Statement of Additional Information Revised as of December 1, 1995
MIDAS FUND, INC.
11 Hanover Square
New York, NY 10005
1-800-400-MIDAS
This Statement of Additional Information regarding Midas Fund, Inc. (the "Fund")
should be read in conjunction with the Fund's prospectus dated August 28, 1995.
Prior to August 28, 1995, the Fund was known as Excel Midas Gold Shares, Inc.
The prospectus is available to prospective investors without charge upon request
to Investor Service Center, Inc., the Fund's Distributor, by calling
1-800-400-MIDAS.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS........................................................2
OFFICERS AND DIRECTORS.........................................................2
THE INVESTMENT MANAGER.........................................................4
THE SUBADVISER AND THE SUBADVISORY AGREEMENT..................................5
CALCULATION OF PERFORMANCE DATA................................................5
DISTRIBUTION OF SHARES.........................................................8
DETERMINATION OF NET ASSET VALUE...............................................9
PURCHASE OF SHARES.............................................................9
ALLOCATION OF BROKERAGE........................................................9
DISTRIBUTIONS AND TAXES.......................................................11
REPORTS TO SHAREHOLDERS.......................................................12
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT.............................12
AUDITORS .....................................................................12
FINANCIAL STATEMENTS..........................................................12
APPENDIX--DESCRIPTIONS OF BOND RATINGS........................................13
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INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions set forth below
which, together with the fundamental investment objectives and policies of the
Fund, cannot be changed without approval by holders of a majority of the
outstanding voting securities of the Fund. As defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), this means the lesser of (a) 67% of
the shares of the Fund at a meeting where more than 50% of the outstanding
shares of the Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund. These investment restrictions are set forth
below:
(1) The Fund will not invest more than 5% of its net assets (taken at the
lower of cost or value) in securities of any one company. The Fund
will also limit its investment in a single company to not more than
10% of that company's outstanding voting securities.
(2) The Fund will not invest more than 5% of its total assets in
securities of companies, including any predecessors, less than three
years old.
(3) The Fund will not invest in another investment company except as a
part of a plan of merger, acquisition or consolidation.
(4) The Fund will not buy or sell real estate.
(5) The Fund will not invest in any commodities other than gold, silver
and platinum, and will not invest in commodities futures contracts
other than gold and silver futures contracts.
(6) The Fund will not buy on margin or sell short.
(7) The Fund will not pledge or mortgage its assets, except to the extent
that writing covered call options may be deemed to be pledging or
mortgaging assets.
(8) The Fund will not borrow money or property (for example, securities),
except that as a temporary measure for extraordinary purposes or
emergencies the Fund may borrow from banks up to 5% of the value of
its total assets.
(9) The Fund will not make cash loans. However the Fund may purchase bonds
or other debt securities sold publicly, including short-term
securities which may be acquired under agreements by the sellers to
repurchase; provided that not more than 10% of the Fund's net assets
will, at any time, be subject to repurchase agreements which mature in
more than seven days. The Fund does not consider these debt securities
and other short-term investments to be loans.
(10) The Fund will not invest more than 10% of its total assets, in
restricted securities. Restricted securities are those the sale of
which is limited by contract or law. They are usually traded in
private, direct negotiations.
(11) The Fund will not act as an underwriter.
(12) The Fund will not buy any securities of a company if it knows that the
officers or directors of the Fund, who own1/2of 1% or more of the
company's securities, together own more than 5% of the company's
securities.
(13) The Fund will not invest in exploration or development programs, such
as oil or gas programs.
With respect to investment restriction (10) above, the Fund includes
securities purchased pursuant to Rule 144A under the Securities Act of 1933 in
its calculation of investments in restricted securities. With respect to
investment restriction (12), the Fund applies this restriction without
qualification to its knowledge. If a percentage limitation described above is
adhered to at the time of the investment by the Fund, a later increase or
decrease in the percentage resulting from any change in the value of the Fund's
net assets will not constitute a violation of the restriction.
OFFICERS AND DIRECTORS
The officers and Directors of the Fund, their respective offices and
principal occupations during the last five years are set forth below. Unless
otherwise noted, the address of each is 11 Hanover Square, New York, NY 10005.
