Statement of Additional Information Rule 497(e), Registration Statement
1933 Act File No. 33-02430
1940 Act File No. 811-04534
July 12, 1999 revised to August 5, 1999
MIDAS MAGIC, INC.
11 Hanover Square
New York, NY 10005
Toll-free: 1-800-400-MIDAS (6432)
This Statement of Additional Information regarding Midas Magic, Inc.
("Fund") is not a prospectus and should be read in conjunction with the Fund's
prospectus dated June 30, 1999. The prospectus is available to prospective
investors without charge upon request by calling toll-free 1-800-400-MIDAS
(6432).
The most recent Annual Report and Semi-Annual Report to Shareholders
for the Fund are separate documents supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing in the Annual Report are incorporated by
reference into this Statement of Additional Information.
TABLE OF CONTENTS
DESCRIPTION OF THE FUND........................................................2
THE FUND'S INVESTMENT PROGRAM..................................................2
INVESTMENT RESTRICTIONS........................................................5
MANAGEMENT OF THE FUND.........................................................6
INVESTMENT MANAGER.............................................................8
CALCULATION OF PERFORMANCE DATA................................................9
DISTRIBUTION OF SHARES........................................................13
DETERMINATION OF NET ASSET VALUE..............................................15
PURCHASE OF SHARES............................................................15
ALLOCATION OF BROKERAGE.......................................................15
DISTRIBUTIONS AND TAXES.......................................................18
REPORTS TO SHAREHOLDERS.......................................................19
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT.............................19
AUDITORS......................................................................19
FINANCIAL STATEMENTS..........................................................20
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DESCRIPTION OF THE FUND
The Fund is a Maryland corporation formed on December 11, 1996.
Prior to June 30, 1999 and after March 1, 1997, the Fund operated under the name
"Rockwood Fund, Inc". Prior to March 1, 1997, the Fund operated under the name
"The Rockwood Growth Fund, Inc.," an Idaho corporation organized on March 7,
1985. Midas Management Corporation ("Investment Manager") serves as the Fund's
investment adviser and general manager. Investor Service Center, Inc.
("Distributor") is the distributor of the Fund's shares.
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 the prospectus will
be amended. 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 borrow money to the extent permitted under the
Investment Company Act of 1940, as amended, ("1940 Act") which permits an
investment company to borrow in an amount up to 33 1/3% of the value of its
total assets. 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 credits 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,
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municipal securities and corporate bonds and notes. Certain of 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 Midas Management Corporation
("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 considered loans under the 1940
Act and 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
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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. Therfore, a shareholder would bear duplicative fees and expenses.
Year 2000 Risks. Like other investment companies, financial and
business organizations around the world, the Fund will be adversely affected if
the computer systems used by the Investment Manager and the Fund's other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund is taking steps that it believes are reasonably designed to
address the Year 2000 Problem with respect to the computer systems it uses and
to obtain satisfactory assurances that comparable steps are being taken by each
of the Fund's major service
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providers. The Fund does not expect to incur any significant costs in order to
address the Year 2000 Problem. However, at this time there can be no assurances
that these steps will be sufficient to avoid any adverse impact on the Fund.
Additionally, while the Fund cannot, at this time, predict the degree of impact,
it is possible that foreign markets will be less prepared than U.S. markets.
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.
Except for the percentage limitations referred to in (1) with respect to
borrowing and (i) with respect to illiquid securities, if a percentage
restriction is adhered to at the time an investment is made, a later change in
percentage resulting from a change in value or assets will not constitute a
violation of that restriction. With respect to investment restriction (1),
however, if borrowings exceed 33 1/3% of the value of a Fund's total assets as a
result of a change in value or assets, the Fund must take steps to reduce such
borrowings at least to the extent of such excess. The Fund may not:
1. Borrow money, except to the extent permitted by the Investment
Company Act of 1940, as amended ("1940 Act") (which currently limits
borrowing to 33 1/3% of the value of the Fund's total assets);
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.
The Fund's Board of Directors has established the following
non-fundamental investment limitations that may be changed by the Board without
shareholder approval:
The Fund may:
(i) Invest up to 15% of the value of its net assets in
illiquid securities, including repurchase agreements
providing for settlement in more than seven days after
notice.
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(ii) Purchase securities issued by other investment companies
to the extent permitted under the 1940 Act.
(iii) Pledge, mortgage, hypothecate or otherwise encumber its
assets to the extent permitted under the 1940 Act.
MANAGEMENT OF THE FUND
The Fund's board is responsible for the management and supervision
of the Fund. The Board approves all significant agreements with those companies
that furnish services to the Fund. These companies are as follows: CEF Advisers,
Inc., Investment Adviser and General Manager; Investor Service Center, Inc.,
Distributor; DST Systems, Inc., Transfer and Dividend Disbursing Agent; and
Investors Fiduciary Trust Company, Custodian.
