addition, increased assets enable the establishment and maintenance of a
better shareholder servicing staff which can respond more effectively and
promptly to shareholder inquiries and needs. While net increases in total assets
are desirable, the primary goal of the Plan is to prevent a decline in assets
serious enough to cause disruption of portfolio management and to impair the
Fund's ability to maintain a high level of quality shareholder services.
The Plan increases the overall expense ratio of the Fund; however, a substantial
decline in Fund assets is likely to increase the portion of the Fund's expense
ratio comprised of costs other than the Plan, while a substantial increase in
Fund assets would be expected to reduce the portion of the expense ratio
comprised of such costs. Nevertheless, the net effect of the Plan is to increase
overall expenses. The Board of Directors is provided with and reviews at least
quarterly a written report of all expenditures by the Fund pursuant to the Plan
and the purposes for which such expenditures were made.
Of the amounts reimbursed to the Distributor during the Fund's fiscal year ended
December 31, 1995, approximately $12,032 represented reimbursement of expenses
incurred for advertising, $10,425 for printing and mailing prospectuses and
other information to other than current shareholders, $9,528 for salaries of
marketing and sales personnel, $1,853 for payments to third parties who sold
shares of the Fund and provided certain services in connection therewith, and
$5,288 for overhead and miscellaneous expenses.
The Plan was approved by the vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities of the Fund and by the vote of a majority of
both those Directors of the Fund who are not "interested persons" of the Fund
(as defined in the 1940 Act) and have no direct or indirect financial interest
in the operation of the Plan or any agreement related to it (the "Plan
Directors"), and all of the Directors then in office, cast in person at a
meeting called for the purpose of voting on the Plan. Any agreements related to
the Plan must be approved by a vote of a majority of the entire Board of
Directors and the Plan Directors. The Plan will continue in effect for so long
as such continuance is specifically approved at least annually by the entire
Board of Directors and the Plan Directors, unless terminated by a vote of a
majority of the Plan Directors, or by a vote of a majority of the outstanding
voting securities of the Fund. The Plan may not be amended to increase
materially the limit upon distribution expenses described above unless approved
by the shareholders, and no other material amendment to the Plan shall be made
unless approved by the entire Board of Directors and the Plan Directors. While
the Plan is in effect, the selection and nomination of Directors who are not
interested persons (as defined in the 1940 Act) of the Fund will be committed to
the discretion of the Directors who are not interested persons. Other than as
described above, no Director or interested person of the Fund had any direct or
indirect financial interest in the operation of the Plan or any related
agreement.
The Glass-Steagall Act prohibits certain banks from engaging in the business of
underwriting, selling, or distributing securities such as shares of a mutual
fund. Although the scope of this prohibition under the Glass-Steagall Act has
not been fully defined, in the Distributor's opinion it should not prohibit
banks from being paid for administrative and accounting services under the Plan.
If, because of changes in law or regulation, or because of new interpretations
of existing law, a bank or the Fund were prevented from continuing these
arrangements, it is expected that other arrangements for these services will be
made. In addition, state securities laws on this issue may differ from the
interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of regular trading
on the New York Stock Exchange each day the Exchange is open for trading
("Business Day"). The following are not Business Days of the Fund: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Municipal securities with remaining maturities of more than 60 days are valued
in accordance with valuations furnished by the pricing service employed by the
Fund that are based on a computerized matrix system or appraisals by the pricing
service. Debt obligations with remaining maturities or 60 days or less are
valued at cost adjusted for amortization of premiums and accretions of
discounts. All other assets will be valued at fair value as determined in good
faith by or under the direction of the Board of Directors.