RUSSELL E. BURKE III -- Director (since 1995). 36 East 72nd Street, New York,
New York 10021. He is President of Russell E. Burke III, Inc. Fine Art. From
1988 to 1991, he was President of Altman Burke Fine Arts, Inc. From 1983 to
1988, he was Senior Vice President of Kennedy Galleries. He is also a Director
of certain of the investment companies in the Bull & Bear funds complex (the
"Complex"). He was born August 23, 1946.
BRUCE B. HUBER, CLU -- Director (since 1995). 298 Broad Street, Red Bank, New
Jersey 07701. He is President of Huber Hogan Knotts Consulting, Inc., financial
consultants and insurance planners. From 1990 to March 1995, he was President of
Huber-Hogan Associates. From 1988 to 1990, he was Chairman of Bruce Huber
Associates. He is also a Director of other investment companies in the Complex.
He was born February 7, 1930.
JAMES E. HUNT -- Director (since 1995). One Dag Hammarskjold Plaza, New York,
New York 10017. He is a principal of Kenny, Kindler, Hunt & Howe, Inc.,
executive recruiting consultants. He is also a Director of other investment
companies in the Complex. He was born December 14, 1930.
FREDERICK A. PARKER, JR. -- Director (since 1995). 219 East 69th Street, New
York, New York 10021. He is President and Chief Executive Officer of American
Pure Water Corporation, a manufacturer of water purifying equipment. He is also
a Director of other investment companies in the Complex. He was born November
14, 1926.
JOHN B. RUSSELL -- Director (since 1995). 334 Carolina Meadows Villa, Chapel
Hill, North Carolina 27514. He was Executive Vice President and a Director of
Dan River, Inc., a diversified textile company, from 1969 until he retired in
1981. He is a Director of Wheelock, Inc., a manufacturer of signal products, and
a consultant
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for the National Executive Service Corps in the health care industry. He is also
a Director of other investment companies in the Complex. He was born February 9,
1923.
THOMAS B. WINMILL* -- Director (since 1995), Co-President (since 1995), Co-Chief
Executive Officer (since 1995), and General Counsel (since 1995). He is
President of Midas Management Corporation (the "Investment Manager") and the
Distributor, and Chairman of Bull & Bear Securities, Inc. ("BBSI"). He is also a
Director of certain of the investment companies in the Complex. He was
associated with the law firm of Harris, Mericle & Orr from 1984 to 1987. He is a
member of the New York State Bar. He is a brother of Mark C. Winmill. He was
born June 25, 1959.
The executive officers of Midas Fund, each of whom serves at the pleasure
of the Board of Directors, are as follows:
MARK C. WINMILL -- Co-President, Co-Chief Executive Officer, and Chief Financial
Officer (since 1995). He is Chief Financial Officer of the Investment Manager
and certain of its affiliates. He is also a Director of certain of the
investment companies in the Complex. He received his M.B.A. from the Fuqua
School of Business at Duke University in 1987. From 1983 to 1985 he was
Assistant Vice President and Director of Marketing of E.P. Wilbur & Co., Inc., a
real estate development and syndication firm and Vice President of E.P.W.
Securities, its broker/dealer subsidiary. He is the brother of Thomas B.
Winmill. He was born November 26, 1957.
THOMAS B. WINMILL -- Co-President, Co-Chief Executive Officer, and General
Counsel (see biographical information above) (since 1995).
ROBERT D. ANDERSON -- Vice Chairman (since 1995). He is Vice Chairman of the
Investment Manager and its affiliates. He is a member of the Board of Governors
of the Mutual Fund Education Alliance, and of its predecessor, the No-Load
Mutual Fund Association. He has also been a member of the District #12, District
Business Conduct and Investment Companies Committees of the National Association
of Securities Dealers, Inc. He is also a Director of certain of the investment
companies in the Complex. He was born December 7, 1929.
STEVEN A. LANDIS -- Senior Vice President (since 1995). He is Senior Vice
President of the Investment Manager and certain of its affiliates. From 1993 to
1995, he was Associate Director -- Proprietary Trading at Barclays De Zoete Wedd
Securities Inc., from 1992 to 1993 he was Director, Bond Arbitrage at WG Trading
Company, and from 1989 to 1992 he was Vice President of Wilkinson Boyd Capital
Markets. He was born March 1, 1955.
