Statement of Additional Information
Rule 497(e) Registration Statement
1933 Act File No. 33-02430
1940 Act File No. 811-04534
March 1, 1998 revised to November 6, 1998
ROCKWOOD FUND, INC.
11 Hanover Square
New York, NY 10005
Toll-free: 1-888-ROCKWOOD
This Statement of Additional Information regarding Rockwood Fund, Inc.
("Fund") is not a prospectus and should be read in conjunction with the Fund's
prospectus dated March 1, 1998. 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.................................................2
INVESTMENT RESTRICTIONS.......................................................3
OFFICERS AND DIRECTORS........................................................4
INVESTMENT MANAGER............................................................6
CALCULATION OF PERFORMANCE DATA...............................................8
DISTRIBUTION OF SHARES.......................................................10
DETERMINATION OF NET ASSET VALUE.............................................11
PURCHASE OF SHARES...........................................................11
ALLOCATION OF BROKERAGE......................................................11
DISTRIBUTIONS AND TAXES......................................................13
REPORTS TO SHAREHOLDERS......................................................13
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT............................13
AUDITORS ....................................................................14
FINANCIAL STATEMENTS.........................................................14
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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 a 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, more than 15% of
the Fund's net assets would be invested in illiquid assets, including repurchase
agreements not entitling the holder to payment of principal within seven days.
The term "illiquid assets" for this purpose includes securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities.
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 Securities Act of 1933, as
amended ("1933 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 ("QIBs"). 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.
("NASD")An insufficient number of QIBs 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. ("Investment
Manager") pursuant to guidelines approved by the Board. The Investment Manager
takes into account a number of factors in reaching liquidity determinations,
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 liquidity determinations 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 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 creditworthy 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.
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
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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 Fund's Board of Directors. The Investment Manager
reviews and monitors the creditworthiness of those institutions under the
Board's general supervision.
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
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.
INVESTMENTS IN CLOSED-END INVESTMENT COMPANIES. The Fund may invest up
to 10% of its total 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.
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;
6. Issue senior securities, except to the extent permitted by the 1940
Act; or
7. Purchase a security if, as a result, 25% or more of the value of the
Fund's total assets would be invested in the securities of issuers in a
single industry, except that this limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
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The Fund's Board of Directors has established the following
non-fundamental investment limitations that may be changed by the Board without
shareholder approval:
1. The Fund may not purchase or otherwise acquire any security or invest
in a repurchase agreement if, as a result, more than 15% of the Fund's
net assets (taken at current value) would be invested in illiquid
assets, including repurchase agreements not entitling the holder to
payment of principal within seven days;
2. The Fund may not purchase the securities of any investment company (as
defined in the 1940 Act) 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;
3. 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;
4. 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;
5. To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a
Commodity Futures Trading Commission ("CFTC") regulated exchange, in
each case that is not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums required to establish
these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any contracts the Fund has entered into;
6. 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 deemed
to constitute purchasing securities on margin;
7. The Fund may not mortgage, pledge or hypothecate any assets in
excess of one-third of the Fund's total assets;
8. 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; and
9. 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 that immediately
after all borrowings pursuant to (a) and (b) there is asset coverage of
at least 300 per centum for all borrowings; provided that in the event
that such asset coverage shall at any time fall below 300 per centum
the Fund shall within three days thereafter (not including Sundays and
holidays) reduce the amount of its borrowings such that the asset
coverage of such borrowings shall be at least 300 per centum. The Fund
may not purchase securities for investment while any bank borrowing
equaling 5% or more of its total assets is outstanding.
OFFICERS AND DIRECTORS
The officers and Directors of the Fund, their respective offices, date
of birth and principal occupations during the last five years are set forth
below. Unless otherwise noted, the address of each is 11 Hanover Square, New
York, NY 10005. There are seven investment companies advised by subsidiaries of
Bull & Bear Group, Inc. ("Group") (collectively referred to as "Investment
Company Complex").
BRUCE B. HUBER, CLU, ChFC, MSFS -- Director. 3443 Highway 66, Neptune, NJ 07753.
He is Senior Consultant with The Berger Financial Group, LLC specializing in
financial, estate and insurance matters. From March 1995 to December 31, 1995,
he was President of Huber Hogan Knotts Consulting, Inc. From 1990 to March 1995,
he was President of Huber-Hogan Associates. He was born February 7, 1930. He is
also a Director of five other investment companies in the Investment Company
Complex.