PURCHASE OF SHARES
The Fund will only issue shares upon payment of the purchase price by check made
payable to the Fund and drawn in U.S. dollars on a U.S. bank, or by Federal
Reserve wire transfer. Third party checks, credit cards, and cash will not be
accepted. The Fund reserves the right to reject any order, to cancel any order
due to nonpayment, to accept initial orders by telephone or telegram, and to
waive the limit on subsequent orders by telephone, with respect to any person or
class of persons. Orders to purchase shares are not binding on the Fund until
they are confirmed by the Transfer Agent. In order to permit the Fund's
shareholder base to expand, to avoid certain shareholder hardships, to correct
transactional errors, and to address similar exceptional situations, the Fund
may waive or lower the investment minimums with respect to any person or class
of persons.
ALLOCATION OF BROKERAGE
The Fund seeks to obtain prompt execution of orders at the most favorable net
prices. Fund transactions in municipal and over-the-counter securities generally
are with dealers acting as principals at net prices with little or no brokerage
costs. In certain circumstances, however, the Fund may engage a broker as agent
for a commission to effect transactions for such securities. Transactions are
directed to brokers and dealers qualified to execute orders or provide research,
brokerage or other services, and who may sell shares of the Fund or of other
affiliated funds. The Investment Manager may also allocate portfolio
transactions to other broker/dealers that remit a portion of their commissions
as a credit against the custodian's charges. No formula exists and no
arrangement is made with or promised to any broker/dealer which commits either a
stated volume or percentage of brokerage business based on research, brokerage
or other services furnished to the Investment Manager or upon sale of Fund
shares. Purchases of securities from underwriters include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
include a spread between the bid and asked price. While the Investment Manager
generally seeks competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available.
The Investment Manager directs portfolio transactions to broker/dealers for
execution on terms and at rates which it believes, in good faith, to be
reasonable in view of the overall nature and quality of services provided by a
particular broker/dealer, including brokerage and research services, sales of
Fund shares and shares of other affiliated funds, and allocation of commissions
to the Fund's custodian. With respect to brokerage and research services,
consideration may be given in the selection of broker/dealers to brokerage or
research services provided and payment may be made of a fee higher than that
charged by another broker/dealer which does not furnish brokerage or research
services or which furnishes brokerage or research services deemed to be of
lesser value, so long as the criteria of Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), or other applicable law are
met. Section 28(e) of the 1934 Act was adopted in 1975 and specifies that a
person with investment discretion shall not be "deemed to have acted unlawfully
or to have breached a fiduciary duty" solely because such person has caused the
account to pay a higher commission than the lowest available under certain
circumstances. To obtain the benefit of Section 28(e), the person so exercising
investment discretion must make a good faith determination that the commissions
paid are "reasonable in relation to the value of the brokerage and research
services provided ... viewed in terms of either that particular transaction or
his overall responsibilities with respect to the accounts as to which he
exercises investment discretion." Thus, although the Investment Manager may
direct portfolio transactions without necessarily obtaining the lowest price at
which such broker/dealer, or another, may be willing to do business, the
Investment Manager seeks the best value for the Fund on each trade that
circumstances in the market place permit, including the value inherent in
on-going relationships with quality brokers.
Currently, it is not possible to determine the extent to which commissions that
reflect an element of value for brokerage or research services might exceed
commissions that would be payable for execution alone, nor generally can the
value of such services to the Fund be measured, except to the extent such
services have a readily ascertainable market value. There is no certainty that
services so purchased, or the sale of Fund shares, if any, will be beneficial to
the Fund, and it may be that other affiliated funds will derive benefit
therefrom. Such services being largely intangible, no dollar amount can be
attributed to benefits realized by the Fund or to collateral benefits, if any,
conferred on affiliated entities. Those services may include (1) furnishing
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities, (2) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). Pursuant to arrangements with certain bro
ker/dealers, such broker/dealers provide and pay for various computer hardware,
software and services, market pricing information, investment subscriptions and
memberships, and other third party and internal research of assistance to the
Investment Manager in the performance of its investment decision-making
responsibilities for transactions effected by such broker/dealers for the Fund.
