As filed with the Securities and Exchange Commission on June 19, 1996
FORM N-1A
File No. 33-2430
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. -----
Post-Effective Amendment No. 14
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 16
THE ROCKWOOD GROWTH FUND, INC.
(Exact Name of Registrant as Specified in Charter)
P.O. BOX 50313, IDAHO FALLS, IDAHO 83405
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:(208) 522-5593
ROSS H. FARMER, P.O. BOX 50313, IDAHO FALLS, IDAHO 83405
(Name and Address of Agent for Services)
Approximate Date of Proposed Public Offering
It is proposed that this filing will become effective (check appropriate box) /
/ immediately upon filing pursuant to paragraph (b) / / on ____________ pursuant
to paragraph (b) / / 60 days after filing pursuant to paragraph (a)(1) /X / on
August 19, 1996 pursuant to paragraph (a)(1) / / 75 days after filing pursuant
to paragraph (a)(2) / / on ______________ pursuant to paragraph (a)(2) of Rule
485
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has elected to maintain registration of an indefinite number of
shares of common stock, $.10 par value, under the Securities Act of 1933,
pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
registrant's most recent Rule 24f-2 Notice was filed on December 29, 1995.
<PAGE>
THE ROCKWOOD GROWTH FUND, INC.
TABLE OF CONTENTS
CROSS REFERENCE SHEET
PART A
PROSPECTUS
PART B
STATEMENT OF ADDITIONAL INFORMATION
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON
CONTROL WITH REGISTRANT
ITEM 26 NUMBER OF SECURITIES HOLDERS
ITEM 27 INDEMNIFICATION
ITEM 28 BUSINESS OR OTHER CONNECTIONS OF
INVESTMENT ADVISER
ITEM 29 PRINCIPAL UNDERWRITERS
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
ITEM 31 MANAGEMENT SERVICES
ITEM 32 UNDERTAKINGS
SIGNATURE PAGE
EXHIBITS
<PAGE>
THE ROCKWOOD GROWTH FUND, INC.
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
Item No.
of Form N-lA Caption in Prospectus
1 Cover Page
2 "Expense Tables"
3 "Financial Highlights"; "Performance Information"
4 "The Fund's Investment Program"
5 "The Investment Manager and Subadviser"; "Custodian and
Transfer Agent"
5A "Performance Information"
6 Cover Page; "The Investment Manager and Subadviser";
"Distributions and Taxes"; "Determination of Net Asset Value";
"Shareholder Services"; "Capital Stock"
7 "How to Purchase Shares"; "Shareholder Services";
"Determination of Net Asset Value"; "Distribution of Shares"
8 "How to Redeem Shares"; "Determination of Net Asset Value"
9 Not Applicable
Caption in Statement of Additional Information
10 Cover Page
11 "Table of Contents"
12 Not Applicable
13 "The Fund's Investment Program"; "Investment Restrictions";
"Allocation of Brokerage"
14 "Officers and Directors"
15 "Officers and Directors"; "Investment Manager"
16 "Officers and Directors"; "Investment Manager"; "Subadviser and
Subadvisory Agreement"; "Distribution of Shares"; "Custodian,
Transfer and Dividend Disbursing Agent"; "Auditors"
17 "Allocation of Brokerage"
18 Not Applicable
19 "Purchase of Shares"
20 "Distributions and Taxes"
21 "Distribution of Shares"
22 "Calculation of Performance Data"
23 "Financial Statements"
<PAGE>
THE ROCKWOOD GROWTH FUND, INC. is an open end non-diversified no-load
management investment company. This kind of arrangement is commonly called a
mutual fund. The objective of the Fund is to seek long term capital
appreciation. This objective will be pursued through investment in common
stocks, securities convertible into common stocks, and preferred stocks. There
is no assurance that the Fund will achieve its objective.
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 August 19, 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 toll-free at 1-
888-ROCKWOOD. 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.
1
EXPENSE TABLES. 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 $100, unless you are in the Rockwood Automatic
Investment Program (see "How to Purchase Shares").
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 reimbursement)......... 0.00.%
12b-1 Fees.................................... 0.25%
Other Expenses ............................... 2.50%
-------
Total Fund Operating Expenses (after 2.75%
reimbursement)................................
EXAMPLE
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return and a redemption at the end of each time
period..................................................................
1 year 3 years 5 years 10 years
- ------ ------- ------- --------
$28 $85 $145 $308
The example set forth above assumes (i) reinvestment of all dividends and other
distributions and (ii) a 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 an assumed level of
average net assets of $1 million to $2 million, and have been restated to
reflect current management and 12b-1 fees. Without the Investment Manager's
expense guarantee, investment management fees, other expenses and total
operating expenses would have been ----%, ---%, and ----%, respectively 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 payable 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 period.1 The following information is supplemental
to the Fund's financial statements and report thereon of Coopers & Lybrand LLP,
independent accountants, appearing in the October 31, 1995 Annual Report to
Shareholders and incorporated by reference in the Statement of Additional
Information; provided, however, that the information set forth for the six
months ended April 30, 1996 and the footnotes to the following table and the
Portfolio Turnover Rate ratios have not been so audited. This table should be
read in conjunction with the Fund's financial statements and the notes thereto.
2
<TABLE>
6 MONTHS
ENDED APRIL 30 YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------------------
PER SHARE DATA 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $18.73 $16.61 $16.32 $12.42 $11.32 $ 9.56 $14.96 $13.05 $ 9.93 $11.25 $10.22
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss) (.35) (.31) (.22) (.26) (.12) (.01) .03 (.01) .01 .12 .37
Net realized and unrealized gain (loss) 10.35 2.43 .51 4.16 1.22 1.83 (4.93) 2.06 3.30 (.69) .66
----- ---- ------ ---- ---- ---- ------ ---- ---- ------ ----
on investments..........
Total from investment operations 10.00 2.12 .29 3.90 .10 1.82 (4.90) 2.05 3.31 (.57) 1.03
---- -- --- ---- --- ----- ------ ---- ---- ----- ----
Less distributions:
Distributions from net interest income.
. . . . .00
Distributions from net realized gains .00 .00 .00 .00 .00 . 00 (50) (.14) .00 (.38) .00
---- ----- ---- ----- ------ ---- ------ ---- ------ ----
Total distributions..... .00 .00 .00 .00 .00 (.06) (.50) (.14) (.19) (.75) .00
--- ---- ----- ------ ------ ------ ------ ------------- ------ -----
Net asset value at end of period $28.$18.73$16.61 $16.32 $12.4 2 $11.32 $9.56 $ 14.96 $13.05 $9.93 $11.25
======== ======== ===== ======== ====== ===== ======= ====== ====== ======
TOTAL RETURN*................ 12.76% 1.78% 31.40% 9.72% 19.04% (32.75) 15.71 33.33% (5.07) 10.08%*
====== ====== ====== ===== ====== ======= ===== ====== ====== =======
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period.. $1,227,128$773,871$714,15$737,96$599,58$876,78$965,459$1,544,82$722,17$410,461,$127,534
Ratio of expenses to average net assets 1.65% 2.30% 2.00% 2.81% 2.46% 2.15% 1.83 1.81% 2.01% 1.17% 6.76%
===== ===== ===== ===== ===== ==== ===== ===== ===== =====
Ratio of net investment income to
average net assets.... (1.77)% 1.38)% 1.67)% 1.09)% (.15)% .25% (.09)% .07% 1.53% 3.30%
======= ====== ====== ====== ====== ===== ====== ===== ===== =====
(1.48%)
=======
Portfolio turnover rate...... 13.69% 13.30.04% 18.26%19.28%%%13.28% 14.35% 37.51% 55.83% 42.00% 30.00% 31.00%
========= ==================== ====== ====== ====== ====== ====== ======
</TABLE>
(a) Ratio prior to reimbursement by the Investment Manager was __%, __%, __%,
__%, __%, __%, __%, __%, __% and __% for the periods ended October 31, 1995,
1994, 1993, 1992, 1991, 1990, 1989, 1988, 1987 and 1986, respectively.
(b) Ratio prior to reimbursement by the Investment Manager was __%, __%, __%,
__%, __%, __%, __%, __%, __% and __% for the periods ended October 31, 1995,
1994, 1993, 1992, 1991, 1990, 1989, 1988, 1987 and 1986, respectively.
3
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TABLE OF CONTENTS
Expense Tables................... Distributions and Taxes.......................
Financial Highlights............. Determination of Net Asset Value..............
The Fund's Investment Program.... Investment Manager and Subadviser.............
How to Purchase Shares........... Distribution of Shares........................
Shareholder Services............. Performance Information.......................
How to Redeem Shares............. Capital Stock.................................
Custodian and Transfer Agent..................
THE FUND'S INVESTMENT PROGRAM
The Fund's investment objective is to seek long term capital appreciation.
The Fund seeks to achieve this objective by investing primarily in equity
securities that, in the opinion of the Investment Manager, are available at
prices less than their intrinsic value. Intrinsic value is a term reflecting an
analyst's subjective view of a company's worth. It may be based on such things
as book value, "hidden assets" (assets carried on the books of a corporation
below market value), the discounted present value of a natural resource (oil,
gas, timber, silver, etc.), or an earnings history/projection. The Investment
Manager believes that investing in such securities provides a greater potential
for overall investment return than investing in securities selling at prices
that reflect more closely their intrinsic value. Any income which the Fund earns
is incidental to its objective of capital appreciation. The risks associated
with an investment in the Fund are those related to fluctuations in the market
value of the Fund's portfolio. Also, at any time, the value of the Fund's shares
may be more or less than the investor's cost. The Fund is not intended for
investors who have as their primary objective conservation of capital.
The Fund will purchase common stocks, securities convertible into common
stocks and preferred stocks that are traded on domestic stock exchanges or in
the over-the-counter market. Common stocks, securities convertible into common
stocks, and preferred stocks are purchased primarily for their potential for
long term capital appreciation and not dividend yield or interest payments. The
Fund may also invest up to 5% of its net assets in shares of closed end
investment companies. In addition to the Fund's expenses, as a shareholder in
another investment company, the Fund would bear its pro rata portion of the
other investment company's expenses.
The Fund retains the flexibility to respond promptly to changes in market
and economic conditions and the Investment Manager may employ a temporary
defensive investment strategy if it determines such a strategy to be warranted.