JAMES E. HUNT -- Director. One Dag Hammarskjold Plaza, New York, NY 10017. He is
a principal of Hunt & Howe, Inc. executive recruiting consultants. He was born
December 14, 1930. He is also a Director of five other investment companies in
the Investment Company Complex.
JOHN B. RUSSELL -- Director. 334 Carolina Meadows Villa, Chapel Hill, NC 27514.
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 was born February 9, 1923. He is also a Director of five other
investment companies in the Investment Company Complex.
MARK C. WINMILL* -- Director and Co-President. He is Director and Co-President
of the Investment Manager and its affiliates. He is also a Director of five
other investment companies in the Investment Company Complex. He received his
M.B.A. from the Fuqua School of Business at Duke University in
1987. He is the brother of Thomas B. Winmill. He was born November 26, 1957.
THOMAS B. WINMILL* -- Director, Co-President, Chief Executive Officer, and
General Counsel. He is Co-President of the Investment Manager and the
Distributor, and of their affiliates. He is also a Director of eight other
investment companies in the Investment Company Complex. 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.
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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 (see biographical information above).
THOMAS B. WINMILL -- Chairman, Chief Executive Officer, Co-President and Genera
Counsel (see biographical information above).
ROBERT D. ANDERSON -- Vice Chairman. He is Vice Chairman of the Investment
Manager and its affiliates. He was 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. He was born December 7,
1929.
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., and from 1992 to 1993 he was Director, Bond Arbitrage at WG Trading
Company. He was born March 1, 1955.
JOSEPH LEUNG, CPA -- Chief Accounting Officer, Chief Financial Officer and
Treasurer. He is Chief Accounting Officer, Chief Financial Officer and Treasurer
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. He is a
member of the American Institute of Certified Public Accountants. He was born
September 15, 1965.
DEBORAH ANN SULLIVAN -- Chief Compliance Officer, Secretary and Vice President.
She is Chief Compliance Officer, Secretary and Vice President of the investment
companies in the Investment Company Complex, and the Investment Manager and its
affiliates. From 1993 through 1994 she was the Blue Sky Paralegal for SunAmerica
Asset Management Corporation and from 1992 through 1993 she was Compliance
Administrator and Blue Sky Administrator with Prudential Securities, Inc. and
Prudential Mutual Fund Management, Inc. She earned her Juris Doctor at Hofstra
University, School of Law. She was born June 13, 1969.
* 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.
<TABLE>
<CAPTION>
COMPENSATION TABLE
NAME OF PERSON, Aggregate Compensa- Pension or Retirement Estimated Annual Total Compensation From Registrant and
POSITION tion From Registrant Benefits Accrued as Benefits Upon Investment Company Complex Paid to Directors
Part of Fund Expenses Retirement
--------------- -------------------- --------------------- ---------------- --------------------------------------------
<S> <C> <C> <C> <C>
Bruce B. Huber,Director None None None $12,500 from 6 Investment Companies
James E. Hunt, Director None None None $12,500 from 6 Investment Companies
John B. Russell, Director None None None $12,500 from 6 Investment Companies
</TABLE>
Information in the preceding table is based on fees paid during the
Fund's fiscal year ended October 31, 1997.
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 December 31, 1997 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 shareholder owned of
record and beneficially, 5% or more of the Fund's outstanding securities:
Name and Address Number of Shares Percentage
---------------- ---------------- ----------
Pfendler Family 4,624.757 6.56%
Revocable Living Trust
2507 Harsh Avenue, S.E.
Massillon, OH 44646
Bobbi W. Patton & 4,663.177 6.61%
Neil W. Patton
4821 E. Exeter Blvd
Phoenix, AZ 85018-2940
As of December 31, 1997 the officers and directors of the Fund owned,
as a group, less than 2% 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, 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
.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.
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The percentage fee is calculated on the daily value of the Fund's net assets at
the close of each business day.
Under the Investment Management Agreement, the Fund assumes and pays
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 Board and shareholders meetings; (k) fees of the independent directors; (l)
necessary office space rental; (m) 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 (n) 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 will be reimbursed by the Fund, subject to examination
by those directors of the Fund who are not interested persons of the Investment
Manager or any affiliate thereof.