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
Winmill & Co. Incorporated (formerly Bull & Bear Group, Inc.) ("Winmill")
(collectively referred to as "Investment Company Complex").
BASSETT S. WINMILL* -- Chairman of the Board. He is Chairman of the Board of
three of the other investment companies advised by the Investment Manager and
its affiliates and the parent of the Investment Manager, Winmill. 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 Thomas B. Winmill. He is 69 years old.
BRUCE B. HUBER, CLU, ChFC, MSFS -- Director. 3443 Highway 66, Neptune, NJ 07753.
He is a Financial Representative with New England Financial 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 is also a Director of five other
investment companies in the Investment Company Complex. He is 69 years old.
JAMES E. HUNT -- Director. One Dag Hammarskjold Plaza, New York, NY 10017. He is
a principal of Hunt & Howe, Inc. executive recruiting consultants. He is also a
Director of five other investment companies in the Investment Company Complex.
He is 68 years old.
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. He is also a Director of
five other investment companies in the Investment Company Complex. He is 76
years old.
THOMAS B. WINMILL* -- Director, President, Chief Executive Officer, and General
Counsel. He is the 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 son of
Bassett S. Winmill. He is 40 years old.
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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:
BASSETT S. WINMILL -- Chairman of the Board and Chief Investment Officer (see
biographical information above).
THOMAS B. WINMILL -- Chairman, Chief Executive Officer, President and General
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 is 69 years old.
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 is 44 years old.
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 is 33 years
old.
DEBORAH ANN SULLIVAN, ESQ. -- 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 is member of
the New York State Bar. He is 30 years old.
*Bassett S. 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 Pension or Retirement Estimated Annual Total Compensation From
Position Compensa- Benefits Accrued as Benefits Upon Registrant and Investment
tion From Registrant Part of Fund Retirement Company Complex Paid to
Expenses Directors
<S> <C> <C> <C> <C>
Bruce B. Huber, $60 None None $13,500 from 6 Investment
Director Companies
James E. Hunt, $60 None None $13,500 from 6 Investment
Director Companies
John B. Russell, $60 None None $13,500 from 6 Investment
Director Companies
</TABLE>
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Information in the preceding table is based on fees paid during the
Fund's fiscal year ended December 31, 1998.
No officer, Director or employee of the Fund's Investment Manager received
any compensation from the Fund for acting as an officer, Director, or employee
of the Fund. As of July 1, 1999, officers and Directors of the Fund owned less
than 1% of the outstanding shares of the Fund. As of July 1, 1999, Charles
Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104 owned of
record 14.94% of the Fund's outstanding shares, National Investor Services
Corporation, 55 Water Street, New York, NY 10041-0001 owned of record 5.30% of
the Fund's outstanding shares U.S. Clearing Corporation, 26 Broadway, New York,
NY 10004 owned of record 9.00% of the Fund's outstanding shares Investors
Fiduciary Trust Company, as custodian, 801 Pennsylvania, Kansas City, MO 64105
owned of record 8.86% of the Fund's outstanding shares and NFSC, Phoenix, AZ
85018 owned of record 8.46% of the Fund's outstanding shares.
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.
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.
Pursuant to the Investment Management Agreement, if requested by the Fund's
Board of Directors, the Investment Manager may provide other services to the
Fund such as 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.
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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.
Voluntary reimbursements for the year ended October 31, 1998 and the two months
ended December 31, 1998 are $77,131 and $15,416, respectively. The Fund
reimbursed the Investment Manager $465 and $56 for providing certain
administrative and accounting services at cost for the year ended October 31,
1998 and December 31, 1998, respectively.
The Investment Manager, a registered investment adviser, is a
wholly-owned subsidiary of Winmill. The other principal subsidiaries of Winmill
include Investor Service Center, Inc., a registered broker-dealer, and CEF
Advisers, Inc., a registered investment adviser.
Winmill 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 Winmill, may be deemed a
controlling person of Winmill on the basis of his ownership of 100% of Winmill'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 $250,000,000 as of February
12, 1999.
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
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 December 31, 1998
One Year (13.82)%
Five Years 7.40%
Ten Years 6.10%
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 one year, five year and
ten year periods ending December 31, 1998 is (13.82)%, 42.88%, and 80.85%,
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.
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Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CDA/Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient features,
management results, income and dividend records, and price ranges.
Consumer's Digest, a bimonthly magazine that periodically features the
performance of a variety of investments, including mutual funds.
Financial Times, Europe's business newspaper, which from time to time reports
the performance of specific investment companies in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Goldman Sachs Convertible Bond Index -- currently includes 67 bonds and 33
preferred shares. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds.