Under a defensive strategy, the Fund may hold cash and/or invest any portion or
all of its assets in high quality money market instruments of U.S. or foreign
government or corporate issuers. To the extent the Fund adopts a temporary
4
<PAGE>
defensive posture, it will not be invested so as to directly achieve its
investment objectives. In addition, pending investment of proceeds from new
sales of Fund shares or in order to meet ordinary daily cash needs, the Fund may
hold cash and may invest in foreign or domestic high quality money market
instruments. Money market instruments in which the Fund may invest include U.S.
or foreign government securities, high grade commercial paper, bank certificates
of deposit, bankers' acceptances, and repurchase agreements relating to any of
the foregoing.
SMALL CAPITALIZATION COMPANIES. The Fund may invest in companies that are small
or thinly capitalized, and may have a limited operating history. As a result,
investment in these securities involves greater risks and may be considered
speculative. For example, such companies may have more limited product lines,
markets or financial resources than companies with larger capitalizations, and
may be more dependent on a small management group. In addition, the securities
of such companies may trade less frequently and in smaller volume, and may be
subject to more abrupt or erratic price movements, than securities of large
companies. The Fund's positions in securities of such companies may be
substantial in relation to the market of such securities. Accordingly, it may be
difficult for the Fund to dispose of securities of these companies at prevailing
market prices. Full development of these companies takes time, and for this
reason the Fund should be considered a long term investment and not a vehicle
for seeking short term profit. The securities of small or thinly capitalized
companies may also be more sensitive to market changes than the securities of
large companies. Such companies may not be well known to the investing public
and may not have institutional ownership. Such companies may also be more
vulnerable than larger companies to adverse business or economic developments.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the Fund
purchases securities from a bank or securities dealer and simultaneously commits
to resell the securities to the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the coupon rate or maturity of
the purchased securities. The Fund maintains custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or dealer
to pay the repurchase price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the other party to the agreement must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price that was paid by the Fund upon their acquisition is
accrued as interest and included in the Fund's net investment income. Repurchase
agreements carry certain risks not associated with direct investments in
securities, including possible declines in the market value of the underlying
securities and delays and costs to the Fund if the other party to a repurchase
agreement becomes insolvent. The Fund intends to enter into repurchase
agreements only with banks and dealers in transactions believed by the
Investment Manager to present minimum credit risks in accordance with guidelines
established by the
5
<PAGE>
Fund's board of directors. The Investment Manager reviews and monitors the
creditworthiness of those institutions under the board's general supervision.
OTHER INFORMATION. The Fund is "non-diversified," as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), but intends to continue to
qualify as a regulated investment company for Federal income tax purposes. This
means, in general, that more than 5% of the Fund's total assets may be invested
in the securities of one issuer (including a foreign government), but only if at
the close of each quarter of the Fund's taxable year, the aggregate amount of
such holdings is less than 50% of the value of its total assets and no more than
25% of the value of its total assets is invested in the securities of a single
issuer. To the extent that the Fund's portfolio at times may include the
securities of a smaller number of issuers than if it were "diversified," as
defined in the 1940 Act, the Fund will at such times be subject to greater risk
with respect to its portfolio securities than an investment company that invests
in a broader range of securities, in that changes in the financial condition or
market assessment of a single issuer may cause greater fluctuation in the Fund's
total return. The Fund may invest (i) up to 15% of its net assets in illiquid
securities, including repurchase agreements with a maturity of more than seven
days, and (ii) up to 10% of its total assets in restricted securities. Illiquid
securities may be more difficult to value than more widely traded securities and
the prices realized from the sales of illiquid securities may be less than if
such securities were more widely traded. The Fund may borrow money from banks
for temporary or emergency purposes (not for leveraging or investment) and
engage in reverse repurchase agreements, but not in excess of an amount equal to
one third of the Fund's total net assets. The Fund may not purchase securities
for investment while any bank borrowing equaling more than 5% of its total
assets is outstanding.
In addition to the Fund's investment objective, the Fund has adopted certain
investment restrictions set forth in the Statement of Additional Information
that are fundamental and may not be changed without shareholder approval. The
Fund's other investment policies are not fundamental and may be changed by the
Board of Directors without shareholder approval.
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 the order by Investor
Service Center (see "Determination of Net Asset Value"). The minimum initial
investment is $500 for regular and Uniform Gifts/Transfers to Minors Act custody
accounts, and $100 for retirement plans established with the Fund, which include
individual retirement accounts ("IRAs"), simplified employee pension plan IRAs
("SEP-IRAs"), rollover IRAs, profit sharing and money purchase plans, and 403(b)
plan accounts. The minimum subsequent investment is $50. The initial investment
minimums are waived if you elect to invest $50 or more each month in the Fund
through the Rockwood Automatic Investment Program (see "Additional Investments"
below).
INITIAL INVESTMENT. The Account Application that accompanies this
prospectusshould be
6
<PAGE>
completed, signed and, with a check or other negotiable bank draft payable to
The Rockwood Growth Fund, mailed to Investor Service Center, 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.
ADDITIONAL INVESTMENTS. Additional investments may be made conveniently at any
time by any one or more of the following methods:
o ROCKWOOD AUTOMATIC INVESTMENT PROGRAM. With the Rockwood Automatic
Investment Program, you can establish a convenient and affordable long term
investment program through one or more of the Plans explained below. Each
Plan is designed to facilitate an automatic monthly investment of $50 or
more into your Fund account.
The ROCKWOOD BANK TRANSFER PLAN lets you purchase Fund shares on a
certain day each month by transferring electronically a specified
dollar amount from your regular checking account, NOW account, or bank
money market deposit account.
In the ROCKWOOD SALARY INVESTING PLAN, part or all of your salary may
be invested electronically in shares of the Fund on each pay date,
depending upon your employer's direct deposit program.
The ROCKWOOD GOVERNMENT DIRECT DEPOSIT PLAN allows you to deposit
automatically part or all of certain U.S. Government payments into your
Fund account. Eligible U.S. Government payments include Social
Security, pension benefits, military or retirement benefits, salary,
veteran's benefits and most other recurring payments.
For more information concerning these Plans, or to request the necessary
authorization form(s), please call Investor Service Center toll-free at
1-888-ROCKWOOD. You may modify or terminate the Bank Transfer Plan at any
time by written notice received at least 10 days prior to the scheduled
investment date. To modify or terminate the Salary Investing Plan or
Government Direct Deposit Plan, you should contact, respectively, your
employer or the appropriate U.S. government agency. 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, and you
should consider your ability to make purchases when prices are low.
o CHECK. Mail a check or other negotiable bank draft ($50 minimum), made
payable to The Rockwood Growth Fund, together with a Rockwood FastDeposit
form to Investor Service Center, Box 419789, Kansas City, MO 64141-6789. If
you do not use that form, please send a letter indicating the account number
to which the subsequent investment is to be credited, and name(s) of the
registered owner(s).
o ELECTRONIC FUNDS TRANSFER (EFT). With EFT, you may purchase additional shares
of the Fund quickly and simply, just by calling Investor Service Center
toll-free at 1-888- ROCKWOOD. The bank you designate on your Account Application
or Authorization Form will be contacted to arrange for the EFT, which is done
through the Automated Clearing House system, to your Fund account. For requests
received by 4 p.m., eastern time, the investment will be credited to your Fund
account ordinarily within two business days. There is a $50 minimum for each EFT
investment. Your designated bank must be an Automated Clearing House member and
any subsequent changes in bank account information must be submitted in writing
with a voided check.
o FEDERAL FUNDS WIRE. You may wire money, by following the procedures set forth
below, to receive that day's net asset value per share.
INVESTING BY WIRE. For an initial investment by wire, you must first telephone
Investor Service Center toll-free at 1-888-ROCKWOOD, 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 The Rockwood Growth Fund account
number. You may then purchase shares by requesting your bank to transmit
immediately available funds ("Federal funds") by wire to: United Missouri Bank
NA, ABA #10-10-00695; for Account 98-7052-724-3; The Rockwood Growth 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, Box 419789, Kansas City, MO 64141-6789. This service is not available on
days when the Federal Reserve wire system is closed. Subsequent investments by
wire may be made at any time without having to call Investor Service Center 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 and other distributions that are paid in additional shares (see
"Distributions and Taxes"). 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 provide safekeeping, we
recommend that you do not request certificates. You will receive transaction
confirmations upon purchasing or selling shares, and quarterly statements.
WHEN ORDERS ARE EFFECTIVE. The purchase price for Fund shares is the net asset
value of such shares next determined after receipt and acceptance by Investor
Service Center of a purchase order in proper form. All purchases are accepted
subject to collection at full face value in Federal funds. Checks must be made
payable to The Rockwood Growth 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.
7
<PAGE>
SHAREHOLDER SERVICES
You may modify or terminate your participation in any of the Fund's special
plans or services at any time. Shares or cash should not be withdrawn from any
tax-advantaged retirement plan described below, however, without consulting a
tax adviser concerning possible adverse tax consequences. Additional information
regarding any of the following services is available from Investor Service
Center by calling toll-free at 1-888-ROCKWOOD.
ELECTRONIC FUNDS TRANSFER (EFT). You automatically have the privilege of linking
your bank account designated on your Account Application or Authorization Form
and your Fund account with Rockwood EFT service. With EFT, you use the Automated
Clearing House system to electronically transfer money quickly and safely
between your bank and Fund accounts. EFT may be used for purchasing and
redeeming Fund shares, direct deposit of dividends into your bank account, the
Automatic Investment Program, the Systematic Withdrawal Plan, and systematic IRA
distributions. You may decline this privilege by checking the indicated box on
the Account Application. Any subsequent changes in bank account information must
be submitted in writing (and the Fund may require the signature to be
guaranteed), with a voided check.
SYSTEMATIC WITHDRAWAL PLAN. If you own Fund shares with a value of at least
$20,000 you may elect an automatic monthly or quarterly withdrawal of cash from
your Fund account in fixed dollar, share, or percentage amounts, subject to a
minimum amount of $100. Under the Systematic Withdrawal Plan, all dividends and
other distributions, if any, are reinvested in the Fund.
ASSIGNMENT. Fund shares may be transferred to another owner. Instructions are
available from Investor Service Center by calling toll-free at 1-888-ROCKWOOD.
TAX-ADVANTAGED RETIREMENT PLANS. These plans provide an opportunity to set aside
money for retirement in a tax-advantaged account in which earnings can be
compounded without incurring a tax liability until the money and earnings are
withdrawn. Contributions may be fully or partially deductible (or
non-deductible) for Federal income tax purposes as noted below. Information on
any of the plans described below is available from Investor Service Center by
calling toll-free at 1-888-ROCKWOOD.