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) or a majority of the holders of the Fund's outstanding
voting securities approve. The Investment Management Agreement may be terminated
without penalty at any time by vote of the Fund's directors or by vote of the
holders of a majority of the Fund's outstanding voting securities on 60 days'
written notice to the Investment Manager, or by the Investment Manager on 60
days' written notice to the Fund, and terminates automatically in the event of
its assignment. The Investment Management Agreement provides that the Investment
Manager will not be liable to the Fund or any shareholder of the Fund for any
error of judgment or mistake of law or for any loss suffered by the Fund or the
Fund's shareholders in connection with the matters to which the Investment
Management Agreement relates. Nothing contained in the Investment Management
Agreement, however, is to be construed to protect the Investment Manager 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 Investment Management Agreement.
The Investment Management Agreement provides that the Investment
Manager will waive all or part of its fee or reimburse the Fund monthly if and
to the extent the Fund's aggregate operating expenses exceed the most
restrictive limit imposed by any state in which the Fund's shares 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 Fund is not subject to any
such state-imposed limitations. 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.
As of October 13, 1997, the Fund paid the Investment Manager
$92,483. Reimbursement for the year ended October 31, 1997 was $106,359. The
Fund reimbursed the Investment Manager $583 for providing certain administrative
and accounting services at cost.
The Investment Manager, a registered investment adviser, is a
wholly-owned subsidiary of Group. The other principal subsidiaries of Group
include Investor Service Center, Inc., 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 National Market System ("NMS") and traded in the over-the-counter market.
Bassett S. Winmill, Chairman of the Board of Group, 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
Investment Company Complex, each of which is managed by an affiliate of the
Investment Manager, had net assets in excess of $280,000,000 as of January 29,
1998.
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.
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
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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 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
Rule 12b-1 fees, charged to all shareholder accounts.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED OCTOBER 31, 1997
Ten Years 12.79%
Five Years 20.01%
One Year 27.55%
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 ten year, five year and one
year periods ending October 31, 1997 is 233.27%, 148.93%, and 27.55%,
respectively.
SOURCE MATERIAL From time to time, in marketing pieces and other Fund
literature, the Fund's performance may be compared to the performance of broad
groups of comparable mutual funds or unmanaged indexes of comparable securities.
Evaluations of Fund performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for Fund performance information may
include, but are not limited to, the following:
Bank Rate Monitor, a weekly publication which reports yields on various bank
money market accounts and certificates of deposit.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance and other data.
Bloomberg, a computerized market data source and portfolio analysis system.
Bond Buyer Municipal Bond Index (20 year), an index of municipal bonds provided
by a national periodical reporting on municipal securities.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CDA/Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient features,
management results, income and dividend records, and price ranges.
Consumer's Digest, a bimonthly magazine that periodically features the
performance of a variety of investments, including mutual funds.
Financial Times, Europe's business newspaper, which from time to time reports
the performance of specific investment companies in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Goldman Sachs Convertible Bond Index -- currently includes 67 bonds and 33
preferred shares. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds.
Growth Fund Guide, a newsletter providing a mutual fund rating service published
for over 25 years.
IBC's Money Fund Report, a weekly publication of money market fund total net
assets, yield, and portfolio composition.
7
<PAGE>
Individual Investor, a newspaper that periodically reviews mutual fund
performance and other data.
Investment Advisor, a monthly publication reviewing performance of mutual funds.
Investor's Business Daily, a nationally distributed newspaper which regularly
covers financial news.
Kiplinger's Personal Finance Magazine, a monthly publication periodically
reviewing mutual fund performance.
Lehman Brothers, Inc. "The Bond Market Report" reports on various Lehman
Brothers bond indices.
Lehman Government/Corporate Bond Index -- is a widely used index composed of
government, corporate, and mortgage backed securities.
Lehman Long Term Treasury Bond -- is composed of all bonds covered by the Lehman
Treasury Bond Index with maturities of 10 years or greater.
Lipper Analytical Services, Inc., a publication periodically reviewing mutual
funds industry-wide by means of various methods of analysis.
Merrill Lynch Pierce Fenner & Smith Taxable Bond Indices reports on a variety of
bond indices.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley Capital International EAFE Index, is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Morningstar, Mutual Fund Values, publications of Morningstar, Inc., periodically
reviewing mutual funds industry-wide by means of various methods of analysis and
textual commentary.