BRETT B. SNEED, CFA -- Senior Vice President (since 1995). He is Senior Vice
President of the Investment Manager and certain of its affiliates. He is a
Chartered Financial Analyst, a member of the Association for Investment
Management and Research, and a member of the New York Society of Security
Analysts. From 1986 to 1988, he managed private accounts, from 1981 to 1986, he
was Vice President of Morgan Stanley Asset Management, Inc. and prior thereto
was a portfolio manager and member of the Finance and Investment Committees of
American International Group, Inc., an insurance holding company. He was born
June 11, 1941.
WILLIAM K. DEAN, CPA -- Treasurer and Chief Accounting Officer (since 1995). He
is Treasurer and Chief Accounting Officer of the Investment Manager and its
affiliates. From 1984 to 1995 he held various positions with The Dreyfus
Corporation, a mutual fund company. He is a member of the American Institute of
Certified Public Accountants and the New York State Society of Certified Public
Accountants. He was born September 5, 1955.
WILLIAM J. MAYNARD -- Vice President and Secretary (since 1995). He is Vice
President and Secretary of the Investment Manager and its affiliates. From 1991
to 1994 he was associated with the law firm of Skadden, Arps, Slate, Meagher &
Flom. He is a member of the New York State Bar. He was born September 13, 1964.
* Thomas B. Winmill is an "interested person" of the Fund as defined by the 1940
Act, because of his positions with the Investment Manager.
Information in the following table is based on fees paid during the year
ended June 30, 1995.
Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Name of Person, Aggregate Pension or Retirement Estimated Annual Benefits Benefits Accrued as Part
Compensation Benefits Accrued as Part Upon Retirement Registrant and Investment
of Fund Expenses Company Complex Paid to
Directors
Russell E. Burke III $4,500 None None $5,500 from
Director 2 Investment Companies
Bruce B. Huber $4,500 None None $10,000 from
Director 5 Investment Companies
James E. Hunt $4,500 None None $10,000 from
Director 5 Investment Companies
Frederick A. Parker $4,500 None None $10,000 from
Director 5 Investment Companies
John B. Russell $4,500 None None $10,000 from
Director 5 Investment Companies
</TABLE>
- --------
1 Directors who are not "interested persons" of the Fund may elect to defer
receipt of fees for serving as a Director of the Fund.
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Mark C. Winmill None None None None
Co-President
Thomas B. Winmill None None None None
Director, Co-President
</TABLE>
THE INVESTMENT MANAGER
Midas Management Corporation (the "Investment Manager") acts as general
manager of the Fund, being responsible for the various functions assumed by it,
including the regular furnishing of advice with respect to portfolio
transactions. The Investment Manager also furnishes or obtains on behalf of the
Fund all services necessary for the proper conduct of the Fund's business and
administration. As compensation for its services to the Fund, the Investment
Manager is entitled to a fee, payable monthly, based upon the Fund's average
daily net assets. Under the Fund's Investment Management Agreement dated August
25, 1995, 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. The foregoing fees are higher than fees paid by
most other investment companies.
Under the Investment Management Agreement, the Fund assumes and shall pay
all the expenses required for the conduct of its business including, but not
limited to, (a) salaries of administrative and clerical personnel; (b) brokerage
commissions; (c) taxes and governmental fees; (d) costs of insurance and
fidelity bonds; (e) fees of the transfer agent, custodian, legal counsel and
auditors; (f) association fees; (g) costs of preparing, printing and mailing
proxy materials, reports and notices to shareholders; (h) costs of preparing,
printing and mailing the prospectus and statement of additional information and
supplements thereto; (I) payment of dividends and other distributions; (j) costs
of stock certificates; (k) costs of Board and shareholders meetings; (l) fees of
the independent directors; (m) necessary office space rental; (n) all fees and
expenses (including expenses of counsel) relating to the registration and
qualification of shares of the Fund under applicable federal and state
securities laws and maintaining such registrations and qualifications; and (o)
such non-recurring expenses as may arise, including, without limitation,
actions, suits or proceedings affecting the Fund and the legal obligation which
the Fund may have to indemnify its officers and directors with respect thereto.
If requested by the Fund's Board of Directors, the Investment Manager may
provide other services to the Fund such as, without limitation, the functions of
billing, accounting, certain shareholder communications and services,
administering state and Federal registrations, filings and controls and other
administrative services. Any services so requested and performed will be for the
account of the Fund and the costs of the Investment Manager in rendering such
services shall be reimbursed by the Fund, subject to examination by those
directors of the Fund who are not interested persons of the Investment Manager
or any affiliate thereof.