The minimum investment to establish a Rockwood IRA or other retirement plan
is $100. Minimum subsequent investments are $50. The initial investment minimums
are waived if you elect to invest $50 or more each month in the Fund through the
Rockwood Automatic Investment Program. There are no set-up fees for any Rockwood
Retirement Plan. Subject to change on 30 days' notice, the plan custodian
charges Rockwood IRAs a $10 annual fiduciary fee, $10 for each distribution
prior to age 59 1/2, and a $20 plan termination fee; however, the annual
fiduciary fee is waived if your IRA has assets of $10,000 or more or if you
invest regularly through the Rockwood Automatic Investment Program.
8
<PAGE>
|X| IRA AND SEP-IRA ACCOUNTS. Anyone with earned income who is less than age 70
1/2at the end of the tax year, even if also participating in another type of
retirement plan, may establish an IRA and contribute each year up to $2,000 or
100% of earned income, whichever is less, and an aggregate of up to $2,250 when
a non-working spouse is also covered in a separate spousal account. If each
spouse has at least $2,000 of earned income each year, they may contribute up to
$4,000 annually. Employers may also make contributions to an IRA on behalf of an
individual under a SEP-IRA in any amount up to 15% of up to $150,000 of
compensation. Generally, taxpayers may contribute to an IRA during the tax year
and through the next year until the income tax return for that year is due,
without regard to extensions. Thus, most individuals may contribute for the 1996
tax year from January 1, 1996 through April 15, 1997.
DEDUCTIBILITY. IRA contributions are fully deductible for many taxpayers.
For a taxpayer who is an active participant in an employer-maintained
retirement plan (or whose spouse is), a portion of IRA contributions is
deductible if adjusted gross income (before the IRA deductions) is
$40,000-$50,000 (if married) and $25,000-$35,000 (if single). Only IRA
contributions by a taxpayer who is an active participant in an
employer-maintained retirement plan (or whose spouse is) and has adjusted
gross income of more than $50,000 (if married) and $35,000 (if single) will
not be deductible. An eligible individual may establish a Rockwood IRA under
the prototype plan available through the Fund, even though such individual
or spouse actively participates in an employer-maintained retirement plan.
o IRA TRANSFER AND ROLLOVER ACCOUNTS. Special forms are available from Investor
Service Center by calling toll-free at 1-888-ROCKWOOD, which make it easy to
transfer or roll over IRA assets to a Rockwood IRA. An IRA may be transferred
from one financial institution to another without adverse tax consequences.
Similarly, no taxes need be paid on a lump-sum distribution that you may receive
as a payment from a qualified pension or profit sharing plan due to retirement,
job termination, or termination of the plan, so long as the assets are put into
an IRA Rollover account within 60 days of the payment. Withholding for Federal
income tax purposes is required at the rate of 20% for "eligible rollover
distributions" made from any retirement plan (other than an IRA) that are not
directly transferred to an "eligible retirement plan," such as a Rockwood
Rollover Account.
o PROFIT SHARING AND MONEY PURCHASE PLANS. These provide an opportunity to
accumulate earnings on a tax-deferred basis by permitting corporations,
self-employed individuals (including partners) and their employees generally to
contribute (and deduct) up to $30,000 annually or, if less, 25% (15% for profit
sharing plans) of compensation or self-employment earnings of up to $150,000.
Corporations and partnerships, as well as all self-employed persons, are
eligible to establish these plans. In addition, a person who is both salaried
and self-employed, such as a college professor who serves as a consultant, may
adopt these retirement plans based on self-employment earnings.
|X| SECTION 403(B) ACCOUNTS. Section 403(b)(7) of the Internal Revenue Code of
1986, as
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amended ("Code"), permits the establishment of custodial accounts on
behalf of employees of public school systems and certain tax-exempt
organizations. A participant in such a plan does not pay taxes on any
contributions made by the participant's employer to the participant's
account pursuant to a salary reduction agreement, up to a maximum
amount, or "exclusion allowance." The exclusion allowance is generally
computed by multiplying the participant's years of service times 20% of
the participant's compensation included in gross income received from
the employer (reduced by any amount previously contributed by the
employer to any 403(b) account for the benefit of the participant and
excluded from the participant's gross income). However, the exclusion
allowance may not exceed the lesser of 25% of the participant's
compensation (limited as above) or $30,000. Contributions and
subsequent earnings thereon are not taxable until withdrawn, when they
are received as ordinary income.
HOW TO REDEEM SHARES
Generally, you may redeem by any of the methods explained below. Requests
for redemption should include the following information: your account
registration information including address, account number and taxpayer
identification number; dollar value, number or percentage of shares to be
redeemed; how and to where the proceeds are to be sent; if applicable, the
bank's name, address, ABA routing number, bank account registration and account
number, and a contact person's name and telephone number; and your daytime
telephone number.
BY MAIL. You may request that the Fund redeem any amount by submitting a written
request to Investor Service Center, Box 419789, Kansas City, MO 64141-6789,
signed by the record owner(s). If the written 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.
BY TELEPHONE. You may telephone Investor Service Center toll-free at
1-888-ROCKWOOD, to expedite redemption of Fund shares if share certificates have
not been issued.
You may redeem as little as $250 worth of shares by requesting Electronic
Funds Transfer (EFT) service. With EFT, you can redeem Fund shares quickly
and conveniently because Investor Service Center will contact the bank
designated on your Account Application or Authorization Form to arrange for
the electronic transfer of your redemption proceeds (through the Automated
Clearing House system) to your bank account. EFT proceeds are ordinarily
available in your bank account within two business days.
If you are redeeming $1,000 or more worth of shares, you may request that
the proceeds be mailed to your address of record or mailed or wired to your
authorized bank.
Telephone requests received on Fund business days by 4 p.m. eastern time will be
redeemed from your account that day, and if received after 4 p.m. eastern time,
on the next
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Fund business day. Any subsequent changes in bank account information must be
submitted in writing, signature guaranteed, with a voided check. Redemptions by
telephone may be difficult or impossible to implement during periods of rapid
changes in economic or market conditions.
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
reinvestment of dividends and other distributions 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 seven 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 seven 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 EFT transfer is
generally subject to a fifteen day delay to allow the check or transfer 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 other distributions
to which you may be entitled through the date of redemption. The clearing period
does not apply to purchases made by wire.
TELEPHONE PRIVILEGES. You automatically have all telephone privileges to, among
other things, authorize purchases and redemptions with EFT or by other means,
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 and if it does not, it may be liable for
losses due to unauthorized or fraudulent transactions. These procedures include
requiring personal identification prior to acting upon telephone instructions,
providing written confirmation of such transactions, and recording telephone
conversations. The Fund may modify or terminate any telephone privileges or
shareholder services (except as noted) at any time
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without notice.
SIGNATURE GUARANTEES. No signature guarantees are required when payment is to be
made to you at your address of record. If the redemption proceeds 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, and 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.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. The Fund pays dividends annually to its shareholders from its net
investment income, if any. The Fund also makes an annual distribution to its
shareholders out of any net realized capital gains, after offsetting any capital
loss carryover, and any net realized gains from foreign currency transactions.
Dividends and other distributions, if any, 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, in which event they will be deemed
received by the shareholders on the preceding December 31 for tax purposes. The
Fund may also make an additional distribution following the end of its fiscal
year out of any undistributed income and capital gains. Dividends and other
distributions are made in additional Fund shares, unless you elect to receive
cash on the Account Application or so elect subsequently by calling Investor
Service Center toll-free at 1-888-ROCKWOOD. For Federal income tax purposes,
dividends and other distributions are treated in the same manner whether
received in additional Fund shares or in cash. 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 under the Code ("RIC") so that it will be relieved of Federal
income tax on that part of its investment company taxable income (generally
consisting of net investment income, net short term capital gains, and net gains
from certain foreign currency transactions) and net capital gain (the excess of
net long term capital gain over net short term capital loss) that is distributed
to its shareholders. Dividends paid by the Fund from its investment company
taxable income (whether paid in cash or in additional Fund shares) generally are
taxable to its shareholders, other than shareholders that are not subject to tax
on their income, as ordinary income to the extent of the Fund's earnings and
profits; a portion of those dividends may be eligible for the corporate
dividends-received deduction. Distributions by the Fund of its net capital gain
(whether paid in cash or in additional Fund shares), when designated as such by
the Fund, are taxable to the shareholders as long term capital gains, regardless
of how long they have held their Fund shares. The Fund notifies its shareholders
following the end of each calendar year of the amounts of dividends and capital
gain distributions paid (or deemed paid)
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that year and of any portion of those dividends that qualifies for the corporate
dividends-received deduction. Any dividend or other distribution paid by the
Fund will reduce the net asset value of Fund shares by the amount of the
distribution. Furthermore, such distribution, although similar in effect to a
return of capital, will be subject to taxes.
The Fund is required to withhold 31% of all 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. Withholding at that rate also is required from
dividends and capital gain distributions payable to such shareholders who are
otherwise subject to backup withholding.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. Since other tax
considerations may apply, you should consult your tax adviser.
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 its 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 trading. 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 readily available. Securities and other
assets for which quotations are not readily available will be valued at fair
value as determined in good faith by or under the direction of the Board of
Directors.
INVESTMENT MANAGER AND SUBADVISER
Rockwood Advisers, Inc. (the "Investment Manager") acts as general manager
of the Fund, being responsible for the various functions assumed by it,
including regularly furnishing advice with respect to portfolio transactions.
The Investment Manager also furnishes or obtains on behalf of the Fund all
services necessary for the proper conduct of the Fund's business and
administration. The Investment Manager retains final discretion in the
investment and reinvestment of the Fund's assets, subject to the control and
oversight of the Board of Directors. The Investment Manager is authorized to
place portfolio transactions with an affiliated broker/dealer, and may allocate
brokerage transactions by taking into account the sales of
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shares of the Fund and other affiliated investment companies. The Investment
Manager may allocate 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 fee based on the average
daily net assets of the Fund, at the annual rate of 1% on the first $200 million
and declining thereafter as a percentage of average daily net assets. This fee
is higher than fees paid by most other investment companies. During the fiscal
year ended October 31, 1995, investment management fees paid by the Fund after
reimbursement represented less than 0.01% of average daily net assets. The
Investment Manager provides certain administrative services to the Fund at cost.
Bassett S. Winmill may be deemed a controlling person of the Investment Manager.