Mutual Fund Forecaster, a newsletter providing a mutual fund rating service.
Nasdaq Industrial Index -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter that reports on mutual fund
performance, rates funds, and discusses investment strategies for mutual fund
investors.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
special section reporting on mutual fund performance, yields, indexes, and
portfolio holdings.
Russell 3000 Index -- consists of the 3,000 largest stocks of U.S. domiciled
companies commonly traded on the New York and American Stock Exchanges or the
Nasdaq over-the-counter market, accounting for over 90% of the market value of
publicly traded stocks in the U.S.
Russell 2000 Small Company Stock Index -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely used benchmark for small capitalization common
stocks.
Salomon Brothers GNMA Index -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
Salomon Brothers High-Grade Corporate Bond Index -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
Salomon Brothers Broad Investment-Grade Bond Index -- is a market-weighted index
that contains approximately 4,700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
Salomon Brothers Market Performance tracks the Salomon Brothers bond index.
Standard & Poor's 500 Composite Stock Price Index -- is an index of 500
companies representing the U.S. stock market.
Standard & Poor's 100 Composite Stock Price Index -- is an index of 100
companies representing the U.S. stock market.
Standard & Poor's Preferred Index -- is an index of preferred securities.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
businesses, often featuring mutual fund performance data.
USA Today, a national newspaper that periodically reports mutual fund
performance data.
U.S. News and World Report, a national weekly that periodically reports mutual
fund performance data.
The Wall Street Journal, a nationally distributed newspaper which regularly
covers financial news.
The Wall Street Transcript, a periodical reporting on financial markets and
securities.
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.
8
<PAGE>
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 Smith Barney Holdings 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 principal 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 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 may 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 will 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 distribu tion
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 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 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.
Of the amounts compensated to the Distributor during the Fund's fiscal
year ended October 31, 1997, approximately $790 represented expenses incurred
for advertising, $1,896 for printing and mailing prospectuses and other
information to other than current shareholders, $443 for salaries of marketing
and sales personnel, $257 for payments to third parties who sold shares of the
Fund and provided certain services in connection therewith, and $80 for overhead
and miscellaneous expenses.
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
9
<PAGE>
services will be made. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
regular trading for equity securities on the New York Stock Exchange ("NYSE")
(currently 4:00 p.m., eastern time) each business day of the Fund. The following
are not Fund business days: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Securities owned by the Fund are valued by various methods depending on
the market or exchange on which they trade. Securities listed or traded on a
national securities exchange or the NMS are valued at the last quoted sales
price on the day the valuations are made. Such listed securities that are not
traded on a particular day and securities traded in the over-the-counter market
that are not on the NMS are valued at the mean between the current bid and asked
prices. Securities for which quotations from the national securities exchange or
the NMS are not readily available or reliable and other assets may be valued
based on over-the-counter quotations or at fair value as determined in good
faith by or under the direction 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.
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.
PURCHASE OF SHARES
The Fund will only issue shares upon payment of the purchase price by
check made drawn to the Fund's order 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 Fund's transfer agent. If an order is canceled because
of non-payment or because the purchaser's check does not clear, the purchaser
will be responsible for any loss the Fund incurs. If the purchaser is already a
shareholder, the Fund can redeem shares from the purchaser's account to
reimburse the Fund for any loss. In addition, the purchaser may be prohibited or
restricted from placing future purchase orders in the Fund or any of the other
Funds in the Investment Company Complex. 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. Transactions are directed to brokers and dealers qualified to execute
orders or provide research, statistical or other services, and who may sell
shares of the Fund or other affiliated investment companies. The Investment
Manager may also allocate portfolio transactions to broker/dealers that remit a
portion of their commissions as a credit against the Custodian's charges. No
formula exists and no arrangement is made with or promised to any broker/dealer
which commits either a stated volume or percentage of brokerage business based
on research, statistical or other services furnished to the Investment Manager
or upon sale of Fund shares. Fund transactions in debt and over-the-counter
securities generally are with dealers acting as principals at net prices with
little or no brokerage costs. In certain circumstanc es, 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 by the issuer to the underwriter, and purchases from dealers
include a spread between the bid and asked price. While the Investment Manager
generally seeks competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available.