Growth Fund Guide, a newsletter providing a mutual fund rating service published
for over 25 years.
IBC's Money Fund Report, a weekly publication of money market fund total net
assets, yield, and portfolio composition.
Individual Investor, a newspaper that periodically reviews mutual fund
performance and other data.
Investment Advisor, a monthly publication reviewing performance of mutual funds.
Investor's Business Daily, a nationally distributed newspaper which regularly
covers financial news.
Kiplinger's Personal Finance Magazine, a monthly publication periodically
reviewing mutual fund performance.
Lehman Brothers, Inc. "The Bond Market Report" reports on various Lehman
Brothers bond indices.
Lehman Government/Corporate Bond Index -- is a widely used index composed of
government, corporate, and mortgage backed securities.
Lehman Long Term Treasury Bond -- is composed of all bonds covered by the Lehman
Treasury Bond Index with maturities of 10 years or greater.
Lipper Analytical Services, Inc., a publication periodically reviewing mutual
funds industry-wide by means of various methods of analysis.
Merrill Lynch Pierce Fenner & Smith Taxable Bond Indices reports on a variety of
bond indices.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
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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 Smith Barney GNMA Index -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
Salomon Smith Barney 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 Smith Barney 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 Smith Barney 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.
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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.
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, the 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.
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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 Winmill, 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 fees. The amount of Hanover Direct's fees 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 fees, 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, 1998, and the two month period ended December 31,
1998, approximately $7 and $0, respectively, represented expenses incurred for
advertising; $1,297 and $47, respectively, for printing and mailing prospectuses
and other information to other than current shareholders, $937 and $130,
respectively, for salaries of marketing and sales personnel, $92 and $69,
respectively, for payments to third parties who sold shares of the Fund and
provided certain services in connection therewith, and $358 and $0,
respectively, 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
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.
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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, Washington's Birthday, 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 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. Subject to the
approval of the Board, 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
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 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 avail able.
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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 trans actions 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.
Until March 31, 1999, Bull & Bear Securities, Inc. ("BBSI") was a
wholly owned subsidiary of Winmill and the Investment Manager's affiliate. BBSI
provides discount brokerage services to the public as an introducing broker
clearing through unaffiliated firms on a fully disclosed basis. The Investment
Manager was, until March 31, 1999, authorized to place Fund brokerage through
BBSI at its posted discount rates and indirectly through a BBSI clearing firm.
The Fund did not deal with BBSI in any transaction in which BBSI acts as
principal. The clearing firm executed trades in accordance with the fully
disclosed clearing agreement between BBSI and the clearing firm. BBSI was
financially responsible to the clearing firm for all trades of the Fund until
complete payment was received by the Fund or the clearing firm. BBSI provided
order entry services or order entry facilities to the Investment Manager,
arranged for execution and clearing of portfolio transactions through executing
and clearing brokers, monitored trades and
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settlements and performed limited back-office functions including the
maintenance of all 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 have been
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 adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid
to BBSI were 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 determined that portfolio
transactions may have been executed through BBSI if, in the judgment of the
Investment Manager, the use of BBSI was likely to result in price and execution
at least as favorable as those of other qualified broker/dealers and if, in
particular transactions, BBSI charged the Fund a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. Brokerage
transactions with BBSI were also subject to such fiduciary standards as may be
imposed by applicable law. The Investment Manager's fees under its agreement
with the Fund were not reduced by reason of any brokerage commissions paid to
BBSI.
Brokerage commissions paid in fiscal years ended October 31, 1996,
1997 and 1998 and the two month period ended December 31, 1998 were $9,411,
$2,059, $7,439 and $20, respectively. $5,554 and $0 of such commissions paid
during the fiscal year ended October 31, 1998 and the two month period ended
December 31, 1998 (representing approximately $4,264,012 and $0, in portfolio
transactions), respectively, was allocated to bro ker/dealers that provided
research services. $0 and $0 of such commissions paid during the fiscal year
ended October 31, 1998 and the two month period ended December 31, 1998,
respectively, 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, 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. During the Fund's fiscal year ended October 31, 1998 and
the two month period ended December 31, 1998, the Fund paid $1,885 and $20 in
brokerage commissions to BBSI which represented approximately 25.34% and 100% of
total brokerage commissions paid by the Fund and 22.03% and 100% of the
aggregate dollar amount of transactions involving the payment of commissions,
respectively.
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
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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 Winmill, 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 Winmill, 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 two month period ended December 31, 1998
and the fiscal years ended October 31, 1998, 1997 and 1996, the Fund's portfolio
turnover rate was 0% and 207.02%, 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.
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 redeposit a shareholder check, thereby crediting 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 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 would be taxed at
corporate rates.
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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 a December 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 December 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.
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FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended December
31, 1998, 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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