The Investment Manager has entered into a subadvisory agreement with Aspen
Securities and Advisory, Inc., an Idaho corporation (the "Subadviser"), for
certain subadvisory services. The Subadviser advises and consults with the
Investment Manager regarding the selection, clearing and safekeeping of the
Fund's portfolio investments and assists in pricing and generally monitoring
such investments. The principal business address of the Subadviser is 545 Shoup
Avenue, No. 303, Idaho Falls, Idaho 83402. The Subadviser is controlled by Ross
H. Farmer, its principal stockholder, who owns 79% of the outstanding stock of
the Subadviser and is a controlling person of the Subadviser as the term is
defined in the Investment Company Act of 1940. The Investment Manager, not the
Fund, pays the Subadviser monthly a percentage of the Investment Manager's net
fees based upon the Fund's performance and its total net assets ranging from ten
to fifty percent of the Investment Manager's net fees. The Subadviser had served
as the investment adviser to the Fund until August 19, 1996. Mr. Ross Farmer,
the Subadviser's President, has been the Fund's portfolio manager since April
1986 and currently serves as the Fund's portfolio manager together with the
Investment Manager's Investment Policy Committee. Mr. Farmer has been President
of the Subadviser since 1986.
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 pays the Distributor a fee in an amount of 0.25% per annum of the
Fund's average daily net assets for distribution and service activities. This
fee may be retained by the Distributor or passed through to brokers, banks and
others who provide services to their customers who are Fund shareholders or to
the Distributor. The Fund will pay the fee to the Distributor until either the
Plan is terminated or not renewed. In that event, the Distributor's expenses in
excess of fees received or accrued through the termination day will be the
Distributor's sole responsibility and not obligations of the Fund. During the
period they are in effect, the Distribution Agreement and Plan obligate the Fund
to pay a fee to the Distributor as
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compensation for its distribution and service activities. If the Distributor's
expenses exceeds the fee, the Fund will not be obligated to pay any additional
amount to the Distributor. If the Distributor's expenses are less than the fee,
it may realize a profit.
PERFORMANCE INFORMATION
Advertisements and other sales literature for the Fund may refer to the
Fund's "average annual total return" and "cumulative total return." All such
quotations are based upon historical earnings and are not intended to indicate
future performance. The investment return on and principal value of an
investment in the Fund will fluctuate, so that an investor's shares when
redeemed may be worth more or less than their original cost. In addition to
advertising average annual total return and cumulative total return, comparative
performance information may be used from time to time in advertising the Fund's
shares, including data from Morningstar, Inc., Lipper Analytical Services, Inc.
and other sources. "Average annual total return" is the average annual
compounded rate of return on a hypothetical $1,000 investment made at the
beginning of the advertised period. In calculating average annual total return,
all dividends and other distributions are assumed to be reinvested. "Cumulative
total return" is calculated by subtracting a hypothetical $1,000 payment to the
Fund from the ending redeemable value of such payment (at the end of the
relevant advertised period), dividing such difference by $1,000 and multiplying
the quotient by 100. In calculating ending redeemable value, all dividends and
other distributions are assumed to be reinvested in additional Fund shares.
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. For more information regarding
how the Fund's average annual total return and cumulative total return is
calculated, see "Calculation of Performance Data" in the Statement of Additional
Information. The Fund's annual report to shareholders contains further
information about the Fund's performance, and is available free of charge upon
request.
The accompanying total return performance graph compares results of a
$10,000 investment in the Fund and in the Valueline Arithmetic ("Valueline").
The Valueline is unmanaged and fully invested in common stocks. The Fund's
inception was April 30, 1986. Performance Graphs are from April 30, 1986 to
October 31, 1995, and results in each case reflect reinvestment of dividends and
distributions.
Plot Points:
Fund: $10,220, $11,250, $10,632, $14,240, $16,499, $10,897, $12,978, $14,239,
$18,710, $19,042, $21,484
Valueline:$10,000, $10,030, $9,556, $11,987, $13,982, $10,611, $15,765, $17,442,
$21,932, $22,781, $26,475
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Average annual returns for the one, three, and five year periods, and since
inception are as follows:
Fund: 12.76%, 14.70%, 14.59%, and 8.13%
Valueline: 16.21%, 14.92%, 20.06%, and 10.79%
For the fiscal year ending October 31, 1995, the Fund appreciated 12.76%.
This gain is attributable to the general appreciation of the Fund's holdings,
not any particular company or industry group.
CAPITAL STOCK
The Fund is a non-diversified open-end management investment company
organized as an Idaho corporation on March 7, 1985. The Fund is authorized to
issue up to 100,000,000 shares ($.10 par value). The Fund's stock is freely
assignable by way of pledge (as, for example, for collateral purposes), gift,
settlement of an estate and also by an investor to another investor. Each share
has equal dividend, voting, liquidation, and redemption rights with every other
share. The shares are non-assessable and have no preemptive or conversion
rights.
The Fund is currently required to hold an annual meeting of shareholders to
elect directors and to transact such other business as may properly be brought
before the meeting. In addition, the holders of 10% of the Fund's shares may
call a meeting at any time.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111, 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 ("Transfer Agent") is DST
Systems, Inc., Box 419789, Kansas City, MO 64141-6789. The Distributor provides
certain shareholder administration services to the Fund and is reimbursed its
cost by the Fund. The Fund may also enter into agreements with brokers, banks
and others who would perform, on behalf of its customers, certain shareholder
services not otherwise provided by the Transfer Agent or the Distributor.
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Statement of Additional Information August 19, 1996
THE ROCKWOOD GROWTH FUND, INC.
11 Hanover Square
New York, NY 10005
Toll-free: 1-888-ROCKWOOD
This Statement of Additional Information regarding The Rockwood Growth Fund,
Inc. ("Fund") is not a prospectus and should be read in conjunction with the
Fund's prospectus dated August 19, 1996. The prospectus is available to
prospective investors without charge upon request to Investor Service Center,
Inc., the Fund's distributor, by calling toll-free at 1-888- ROCKWOOD.
TABLE OF CONTENTS
THE FUND'S INVESTMENT PROGRAM.......................3
INVESTMENT RESTRICTIONS.............................6
OFFICERS AND DIRECTORS..............................9
INVESTMENT MANAGER.................................12
SUBADVISER AND SUBADVISORY AGREEMENT...............14
CALCULATION OF PERFORMANCE DATA....................16
DISTRIBUTION OF SHARES.............................21
DETERMINATION OF NET ASSET VALUE...................23
PURCHASE OF SHARES.................................24
ALLOCATION OF BROKERAGE............................24
DISTRIBUTIONS AND TAXES............................28
REPORTS TO SHAREHOLDERS............................30
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT..31
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AUDITORS.....................................31
FINANCIAL STATEMENTS.........................31
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THE FUND'S INVESTMENT PROGRAM
The following information supplements the information concerning the
investment objective, policies and limitations of the Fund found in the
Prospectus. The Fund's investment objective of capital appreciation is
non-fundamental and may be changed by the Fund's Board of Directors without
shareholder approval. Fund shareholders will be notified at least thirty days in
advance of a change in the Fund's investment objective, and shareholders will
not be charged an exchange fee or redemption fee if they redeem after such
notice and prior to the change of investment objective.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund may
invest include direct obligations of the U.S. government (such as Treasury
bills, notes and bonds) and obligations issued by U.S. government agencies and
instrumentalities backed by the full faith and credit of the U.S. government,
such as those issued by the Government National Mortgage Association. In
addition, the U.S. government securities in which the Fund may invest include
securities supported primarily or solely by the creditworthiness of the issuer,
such as securities issued by the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and the Tennessee Valley Authority. In
the case of obligations not backed by the full faith and credit of the U.S.
government, the Fund must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the U.S. government itself in the event the
agency or instrumentality does not meet its commitments. Accordingly, these
securities may involve more risk than securities backed by the U.S. government's
full faith and credit.
BORROWING. The Fund may incur overdrafts at its custodian bank from time to
time in connection with redemptions and/or the purchase of portfolio securities.
In lieu of paying interest to the custodian bank, the Fund may maintain
equivalent cash balances prior or subsequent to incurring such overdrafts. If
cash balances exceed such overdrafts, the custodian bank may credit 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, (a) 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,
or (b) more than 10% of the Fund's total assets would be invested in securities
that are illiquid by virtue of restrictions on the sale of such securities to
the public without registration under the Securities Act of 1933, as amended
("1933 Act"). 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.
Illiquid restricted securities may be sold by the Fund only in privately
negotiated transactions or in a public offering with respect to which a
registration statement is in effect under the 1933
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Act. Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. These instruments are often
restricted securities because the securities are either themselves exempt from
registration or sold in transactions not requiring registration. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend either on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to satisfy share redemption orders
on a timely basis. Such markets might include automated systems for the trading,
clearance and settlement of unregistered securities, such as the PORTAL System
sponsored by the National Association of Securities Dealers, Inc. An
insufficient number of qualified buyers interested in purchasing certain
restricted securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities, and the Fund might be unable to
dispose of such securities promptly or at favorable prices.
The Board of Directors of the Fund has delegated the function of making
day-to-day determinations of liquidity to Rockwood Advisers, Inc. (the
"Investment Manager") pursuant to guidelines approved by the Board. The
Investment Manager takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades and quotes for the security,
(2) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers, (3) dealer undertakings to make a market
in the security, and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). The Investment Manager
monitors the liquidity of restricted securities in the Fund's portfolio and
reports periodically on such decisions to the Board of Directors.
LENDING. The Fund may lend up to one-third of its total assets to other
parties, although it has no current intention of doing so. If the Fund engages
in lending transactions, it will enter into lending agreements that require that
the loans be continuously secured by cash, securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, or any
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combination of cash and such securities, as collateral equal at all times to at
least the market value of the assets lent. To the extent of such activities, the
custodian will apply credits against its custodial charges. There are risks to
the Fund of delay in receiving additional collateral and risks of delay in
recovery of, and failure to recover, the assets lent should the borrower fail
financially or otherwise violate the terms of the lending agreement. Loans will
be made only to borrowers deemed by the Investment Manager to be of good
standing and when, in the Investment Manager's judgment, the consideration which
can be earned currently from such lending transactions justifies the attendant
risk. Any loan made by the Fund will provide that it may be terminated by either
party upon reasonable notice to the other party.