Commission "soft dollars" may be used only for "brokerage and research services"
provided directly or indirectly by the broker/dealer and under no circumstances
will cash payments be made by such broker/dealers to the Investment Manager. To
the extent that commission "soft dollars" do not result in the provision of any
"brokerage and research services" by a broker/dealer to whom such commissions
are paid, the commissions, nevertheless, are the property of such broker/dealer.
To the extent such services are utilized by the Investment Manager for other
than the performance of its investment decision-making responsibilities, the
Investment Manager makes an appropriate allocation of the cost of such services
according to their use.
During the fiscal years ended December 31, 1993, 1994, and 1995 the Fund did not
pay any brokerage commissions and no transactions were directed to
broker/dealers during such periods for selling shares of the Fund or any other
affiliated funds.
Investment decisions for the Fund and for the other Funds managed by the
Investment Manager and its affiliates are made independently based on each
Fund's investment objectives and policies. The same investment decision,
however, may occasionally be made for two or more Funds. In such a case, the
Investment Manager may combine orders for two or more Funds for a particular
security if it appears that a combined order would reduce brokerage commissions
and/or result in a more favorable transaction price. Combined purchase or sale
orders are then averaged as to price and allocated as to amount according to a
formula deemed equitable to each Fund. While in some cases this practice could
have a detrimental effect upon the price or quantity available of the security
with respect to the Fund, the Investment Manager believes that the larger volume
of combined orders can generally result in better execution and prices.
The Fund is not obligated to deal with any particular broker, dealer or group
thereof. Certain broker/dealers that the Funds Complex does business with may,
from time to time, own more than 5% of the publicly traded Class A non-voting
Common Stock of Group, the parent of the Investment Manager, and may provide
clearing services to BBSI.
The Fund's portfolio turnover rate may vary from year to year and will not be a
limiting factor when the Investment Manager deems portfolio changes appropriate.
The portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year or
less) by the monthly average value of securities in the portfolio during the
year.
DISTRIBUTIONS AND TAXES
If the U.S. Postal Service cannot deliver a shareholder's check, or if a
shareholder's check remains uncashed for six months, the Fund reserves the right
to credit the shareholder's account with additional shares of the Fund at the
then current net asset value in lieu of the cash payment and to thereafter issue
such shareholder's distributions in additional shares of the Fund.
The Fund intends to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"). To
qualify for this treatment, the Fund must distribute to its shareholders for
each taxable year at least 90% of the sum of its net interest income excludable
from gross income under section 103(a) of the Code ("tax-exempt interest") plus
its investment company taxable income (consisting generally of taxable net
investment income and net short term capital gain) and must meet several
additional requirements. Among these requirements are the following: (1) at
least 90% of the Fund's gross income each taxable year must be derived from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities, or other income derived with
respect to its business of investing in securities ("Income Requirement"); (2)
the Fund must derive less than 30% of its gross income each taxable year from
the sale or other disposition of securities that were held for less than three
months ("Short-Short Limitation"); and (3) the Fund's investments must satisfy
certain diversification requirements. In any year during which the applicable
requirements of the Code are satisfied, the Fund will not be liable for Federal
income tax on income and capital gain that is distributed to its shareholders.
If for any taxable year the Fund does not qualify for treatment as a RIC, all of
its taxable income will be taxed at corporate rates and all distributions to its
shareholders (including the portion thereof attributable to tax-exempt interest)
will be fully taxable to them.
Dividends paid by the Fund will qualify as "exempt-interest" dividends, and thus
will be excludable from gross income by its shareholders, if the Fund satisfies
the additional requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of securities the
interest on which is tax-exempt; the Fund intends to continue to satisfy this
requirement. The aggregate amount annually designated by the Fund as exempt-
interest dividends may not exceed its tax-exempt interest. The shareholders'
treatment of dividends from the Fund under state and local income tax laws may
differ from the treatment thereof under the Code.