The Investment Manager directs portfolio transactions to broker/dealers
for execution on terms and at rates which it believes, in good faith, to be
reasonable in view of the overall nature and quality of services provided by a
particular broker/dealer, including brokerage and research services, sales of
shares, of the Funds or other Funds advised by the Investment Manager or its
affiliates. 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 ("1934 Act"), 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 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 ongoing 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
"brokerage and research services" as defined in Section 28(e)(3) of the 1934
Act, which presently 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
<PAGE>
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 records required of it by the NASD.
In order for BBSI to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by BBSI must be reasonable
and fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. The Fund's Board of Directors has adopted proce dures 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.
Brokerage commissions paid in fiscal years ended October 31, 1995, 1996
and 1997 were $7,349.79, $9,410.74 and $2,058.88, respectively. $1,199 of such
commissions paid during the fiscal year ended October 31, 1997 (representing
approximately $546,783 in portfolio transactions) was allocated to
broker/dealers that provided research services. $278 of such commissions paid
during the fiscal year ended October 31, 1997 was allocated to broker/dealers
for selling shares of the Funds and other Funds advised by the Investment
Manager or its affiliates. During the Fund's fiscal year ended October 31, 1995,
the Fund paid no brokerage commissions to BBSI. During the Fund's fiscal year
ended October 31, 1996, the Fund paid $122 in brokerage commissions to BBSI
which represented approximately 1.30% of total brokerage commissions paid by the
Fund and 1.13% of the aggregate dollar amount of transactions involving the
payment of commissions. During the Fund's fiscal years ended October 31, 1997
the Fund paid $859 in brokerage commissions to BBSI which represented
approximately 41.74% of total brokerage commissions paid by the Fund and 28.56%
of the aggregate dollar amount of transactions involving the payment of
commissions.
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 (a "bunched trade") if it appears that a combined order would reduce
brokerage commissions and/or result in a more favorable transaction price. All
accounts participating in a bunched trade shall receive the same execution price
with all transaction costs (e.g. commissions) shared on a pro rata basis. In the
event that there are insufficient securities to satisfy all orders, the partial
amount executed shall be allocated among participating accounts pro rata on the
basis of order size. In the event of a partial fill and the portfolio manager
does not deem the pro rata allocation of a specified number of shares to a
particular account to be sufficient, the portfolio manager may waive in writing
such allocation. In such event, the account's pro rata allocation shall be
reallocated to the other accounts that participated in the bunched trade.
Following trade execution, portfolio managers may determine in certain instances
that it would be fair and equitable to allocate securities purchased or sold in
such trade in a manner other than that which would follow from a mechanical
application of the procedures outlined above. Such instances may include (i)
partial fills and special accounts (In the event that there are insufficient
securities to satisfy all orders, it may be fair and equitable to give
designated accounts with special investment objectives and policies some degree
of priority over other types of accounts.); (ii) unsuitable or inappropriate
investment (It may be appropriate to deviate from the allocation determined by
application of these procedures if it is determined before the final allocation
that the security in question would be unsuitable or inappropriate for one or
more of the accounts originally designated). 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 or other affiliated
investment companies do 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 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
<PAGE>
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, 1997 and 1996,
the Fund's portfolio turnover rate was 44.00% and 42.48%, 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 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 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.
11
<PAGE>
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 Fund shares at the
then current net asset value in lieu of the cash payment and to thereafter issue
such shareholder's distributions in additional Fund shares.
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 that 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's
investments must satisfy certain diversification require ments. 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 would 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 sale of Fund shares that were held for six months or less
will be treated as a long term (rather than a short term) capital loss to the
extent the shareholder received any capital gain distributions attributable to
those shares.
Dividends 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.
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.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, MO
64105 ("Custodian") 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. The
Distributor provides certain shareholder administration services to the Fund and
is reimbursed by the Fund the actual costs incurred with respect thereto. Among
other such services, the Distributor currently receives and responds to
shareholder inquiries concerning their accounts and processes shareholder
telephone requests such as telephone transfers, purchases and redemptions,
changes of address and similar matters.
AUDITORS
Tait, Weller & Baker, 8 Penn Center Plaza, Suite 800, Philadelphia, PA
19103-2108, 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,
1997, 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.
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