CONVERTIBLE SECURITIES. The Fund may invest up to 5% of its net assets in
convertible securities which are bonds, debentures, notes, preferred stocks or
other securities that may be converted into or exchanged for a specified amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest generally paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Convertible securities have unique investment characteristics in
that they generally (i) have higher yields than common stocks, but lower yields
than comparable non-convertible securities, (ii) are less subject to fluctuation
in value than the underlying stock since they have fixed income characteristics
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security will sell at a premium over its conversion value determined
by the extent to which investors place value on the right to acquire the
underlying common stock while holding a fixed income security.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in the Investment
Manager's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund may hold or trade convertible securities. In selecting convertible
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<PAGE>
securities for the Fund, the Investment Manager evaluates the investment
characteristics of the convertible security as a fixed income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Investment Manager considers numerous factors, including the economic and
political outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
Equity securities involve greater risk of loss of income than debt
securities because issuers are not obligated to pay dividends. In addition,
equity securities are subordinate to debt securities, and are more subject to
changes in economic and industry conditions and in the financial condition of
the issuers of such securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions that
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. Borrow money, except to the extent permitted by the Investment Company Act
of 1940, as amended ("1940 Act");
2. Engage in the business of underwriting the securities of other issuers,
except to the extent that the Fund may be deemed to be an underwriter under
the Federal securities laws in connection with the disposition of the Fund's
authorized investments;
3. Purchase or sell real estate, provided that the Fund may invest in
securities (excluding limited partnership interests) secured by real estate
or interests therein or issued by companies which invest in real estate or
interests therein;
4. Purchase or sell physical commodities, although it may enter into (a)
commodity and other futures contracts and options thereon, (b) options on
commodities, including foreign currencies, (c) forward contracts on
commodities, including foreign currencies, and (d) other financial contracts
or derivative instruments;
5. Lend its assets, provided however, that the following are not prohibited:
(a) the making of time or demand deposits with banks, (b) the purchase of
debt securities such as bonds, debentures, commercial paper, repurchase
agreements and short term obligations in accordance with the Fund's
investment objectives and policies, and (c) engaging in securities and other
asset loan transactions to the extent permitted by the 1940 Act; or
6
<PAGE>
6. Issue senior securities as defined in the 1940 Act. The following will not
be deemed to be senior securities prohibited by this provision: (a)
evidences of indebtedness that the Fund is permitted to incur, (b) the
issuance of additional series or classes of securities that the Board of
Directors may establish, (c) the Fund's futures, options, and forward
transactions, and (d) to the extent consistent with the 1940 Act and
applicable rules and policies adopted by the Securities and Exchange
Commission, (i) the establishment or use of a margin account with a broker
for the purpose of effecting securities transactions on margin and (ii)
short sales.
The Fund's Board of Directors has established the following non-fundamental
investment limitations that may be changed by the Board without shareholder
approval:
(i) The Fund's investments in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets, which amount
may include warrants which are not listed on the New York or American
Stock Exchange provided that such warrants, valued at the lower of cost
or market, do not exceed 2% of the Fund's net assets, and further
provided that this restriction does not apply to warrants attached to,
or sold as a unit with, other securities;
(ii) The Fund may not invest in interests in oil, gas or other mineral
exploration or development programs or leases, although it may invest
in the securities of issuers which invest in or sponsor such programs
or such leases;
(iii) The Fund may not invest more than 5% of its net assets in
securities of companies having a record of less than three
years continuous operations (including operations of
predecessors);
(iv) The Fund may not purchase or otherwise acquire any security or invest
in a repurchase agreement if, as a result, (a) more than 15% of the
Fund's net assets (taken at current value) would be invested in
illiquid assets, including repurchase agreements not entitling the
holder to payment of principal within seven days, or (b) more than 10%
of the Fund's total assets would be invested in securities that are
illiquid by virtue of restrictions on the sale of such securities to
the public without registration under the 1933 Act;
(v) The Fund may not make short sales of securities or maintain a short
position, except (a) the Fund may buy and sell options, futures
contracts, options on futures contracts, and forward contracts, and (b)
the Fund may sell "short against the box" where the Fund
contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short;
(vi) The Fund may not purchase securities on margin, except that the Fund
may obtain such short term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits
made in connection with transactions in options, futures contracts,
forward contracts and other derivative instruments shall not be
7
<PAGE>
deemed to constitute purchasing securities on margin;
(vii) The Fund may not purchase or retain securities of any issuer if those
officers or Directors of the Fund, its Investment Manager or its
subadviser who each own beneficially more than 1/2 of 1% of the
securities of an issuer own beneficially together more than 5% of the
securities of that issuer;
(viii) The Fund may not purchase the securities of any investment company except
(a) by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase, provided that immediately
after such purchase no more than: 10% of the Fund's total assets are
invested in securities issued by investment companies, 5% of the Fund's
total assets are invested in securities issued by any one investment
company, or 3% of the voting securities of any one such investment company
are owned by the Fund, and (b) when such purchase is part of a plan of
merger, consolidation, reorganization or acquisition of assets;
(ix) The Fund may not borrow money, except (a) from a bank for temporary or
emergency purposes (not for leveraging or investment) or (b) by engaging in
reverse repurchase agreements, provided however, that borrowings pursuant
to (a) and (b) do not exceed an amount equal to one third of the total
value of the Fund's assets taken at market value, less liabilities other
than borrowings. The Fund may not purchase securities for investment while
any bank borrowing equaling 5% or more of its total assets is outstanding.
If at any time the Fund's borrowings come to exceed the limitation set
forth in (1) above, such borrowing will be promptly (within three days, not
including Sundays and holidays) reduced to the extent necessary to comply
with this limitation;
(x) The aggregate value of securities underlying put options on securities
written by the Fund, determined as of the date the put options are
written, will not exceed 25% of the Fund's net assets, and the
aggregate value of securities underlying call options on securities
written by the Fund, determined as of the date the call options are
written, will not exceed 25% of the Fund's net assets;
(xi) The Fund may purchase a put or call option on a security or a security
index, including any straddles or spreads, only if the value of its
premium, when aggregated with the premiums on all other such
instruments held by the Fund, does not exceed 5% of the Fund's total
assets;
(xii) To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a
CFTC-regulated exchange, in each case that are not for bona fide
hedging purposes (as defined by the Commodity Futures Trading
Commission ("CFTC")), the aggregate initial margin and premiums
required to establish these positions (excluding the amount by which
options are "in-the-money") may not exceed 5% of the liquidation value
of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any contracts the Fund has entered
8
<PAGE>
into; and
(xiii) The Fund may not mortgage, pledge or hypothecate any assets in excess
of one-third of the Fund's total assets.
OFFICERS AND DIRECTORS
The officers and Directors of the Fund, 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 the
other four investment companies in the investment company complex (the
"Complex") and of Bull & Bear Group, Inc. ("Group"), the parent of the
Investment Manager. 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 the 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.
RUSSELL E. BURKE III -- Director. 900 Park Avenue, New York, NY 10021. He was
born August 23, 1946. He is President of Russell E. Burke III, Inc. Fine Art,
New York, New York. From 1988 to 1991, he was President of Altman Burke Fine
Arts, Inc. From 1983 to 1988, he was Senior Vice President of Kennedy Galleries.
He is also a Director of certain of the investment companies in the Complex.
BRUCE B. HUBER, CLU -- Director. 298 Broad Street, Red Bank, NJ 07701. He is
President of Huber o Hogan o Knotts Consulting, Inc. financial consultants
specializing in executive benefits, estate preservation, and asset management.
From 1990 to 1994, he was President of Huber Hogan Associates. He was born
February 7, 1930. He is also a Director of the 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 the 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 the Complex.
<PAGE>
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 the Complex.
MARK C. WINMILL* -- Director, Co-President, Co-Chief Executive Officer, and
Chief Financial Officer. He is Chief Financial Officer of the Investment Manager
and certain of its affiliates. He is also a Director of certain of the
investment companies in the Complex. 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 the brother of Thomas B.
Winmill. He was born November 26, 1957.
THOMAS B. WINMILL* -- Director, Co-President, Co-Chief Executive Officer, and
General Counsel. He is President of the Investment Manager and the Distributor,
and of their affiliates. He is also a Director of certain of the investment
companies in the Complex. 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 brother of Mark C.
Winmill. He was born June 25, 1959.
The executive officers of the Fund, each of whom serves at the pleasure of
the Board of Directors, are as follows:
MARK C. WINMILL -- Co-President, Co-Chief Executive Officer, and Chief Financial
Officer. (see biographical information above).
THOMAS B. WINMILL -- Co-President, Co-Chief Executive Officer, and General
Counsel (see biographical information above).
ROBERT D. ANDERSON -- Vice Chairman (see biographical information above).
STEVEN A. LANDIS -- Senior Vice President. He is Senior Vice President of the
Investment Manager and certain of its affiliates. 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.
He was born March 1, 1955.
BRETT B. SNEED, CFA -- Senior Vice President. He is Senior Vice President of the
Investment Manager and certain of its affiliates. 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
10
<PAGE>
a portfolio manager and member of the Finance and Investment Committees of
American International Group, Inc., an insurance holding company. He was born
June 11, 1941.
JOSEPH LEUNG, CPA -- Treasurer and Chief Accounting Officer. 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 Investment Manager and its affiliates. 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. He was born September 13, 1964.
* Bassett S. Winmill, Robert D. Anderson, Mark C. Winmill and Thomas B. Winmill
are "interested persons" of the Fund as defined by the 1940 Act, because of
their positions with the Investment Manager.
COMPENSATION TABLE
NAME OF Aggregate Pension or Estimated Total Com
PERSON, Compensa- Retirement Annual pensation
POSITION tion From Benefits Benefits Upon From
Registrant Accrued as Retirement Registrant and
Part of Fund Fund Complex
Expenses Paid to
Directors
Russell E. Burke None None None $9,000 from
III, Director 4 Investment
Companies
Bruce B. Huber, None None None $12,500 from 7
Director Investment
Companies
James E. Hunt, None None None $12,500 from 7
Director Investment
Companies
11
<PAGE>
Frederick A. None None None $12,500 from 7
Parker, Director Investment
Companies
John B. Russell, None None None $12,500 from 7
Director Investment
Companies
Information in the above table is based on fees paid during the year ended
October 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 June 17, 1996 no person beneficially owned either directly or through
one or more controlled companies, more than 25% of the voting securities of the
Fund. As of the same date, the following persons owned of record and
beneficially, in amounts stated after their names, 5% or more of the Fund's
outstanding securities:
Name and Address Number of Shares Percentage
Ronald W. Kiehn 5,172.101 11.2%
P.O. Box 4152
Jackson, WY 83001
Pfendler Family 3411.585 7.39%
Revocable Living Trust
2507 Harsh Avenue, S.E.
Massillon, OH 44646
As of June 17, 1996, the officers and directors of the Fund own, as a group,
21% of the outstanding voting securities of the Fund.