Dividends and other distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. The Fund invests exclusively in debt
securities and receives no dividend income; accordingly, no portion of the
dividends or other distributions paid by the Fund is eligible for the
dividends-received deduction allowed to corporations.
If Fund shares are sold at a loss after being held for six months or less, the
loss will be disallowed to the extent of any exempt-interest dividends received
on those shares; and the portion, if any, that is not disallowed will be treated
as long term, instead of short term, capital loss to the extent of any capital
gain distributions received thereon. Investors also should be aware that if
shares are purchased shortly before the record date for a taxable dividend or
capital gain distribution, the shareholder will pay full price for the shares
and receive some portion of the price back as a taxable distribution.
The Fund will be subject to a nondeductible 4% excise tax to the extent it fails
to distribute by the end of any calendar year substantially all of its ordinary
(taxable) income for that year and capital gain net income for the 12 month
period ending on October 31 of that year, plus certain other amounts.
Interest received on certain otherwise tax-exempt securities (so-called "private
activity" bonds) issued after August 7, 1986, which are used for purposes other
than those generally performed by governmental units, e.g., bonds used for
commercial or housing purposes, is a tax preference item for purposes of the
Federal alternative minimum tax ("AMT") for both individuals and corporations.
The Fund reports to its shareholders after its fiscal year-end the portion, if
any, of its dividends paid during the preceding year that is a tax-preference
item for these purposes.
Corporations also may be subject to the AMT based in part on certain differences
between taxable income as adjusted for other tax preferences and "adjusted
current earnings." Because exempt-interest dividends paid by the Fund will be
included in adjusted current earnings, a corporate shareholder may be required
to pay AMT on those dividends, without regard to whether they are derived to any
extent from interest on private activity bonds.
Entities or other persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by private activity bonds or
industrial development bonds should consult their tax advisers before purchasing
Fund shares because, for users of certain of these facilities, the interest on
such bonds is not exempt from Federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of such bonds.
Up to 85% of social security and railroad retirement benefits may be included in
taxable income for recipients whose adjusted gross income (including income from
tax-exempt sources such as the Fund) plus 50% of their benefits exceeds certain
base amounts. Exempt-interest dividends from the Fund still are tax-exempt to
the extent described above; they are only included in the calculation of whether
a recipient's income exceeds the established amounts.
If the Fund invests in any instruments that generate taxable income, under the
circumstances described in the Prospectus, distributions of the interest earned
thereon will be taxable to its shareholders as ordinary income to the extent of
its earnings and profits. Moreover, if the Fund realizes capital gain as a
result of market transactions, any distributions of such gain will be taxable to
its shareholders.
The Fund is required to withhold 31% of all taxable dividends, capital gain
distributions, and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required to withhold 31% of all
taxable dividends and capital gain distributions payable to such shareholders
who otherwise are subject to backup withholding.
From time to time, proposals have been introduced before Congress that would
restrict or eliminate the Federal income tax exemption for interest on municipal
securities, and it can be expected that similar proposals may continue to be
introduced. Should such a proposal be enacted, both the availability and value
of municipal securities would be affected and the Board of Directors would
consider possible changes for shareholder approval in the Fund's investment
objective and policies.
The foregoing discussion of Federal income tax consequences is based on the tax
law in effect on the date of this Statement of Additional Information, which is
subject to change by legislative, judicial or administrative action. The Fund
may be subject to state or local tax in jurisdictions in which it may be deemed
to be doing business.