INVESTMENT MANAGER
The Investment Manager acts as general manager of the Fund, being
responsible for the various functions assumed by it, including the regular
furnishing of advice with respect to portfolio transactions. The Investment
Manager also furnishes or obtains on behalf of the Fund all services necessary
for the proper conduct of the Fund's business and administration. As
compensation for its services to the Fund, the Investment Manager is entitled to
a fee, payable monthly, based upon the Fund's average daily net assets. Under
the Fund's Investment Management Agreement dated August 18, 1996, the Investment
Manager receives a fee at the annual rate of:
1.00% of the first $200 million of the Fund's average daily net assets
12
<PAGE>
.95% of average daily net assets over $200 million up to $400 million
.90% of average daily net assets over $400 million up to $600 million
.85% of average daily net assets over $600 million up to $800 million
.80% of average daily net assets over $800 million up to $1 billion
.75% of average daily net assets over $1 billion.
The percentage fee is calculated on the daily value of the Fund's net assets at
the close of each business day. The foregoing fees are higher than fees paid by
most other investment companies.
Under the Investment Management Agreement, the Fund assumes and shall pay
all the expenses required for the conduct of its business including, but not
limited to, (a) salaries of administrative and clerical personnel; (b) brokerage
commissions; (c) taxes and governmental fees; (d) costs of insurance and
fidelity bonds; (e) fees of the transfer agent, custodian, legal counsel and
auditors; (f) association fees; (g) costs of preparing, printing and mailing
proxy materials, reports and notices to shareholders; (h) costs of preparing,
printing and mailing the prospectus and statement of additional information and
supplements thereto; (I) payment of dividends and other distributions; (j) costs
of stock certificates; (k) costs of Board and shareholders meetings; (l) fees of
the independent directors; (m) necessary office space rental; (n) all fees and
expenses (including expenses of counsel) relating to the registration and
qualification of shares of the Fund under applicable federal and state
securities laws and maintaining such registrations and qualifications; and (o)
such non-recurring expenses as may arise, including, without limitation,
actions, suits or proceedings affecting the Fund and the legal obligation which
the Fund may have to indemnify its officers and directors with respect thereto.
If requested by the Fund'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.
The Fund's Investment Management Agreement continues from year to year only
if a majority of the Fund's directors (including a majority of disinterested
directors) approve. The Fund's Investment Management Agreement may be terminated
by either the Fund or the Investment Manager on 60 days' written notice to the
other, and terminates automatically in the event of its assignment.
The Investment Management Agreement provides that the Investment Manager
shall waive all or part of its fee or reimburse the Fund monthly if and to the
extent the aggregate operating expenses of the Fund exceed the most restrictive
limit imposed by any state in which shares of the Fund are qualified for sale or
such lesser amount as may be agreed to by the Fund's Board of Directors and the
Investment Manager. Currently, the most restrictive state imposed limit
13
<PAGE>
applicable to the Fund is 2.5% of the first $30 million of the Fund's average
daily net assets, 2.0% of the next $70 million of its average daily net assets
and 1.5% of its average daily net assets in excess of $100 million. Certain
expenses, such as brokerage commissions, taxes, interest, distribution fees,
certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. In addition, the
Investment Manager also has agreed to be subject to the following expense
limitation for a period of two years from the effective date of the Investment
Management Agreement, which limitation is calculated as an amount not in excess
of the fee payable by the Fund if and to the extent that the aggregate operating
expenses of the Fund (excluding interest expense, Rule 12b-1 Plan of
Distribution fees, taxes and brokerage fees and commissions) are in excess of
2.0% of the first $10 million of average net assets of the Fund, plus 1.5% of
the next $20 million of average net assets, plus 1.25% of average net assets
above $30 million.
For the years ended 1993, 1994, and 1995 Aspen Securities and Advisory,
Inc., the current Subadviser and the Fund's previous investment adviser, earned,
before reimbursement of certain expenses, $___, $___, and $__, respectively, in
fees from the Fund. These fees were calculated pursuant to a different fee
schedule under which the Investment Manager's fee is currently calculated. For
the years ended October 31, 1993, 1994, and 1995 the Subadviser reimbursed $___,
$___, and $___, respectively, to the Fund for expenses in excess of expense
limitations.
The Investment Manager, a registered investment adviser, is a wholly-owned
subsidiary of Bull & Bear Group, Inc. ("Group"). The other principal
subsidiaries of Group include Investor Service Center, Inc., a registered
broker-dealer, Bull & Bear Advisers, Inc. and Midas Management Corporation,
registered investment advisers, and Bull & Bear Securities, Inc., a registered
broker-dealer providing discount brokerage services.
Group is a publicly-owned company whose securities are listed on the 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 and, therefore, of the Investment Manager. The investment companies
in the Complex, each of which is managed by an affiliate of the Investment
Manager, had net assets in excess of $425,000,000 as of June 4, 1996.
SUBADVISER AND SUBADVISORY AGREEMENT
The Investment Manager has entered into a subadvisory agreement with the
Subadviser for certain subadvisory services. The Subadviser advises and consults
with the Investment Manager regarding the selection, clearing and safekeeping of
the Fund's portfolio investments and assists in pricing and generally monitoring
such investments.
In consideration of the Subadviser's services, the Investment Manager, and
not the Fund, pays to the Subadviser a percentage of the Investment Manager's
Net Fees. "Net Fees" are defined as the actual amounts received by the
Investment Manager as compensation less reimbursements, if any, pursuant to the
guaranty of the Investment Management Agreement
14
<PAGE>
and waivers of such compensation by the Investment Manager. The amount of the
percentage is determined by the grid and accompanying definitions set forth as
follows:
SUBADVISER'S FEE AS A PERCENTAGE OF INVESTMENT MANAGER'S NET FEES
<TABLE>
RELATIVE PERFORMANCEA
TOTAL NET ASSETSB More than 50 basis Within 50 basis More than 50
points better than ATR points of ATR basis points
below ATR
<S> <C> <C> <C> <C>
less then or equal to $15,000,000 30% 20% 10%
greater then $15,000,000 and 40% 30% 20%
less then or equal to $50,000,000
greater then $50,000,000 50% 40% 30%
- ---------------------------------- ------------------------------- ------------------------- --------------------
</TABLE>
A. "Relative Performance" shall be determined from comparing the Fund's total
return with the average total return ("ATR") of funds with the investment
objective of "growth" as compiled by Morningstar, Inc., or, if unavailable,
other similar service acceptable to the parties and the Fund. The Relative
Performance shall be determined as of the last calendar day of each month
("Performance Determination Date") and shall measure the Relative Performance
for the most recent 3 year period ("Measurement Period"), except that (A) for
the first 12 months of this Subadvisory Agreement, Relative Performance shall be
based upon annualized returns, the first three Performance Determination Dates
shall be the next three calendar quarter ends after the effective date of this
Subadvisory Agreement, and the Measurement Periods shall be the most recent
three months and the fourth Performance Determination Date shall be the next
calendar quarter end and the Measurement Period shall be the most recent 1 year
period, and (B) for the 13th through the 24th month of this Subadvisory
Agreement, Relative Performance shall be determined as of the last calendar day
of each month and shall measure the Relative Performance for the most recent 1
year period.
B. "Total Net Assets" shall be the total net assets of the Fund as of the
Performance Determination Date.
Under the Subadvisory Agreement's fee structure, the Investment Manager
retains more of its fee (and therefore passes on a lower portion of its fee to
the Subadviser) when the Fund underperforms the ATR by more than 50 basis points
than when the Fund outperforms the ATR by more than 50 basis points.
The Subadvisory Agreement is not assignable and automatically terminates in
the event of its assignment, or in the event of the termination of the
Investment Management Agreement.
15
<PAGE>
The Subadvisory Agreement may also be terminated without penalty on 60 days'
written notice at the option of either party thereto or by the Fund, by the
Board of Directors or by a vote of Fund shareholders. The Subadvisory Agreement
provides that the Subadviser shall not be liable to the Fund for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the Subadvisory Agreement relates. Nothing contained
in the Subadvisory Agreement, however, shall be construed to protect the
Subadviser against liability to the Fund by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties or by reason of its
reckless disregard of obligations and duties under the Subadvisory Agreement.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Fund may refer to the
Fund's "average annual total return" and "cumulative total return." All such
quotations are based upon historical earnings and are not intended to indicate
future performance. The investment return on and principal value of an
investment in the Fund will fluctuate, so that the investor's shares when
redeemed may be worth more or less than their original cost.
The Fund's performance prior to August 18, 1996 was achieved during a period
when the Fund's asset size was small relative to its asset size as of the date
of this Statement of Additional Information. No assurances can be given that the
Fund will achieve similar performance in the future.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and other distributions are reinvested
at net asset value on
16
<PAGE>
the appropriate reinvestment dates as described in the Prospectus, and includes
all recurring fees, such as investment advisory and management fees, charged to
all shareholder accounts.
CUMULATIVE TOTAL RETURN
Cumulative total return is calculated by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR=( ERV-P )100
P
CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a hypothetical $1,000
payment made at the beginning of such period
P = initial payment of $1,000
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and other distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectus, and includes all recurring fees, such as investment advisory and
management fees, charged to all shareholder accounts.
The cumulative return for the Fund for the periods ending October 31, 1995
and beginning at the inception of the Fund (April 30, 1986), and for the five
year and one year periods is 160.37%, 108.82%, and 36.73%, respectively.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED OCTOBER 31, 1995
Since inception 8.13%
Five Years 14.59%
One Year 12.76%
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.
17
<PAGE>
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
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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.
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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.
("Distributor") acts as 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.
Pursuant to a Plan of Distribution ("Plan") adopted pursuant to Rule 12b-1 under
the
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1940 Act, the Fund pays the Distributor monthly a fee in the amount of
one-quarter of one percent per annum of the Fund's average daily net assets as
compensation for its distribution and service activities.
In performing distribution and service activities pursuant to the Plan, the
Distributor may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the Fund's shares or the
servicing and maintenance of shareholder accounts, including, but not limited
to: advertising, direct mail, and promotional expenses; compensation to the
Distributor and its employees; compensation to and expenses, including overhead
and telephone and other communication expenses, of the Distributor, the
Investment Manager, the Fund, and selected dealers and their affiliates who
engage in or support the distribution of shares or who service shareholder
accounts; fulfillment expenses, including the costs of printing and distributing
prospectuses, statements of additional information, and reports for other than
existing shareholders; the costs of preparing, printing and distributing sales
literature and advertising materials; and internal costs incurred by the
Distributor and allocated by the Distributor to its efforts to distribute shares
of the Fund or service shareholder accounts such as office rent and equipment,
employee salaries, employee bonuses and other overhead expenses.
Among other things, the Plan provides that (1) the Distributor will submit
to the Fund's Board of Directors at least quarterly, and the Directors will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendment or
agreement related thereto is approved, by the Fund's Board of Directors,
including those Directors who are not "interested persons" of the Fund and who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related to the Plan ("Plan Directors"), acting in person at a
meeting called for that purpose, unless terminated by vote of a majority of the
Plan Directors, or by vote of a majority of the outstanding voting securities of
the Fund, (3) payments by the Fund under the Plan shall not be materially
increased without the affirmative vote of the holders of a majority of the
outstanding voting securities of the Fund and (4) while the Plan remains in
effect, the selection and nomination of Directors who are not "interested
persons" of the Fund shall be committed to the discretion of the Directors who
are not interested persons of the Fund.
With the approval of the vote of a majority of the entire Board of Directors
and of the Plan Directors 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 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
absorb any of such costs.
It is the opinion of the Board of Directors that the Plan is necessary to
maintain a flow of
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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. The offsetting of 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. Increased assets
enable the Fund to further diversify its portfolio, which spreads and reduces
investment risk while increasing opportunity. 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 management fees and fixed costs (i.e., 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 management fees
(reflecting a larger portion of the assets falling within fee scale-down
levels), as well as of fixed costs. Nevertheless, the net effect of the Plan is
to increase overall expenses. 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 fee revenue base,
diminishing the obligation, if any, of the Investment Manager to make an expense
reimbursement to the Fund, and eliminating or reducing any contribution made by
the Investment Manager to marketing expenses. Other than as described herein, no
Director or interested person of the Fund has 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
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The Fund's net asset value per share is determined as of the close of
regular trading on the New York Stock Exchange ("NYSE") (currently 4:00 p.m.
eastern time) each business day of the Fund. 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. Because a
substantial portion of the Fund's net assets may be invested in gold, platinum
and silver bullion, foreign securities and/or foreign currencies, trading in
each of which is also conducted in foreign markets which are not necessarily
closed on days when the NYSE is closed, the net asset value per share may be
significantly affected on days when shareholders have no access to the Fund or
its transfer agent.
Securities owned by the Fund are valued by various methods depending on the
market or exchange on which they trade. Securities traded on the NYSE, the
American Stock Exchange and the Nasdaq National Market System are valued at the
last sales price, or if no sale has occurred, at the mean between the current
bid and asked prices. Securities traded on other exchanges are valued as nearly
as possible in the same manner. Securities traded only OTC are valued at the
mean between the last available bid and ask quotations, if available, or at
their fair value as determined in good faith by or under the general supervision
of the Board of Directors. Short term securities are valued either at amortized
cost or at original cost plus accrued interest, both of which approximate
current value.
Foreign securities, if any, are valued at the price in a principal market
where they are traded, or, if last sale prices are unavailable, at the mean
between the last available bid and ask quotations. Foreign security prices are
expressed in their local currency and translated into U.S. dollars at current
exchange rates. Any changes in the value of forward contracts due to exchange
rate fluctuations are included in the determination of the net asset value.
Foreign currency exchange rates are generally determined prior to the close of
trading on the NYSE. Occasionally, events affecting the value of foreign
securities and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events will not be
reflected in a computation of the Fund's net asset value on that day. If events
materially affecting the value of such securities or exchange rates occur during
such time period, the securities will be valued at their fair value as
determined in good faith under the direction of the Fund's Board of Directors.
Price quotations generally are furnished by pricing services, which may also
use a matrix system to determine valuations. This system considers such factors
as security prices, yields, maturities, call features, ratings, and developments
relating to specific securities in arriving at valuations.
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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. The Fund is not currently obligated to deal with any particular
broker, dealer or group thereof. Fund transactions in debt and OTC securities
generally are with dealers acting as principals at net prices with little or no
brokerage costs. In certain circumstances, however, the Fund may engage a broker
as agent for a commission to effect transactions for such securities. Purchases
of securities from underwriters include a commission or concession paid to the
underwriter, and purchases from dealers include a spread between the bid and
asked price. While the Investment Manager generally seeks reasonably competitive
spreads or commissions, payment of the lowest spread or commission is not
necessarily consistent with obtaining the best net results. Accordingly, the
Fund will not necessarily be paying the lowest spread or commission available.
The Investment Manager directs portfolio transactions to broker/dealers for
execution on terms and at rates which it believes, in good faith, to be
reasonable in view of the overall nature and quality of services provided by a
particular broker/dealer, including brokerage and research services, sales of
Fund shares, and allocation of commissions to the Fund's Custodian. With respect
to brokerage and research services, consideration may be given in the selection
of broker/dealers to brokerage or research provided and payment may be made for
a fee higher than that charged by another broker/dealer which does not furnish
brokerage or research services or which furnishes brokerage or research services
deemed to be of lesser value, so long as the criteria of Section 28(e) of the
Securities Exchange Act of 1934, as amended, or other applicable law are met.
Section 28(e) of the 1934 Act 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
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transactions without necessarily obtaining the lowest price at which such
broker/dealer, or another, may be willing to do business, the Investment Manager
seeks the best value to the Fund on each trade that circumstances in the market
place permit, including the value inherent in on-going relationships with
quality brokers.
Currently, it is not possible to determine the extent to which commissions
that reflect an element of value for brokerage or research services might exceed
commissions that would be payable for execution alone, nor generally can the
value of such services to the Fund be measured, except to the extent such
services have a readily ascertainable market value. There is no certainty that
services so purchased, or the sale of Fund shares, if any, will be beneficial to
the Fund. Such services being largely intangible, no dollar amount can be
attributed to benefits realized by the Fund or to collateral benefits, if any,
conferred on affiliated entities. These services may include (1) furnishing
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities, (2) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). Pursuant to arrangements with certain
broker/dealers, such broker/dealers provide and pay for various computer
hardware, software and services, market pricing information, investment
subscriptions and memberships, and other third party and internal research of
assistance to the Investment Manager in the performance of its investment
decision-making responsibilities for transactions effected by such
broker/dealers for the Fund. Commission "soft dollars" may be used only for
"brokerage and research services" provided directly or indirectly by the
broker/dealer and under no circumstances will cash payments be made by such
broker/dealers to the Investment Manager. To the extent that commission "soft
dollars" do not result in the provision of any "brokerage and research services"
by a broker/dealer to whom such commissions are paid, the commissions,
nevertheless, are the property of such broker/dealer. To the extent any such
services are utilized by the Investment Manager for other than the performance
of its investment decision-making responsibilities, the Investment Manager makes
an appropriate allocation of the cost of such services according to their use.
Bull & Bear Securities, Inc. ("BBSI"), a wholly owned subsidiary of Group
and the Investment Manager's affiliate, provides discount brokerage services to
the public as an introducing broker clearing through unaffiliated firms on a
fully disclosed basis. The Investment Manager is authorized to place Fund
brokerage through BBSI at its posted discount rates and indirectly through a
BBSI clearing firm. The Fund will not deal with BBSI in any transaction in which
BBSI acts as principal. The clearing firm will execute trades in accordance with
the fully disclosed clearing agreement between BBSI and the clearing firm. BBSI
will be financially responsible to the clearing firm for all trades of the Fund
until complete payment has been received by the Fund or the clearing firm. BBSI
will provide order entry services or order entry facilities to the Investment
Manager, arrange for execution and clearing of portfolio transactions through
executing and clearing brokers, monitor trades and settlements and perform
limited back-office functions including the maintenance of all
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records required of it by the National Association of Securities Dealers, Inc.
In order for BBSI to effect any portfolio transactions for the Fund, the
commissions, fees or other remuneration received by BBSI must be reasonable and
fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. The Fund's Board of Directors has adopted procedures in conformity with
Rule 17e- 1 under the 1940 Act to ensure that all brokerage commissions paid to
BBSI are reasonable and fair. Although BBSI's posted discount rates may be lower
than those charged by full cost brokers, such rates may be higher than some
other discount brokers and certain brokers may be willing to do business at a
lower commission rate on certain trades. The Board has determined that portfolio
transactions may be executed through BBSI if, in the judgment of the Investment
Manager, the use of BBSI is likely to result in price and execution at least as
favorable as those of other qualified broker/dealers and if, in particular
transactions, BBSI charges the Fund a rate consistent with that charged to
comparable unaffiliated customers in similar transactions. Brokerage
transactions with BBSI are also subject to such fiduciary standards as may be
imposed by applicable law. The Investment Manager's fees under its agreement
with the Fund are not reduced by reason of any brokerage commissions paid to
BBSI.
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Brokerage commissions paid in fiscal years ended October 31, 1993, 1994 and
1995 were $2,010.07, $2,902.15, and $7,349.79 respectively, all of which
(representing approximately $_____,000 in portfolio transactions) was allocated
to broker/dealers that provided research services. No transactions were directed
to broker/dealers during such periods for selling shares of the Fund or any
affiliated funds. During the Fund's fiscal years ended October 31, 1993, 1994,
and 1995, the Fund paid no brokerage commissions to BBSI.
Investment decisions for the Fund and for the other Funds managed by the
Investment Manager or its affiliates are made independently based on each Fund's
investment objectives and policies. The same investment decision, however, may
occasionally be made for two or more Funds. In such a case, the Investment
Manager may combine orders for two or more Funds for a particular security if it
appears that a combined order would reduce brokerage commissions and/or result
in a more favorable transaction price. Combined purchase or sale orders are then
averaged as to price and allocated as to amount according to a formula deemed
equitable to each Fund. While in some cases this practice could have a
detrimental effect upon the price or quantity available of the security with
respect to the Fund, the Investment Manager believes that the larger volume of
combined orders can generally result in better execution and prices.
The Fund is not obligated to deal with any particular broker, dealer or
group thereof. Certain broker/dealers that the Fund 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. For the fiscal years ended October 31, 1995 and 1994,
the Fund's portfolio turnover rate was 30.04% and 18.26%, respectively. A higher
portfolio turnover rate involves correspondingly greater transaction costs and
increases the potential for short-term capital gains and taxes.