REPORTS TO SHAREHOLDERS
The Fund issues, at least semi-annually, reports to its shareholders including a
list of investments held and statements of assets and liabilities, income and
expense, and changes in net assets of the Fund. The Fund's fiscal year ends on
December 31 each year.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02109, has been
retained to act as custodian of the Fund's investments and may appoint one or
more subcustodians, provided such subcustodianship is in compliance with the
rules and regulations promulgated under the 1940 Act. The custodian also
performs accounting services for the Fund. As part of its agreement with the
Fund, the custodian may apply credits or charges for its services to the Fund
for, respectively, positive or deficit cash balances maintained by the Fund with
the Custodian. DST Systems, Inc., P.O. Box 419789, Kansas City, MO 64141- 6789,
is the Fund's transfer and dividend disbursing agent. The Distributor provides
certain administrative and shareholder services to the Fund pursuant to the
Shareholder Services Agreement and is reimbursed by the Fund the actual costs
incurred with respect thereto. Among other such services, the Distributor
currently receives and responds to shareholder inquiries concerning their
accounts and processes shareholder telephone requests such as telephone
transfers, purchases and redemptions, changes of address and similar matters.
For shareholder services, the Fund paid the Distributor for the fiscal years
ended December 31, 1993, 1994, and 1995 approximately $12,179, $16,280 and
$13,117, respectively.
AUDITORS
Tait, Weller & Baker, Two Penn Center, Suite 700, Philadelphia, PA 19102-1707,
are the independent accountants for the Fund. Financial statements of the Fund
are audited annually.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended December 31, 1995,
together with the Report of the Fund's independent accountants thereon, appear
in the Fund's Annual Report to Shareholders and are incorporated herein by
reference.
APPENDIX
Ratings of Municipal Bonds
Fitch Investors Service, L.P. 'AAA' rated bonds are considered to be investment
grade and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. 'AA' rated bonds are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated
'AAA'. 'A' rated bonds are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings. BBB rated bonds are
considered to be investment grade and of satisfactory credit quality. The
obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings. Plus and minus
signs are used with a rating symbol to indicate the relative position of an
issuer within the rating category. Plus and minus signs, however, are not used
in the 'AAA' category.
Moody's Investors Service, Inc. Bonds which are rated 'Aaa' are judged to be of
the best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues. Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the 'Aaa' group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risk appear somewhat larger than the 'Aaa'
securities. Bonds which are rated 'A' possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future. Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Standard & Poor's Ratings Services. Debt rated 'AAA' has the highest rating
assigned by Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong. Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories. Debt
rated 'BBB' is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Ratings of Municipal Notes
Fitch Investors Service, L.P. 'F-1+': (Exceptionally strong credit quality)
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment. 'F-1': (Very strong credit quality) Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated 'F-1+'. 'F-2': (Good credit quality) Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned 'F-1+' and 'F-1'
ratings. 'F-3': (Fair credit quality) Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these securities to be
rated below investment grade.
Moody's Investors Service, Inc. 'MIG 1': This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad based access to the market for refinancing. 'MIG
2': This designation denotes high quality, with margins of protection ample
although not so large as in the preceding group. 'MIG 3': This designation
denotes favorable quality, with all security elements accounted for, but lacking
the undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be less
well established.
Standard & Poor's Ratings Services. 'SP-1': Very strong or strong capacity to
pay principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation. 'SP-2':
Satisfactory capacity to pay principal and interest. 'SP-3': Speculative
capacity to pay principal and interest.
Ratings of Commercial Paper
Fitch Investors Service, L.P. 'F-1+': (Exceptionally strong credit quality)
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment. 'F-1': (Very strong credit quality) Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated 'F-1+'. 'F-2': (Good credit quality) Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned 'F-1+' and 'F-1'
ratings.
Moody's Investors Service, Inc. Issuers rated 'Prime-1' (or supporting
institutions) have a superior ability for repayment of senior short term debt
obligations. 'Prime-1' repayment ability will often be evidenced by many of the
following characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well-established access to a range of financial markets and assured
sources of alternate liquidity. Issuers rated Prime-2 (or supporting
institutions) have a strong ability for repayment of senior short term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Standard & Poor's Ratings Group Services. 'A-1': This designation indicates that
the degree of safety regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are denoted with a plus sign
(+) designation. 'A-2': Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated 'A-1'.