From time to time, certain brokers may be paid a fee for record keeping,
shareholder communications and other services provided by them to investors
purchasing shares of the Fund through the "no transaction fee" programs offered
by such brokers. This fee is based on the average daily value of the investments
in the Fund made by such brokers on behalf of investors participating in their
"no transaction fee" programs. The Fund's Directors have further authorized the
Investment Manager to place a portion of the Fund's brokerage transactions with
any such brokers, if the Investment Manager reasonably believes that, in
effecting the Fund's transactions in portfolio securities, such broker or
brokers are able to provide the best execution of orders at the most favorable
prices. Commissions earned by such brokers from executing portfolio transactions
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on behalf of the Fund may be credited by them against the fee they charge the
Fund, on a basis which has resulted from negotiations between the Investment
Manager and such brokers.
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 its investment company
taxable income (consisting generally of net investment income, net short term
capital gain and net gains from certain foreign currency transactions
("Distribution Requirement")) and must meet several additional requirements.
Among these requirements are the following: (1) at least 90% of the Fund's gross
income each taxable year must be derived from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months - options, futures, or forward contracts (other than
those on foreign currencies), or foreign currencies (or options, futures, or
forward contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); and (3) the Fund's investments must satisfy
certain diversification requirements. In any year during which the applicable
provisions of the Code are satisfied, the Fund will not be liable for Federal
income tax on net income and gains that are 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.
A portion of the dividends from the Fund's investment company taxable income
(whether paid in cash or in additional Fund shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by the Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
A loss on the redemption of Fund shares that were held for six months or
less will be treated as a long term (rather than a short term) capital loss to
the extent the shareholder received any capital gain distributions attributable
to those shares.
Any dividend or other distribution will have the effect of reducing the net
asset value of the Fund's shares on the payment date by the amount thereof.
Furthermore, any such dividend or other distribution, although similar in effect
to a return of capital, will be subject to taxes. Dividends
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and other distributions may also be subject to state and local taxes.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year an amount
equal to the sum of (1) 98% of its ordinary income, (2) 98% of its capital gain
net income (determined on an October 31 fiscal year basis), plus (3) generally,
all income and gain not distributed or subject to corporate tax in the prior
calendar year. The Fund intends to avoid imposition of this excise tax by making
adequate distributions.
Dividends and interest received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible to, and may, file an election
with the Internal Revenue Service that would enable its shareholders, in effect,
to receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions' income taxes paid by it. Pursuant to the election, the Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by the shareholder, the shareholder's proportionate share of those taxes, (2)
treat the shareholder's share of those taxes and of any dividend paid by the
Fund that represents income from foreign or U.S. possessions sources as the
shareholder's own income from those sources, and (3) either deduct the taxes
deemed paid by the shareholder in computing the shareholder's taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the shareholder's Federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of the
Fund's income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the Fund will be subject to
Federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain from disposition of the stock (collectively "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC income as
a taxable dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's taxable income and, accordingly, will not be taxable to
it to the extent that income is distributed to its shareholders. If the Fund
invests in a PFIC and elects to treat the PFIC as a "qualified electing fund,"
then in lieu of the foregoing tax and interest obligation, the Fund will be
required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gain (the excess of net
long term capital gain over net short term capital loss), even if they are not
distributed to the Fund; those earnings and gains probably would have to be
distributed to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax. In most instances it will be very difficult, if not impossible, to
make this election because of certain requirements thereof.
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Pursuant to proposed regulations, open-end RICs, such as the Fund, would be
entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
OPTIONS, FUTURES, FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCIES. The Fund's
use of hedging strategies, such as selling (writing) and purchasing options and
futures contracts and entering into forward currency contracts, involves complex
rules that will determine for income tax purposes the timing of recognition and
character of the gains and losses the Fund realizes in connection therewith.
Gains from the disposition of foreign currencies (except certain gains that may
be excluded by future regulations), and gains from transactions in options,
futures, and forward currency contracts derived by the Fund with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options and futures other than those on foreign currencies will
be subject to the Short-Short Limitation if they are held for less than three
months. Income from the disposition of foreign currencies, and options, futures,
and forward contracts on foreign currencies, also will be subject to the
Short-Short Limitation if they are held for less than three months and are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect thereto).
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of the that limitation. The
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not so qualify, it may be
forced to defer the closing out of certain options, futures, and forward
currency contracts beyond the time when it otherwise would be advantageous to do
so, in order for the Fund to continue to qualify as a RIC.
The foregoing discussion of Federal tax consequences is based on the 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 October 31.
30
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, Box 2197, Boston, MA 02111 has been retained
by the Fund to act as Custodian of the Fund's investments and may appoint one or
more subcustodians. The Custodian also performs certain accounting services for
the Fund. As part of its agreement with the Fund, the Custodian may apply
credits or charges for its services to the Fund for, respectively, positive or
deficit cash balances maintained by the Fund with the Custodian. DST Systems,
Inc., Box 419789, Kansas City, Missouri 64141-6789, is the Fund's Transfer and
Dividend Disbursing Agent.
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 October 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.
31
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENT AND EXHIBITS
(a) Financial Statements included in Parts A and B of this Post-Effective
Amendment are:
(1) Statement of Assets and Liabilities, as of October 31, 1995.
(2) Statement of Operations, for the year ended October 31, 1995.
(3) Statement of Changes in Net Assets, for the years ended October 31,
1995 and 1994.
(4) Schedule of Portfolio Investments in Securities as of October 31,
1995.
(5) Financial highlights for the years ended October 31, 1986 through
1995.
(6) Notes to the Financial Statement.
(b) Exhibits:
(1) Charter as now in effect: The Articles of Incorporation are contained
in the Fund's registration statement dated April 30, 1986 and
incorporated herein by reference.
(2) Copy of Existing By-Laws: The By-Laws are contained in the Fund's
registration statement dated April 30, 1986 and incorporated herein
by reference.
(3) Copy of Voting Trust Agreement: Not Applicable.
(4) Specimens of copies of each security issued by the Registrant,
including copies of all constituent instruments, and copies of each
security being registered: A specimen security is contained in the
Fund's registration statement dated April 30, 1986 and incorporated
herein by reference.
(5) Copy of Investment Advisory Contracts: A copy of the Investment
Advisory Contract is contained in the registration statement dated
incorporated herein by reference.
(9) Copy of Other Material Contracts:
A. A copy of the Registrant's Agency Agreement is contained in the
Fund's registration statement dated April 30, 1986 and incorporated
herein by reference.
B. A facsimile of the Registrant's Share Purchase Application is
Part C, P. 1
<PAGE>
contained in Post-Effective Amendment No. 15 and incorporated herein
by reference.
C. A copy of the Registrant's Pre-Authorized Check Plan is
contained in Post-Effective Amendment No. 7 and incorporated herein
by reference.
(10) Opinion and Consent of Counsel as to Legality of Securities: A copy
of the opinion and consent of the Fund's Counsel is contained in the
Fund's registration statement dated April 30, 1986 and incorporated
herein by reference.
(11) Copy of Opinions, Appraisals or Rulings, and Consents to the Use
Thereof: The consent of the Registrant's Independent Accountant,
Coopers & Lybrand L.L.P., is attached.
(12) Financial Statements Omitted from Item 23: Not Applicable.
(13) Copy of Agreement in Consideration for Initial Capital: Not
Applicable.
(14) Copy of the Model Plan Used in the Establishment of any Retirement
Plan: A copy of Form 5305A and the Custodian Disclosure Statement
used for the establishment of an IRA account is contained in the
Registrant's registration statement dated April 30, 1986 and
incorporated herein by reference. A revised version of the
Custodian Disclosure Statement is contained in Post-Effective
Amendment No. 7 and incorporated herein by reference.
(15) Copy of Registrant's Rule 12b-1 Plan: Not Applicable.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF RECORD HOLDERS OF SECURITIES AS OF JUNE 17, 1996.
TITLE OF CLASS NUMBER OF RECORD HOLDERS
$.10 par value 163
common stock
ITEM 27. INDEMNIFICATION
The Registrant has no formal indemnification contract or arrangement with
any director, officer, underwriter, or affiliated person, other than such
arrangement as is evidenced by the Registrant's By-Laws.
Insofar as indemnification for liability arising under the Securities Act
Part C, P. 2
<PAGE>
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that
claim for indemnification against such liabilities (other than the payment
by the officer or controlling person of the registrant in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such ) the vote of a majority of a quorum of
directors who are neither "interested persons" of the company as defined in
Section 2(a)(19) of the 1940 Act [15 U.S.C. 80a2(19)] nor parties to the
proceeding ("disinterested, non-party directors"), or (b) an independent
legal counsel in written opinion. The Fund may advance fees and costs to
officers and directors for legal expenses incurred by them in the defense
of proceedings brought against them only if one or more of the following
conditions exist:
1. the indemnitee shall provide a security for this undertaking;
2. the investment company shall be insured against losses arising by
reason of any lawful advances; or,
3. a majority of a quorum of the disinterested, non-party directors of the
Fund, or an independent legal counsel in a written opinion, shall
determine, based on a review of readily available facts (as opposed to a
full trial type inquiry), that there is reason to believe that the
indemnitee ultimately will be found entitled to indemnification.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The business activities of the Adviser, Aspen Securities and Advisory,
Inc., and the activities of the officers and directors of the Adviser are
disclosed in the Prospectus under the headings "Management of the Fund" and
"Investment Adviser".
ITEM 29. PRINCIPAL UNDERWRITERS
Not Applicable.
ITEM 30. LOCATION OF THE ACCOUNTS AND RECORDS
All accounts and records required to be maintained by the Registrant are
maintained by Aspen Securities and Advisory, 545 Shoup Avenue, No. 303,
Idaho Falls, Idaho 83402.
ITEM 31. MANAGEMENT SERVICES
Part C, P. 3
<PAGE>
There are no management related service contracts not discussed in Part A
or Part B of this Registration Statement.
ITEM 32. UNDERTAKINGS
Not Applicable.
Part C, P. 4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
County of Bonneville, and State of Idaho, this 19th day of June 1996.
THE ROCKWOOD GROWTH FUND, INC.
By: ROSS H. FARMER
----------------------------
Ross H. Farmer, President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment has been signed below by the following persons in the capacities and
on the date indicated.
RONALD W. KIEHN
-----------------------------
Date: June 19, 1996
JAMES C. HERNDON
-------------------------------
James C. Herndon, Director
Date: June 19, 1996
Part C, P. 5
<PAGE>