The Fund's Investment Management Agreement continues from year to year
only if a majority of the Fund's directors (including a majority of
disinterested directors) approve. The Fund's Investment Management Agreement may
be terminated by either the Fund or the Investment Manager on 60 days' written
notice to the other, and terminates automatically in the event of its
assignment.
The Investment Management Agreement provides that the Investment Manager
shall waive all or part of its fee or reimburse the Fund monthly if and to the
extent the aggregate operating expenses of the Fund exceed the most restrictive
limit imposed by any state in which shares of the Fund are qualified for sale or
such lesser amount as may be agreed to by the Fund's Board of Directors and the
Investment Manager. Currently, the most restrictive state imposed limit
applicable to the Fund is 2.5% of the first $30 million of the Fund's average
daily net assets, 2.0% of the next $70 million of its average daily net assets
and 1.5% of its average daily net assets in excess of $100 million. Certain
expenses, such as brokerage commissions, taxes, interest, distribution fees,
certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. In addition, the
Investment Manager also has agreed to be subject to the following expense
limitation for a period of two years from the effective date of the Investment
Management Agreement, which limitation is calculated as an amount not in excess
of the fee payable by the Fund if and to the extent that the aggregate operating
expenses of the Fund (excluding interest expense, Rule 12b-1 Plan of
Distribution fees, taxes and brokerage fees and commissions) are in excess of
2.0% of the first $10 million of average net assets of the Fund, plus 1.5% of
the next $20 million of average net assets, plus 1.25% of average net assets
above $30 million.
For the years ended December 31, 1992, 1993 and 1994, Excel Advisors,
Inc., the Fund's previous investment adviser, earned, before reimbursement of
certain expenses, $54,991, $72,039 and $85,126, respectively, in fees from the
Fund. These fees were calculated pursuant to the same fee schedule under which
the Investment Manager's fee is currently calculated. For the years ended
December 31, 1992, 1993 and 1994, Excel Advisors, Inc. reimbursed $15,536, $0
and $0, respectively, to the Fund for expenses in excess of expense limitations.
The Investment Manager, a registered investment adviser, is a
wholly-owned subsidiary of Bull & Bear Group, Inc. ("Group"). The other
principal subsidiaries of Group include Investor Service Center, Inc., a
registered broker-dealer, and Bull & Bear Securities, Inc., a registered
broker-dealer providing discount brokerage services.
Group is a publicly-owned company whose securities are listed on the
Nasdaq and traded in the over-the-counter market. Bassett S. Winmill may be
deemed a controlling person of Group on the basis of his ownership of 100% of
Group's voting stock and, therefore, of the Investment Manager. The Bull & Bear
Funds, each of which is managed by the Investment Manager, had net assets in
excess of $240,000,000 as of August 4, 1995.
4
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THE SUBADVISER AND THE SUBADVISORY AGREEMENT
The Investment Manager has entered into a subadvisory agreement with Lion
Resource Management Limited (the "Subadviser") for certain subadvisory services.
The Subadviser advises and consults with the Investment Manager regarding the
selection, clearing and safekeeping of the Fund's portfolio investments and
assists in pricing and generally monitoring such investments. The Subadviser
also provides the Investment Manager with advice as to allocating the Fund's
portfolio assets among various countries, including the United States, and among
equities, bullion, and other types of investments, including recommendations of
specific investments.
In consideration of the Subadviser's services, the Investment Manager,
and not the Fund, pays to the Subadviser a percentage of the Investment
Manager's Net Fees. "Net Fees" are defined as the actual amounts received by the
Investment Manager as compensation less reimbursements, if any, pursuant to the
guaranty of the Investment Management Agreement and waivers of such compensation
by the Investment Manager. The amount of the percentage is determined by the
grid and accompanying definitions set forth as follows:
<TABLE>
<CAPTION>
RELATIVE PERFORMANCEA
<S> <C> <C> <C>
TOTAL NET ASSETSB More than 50 basis points Within 50 basis points More than 50 basis points
better than BTR of BTR below BTR
less or = $15,000,000 30% 20% 10%
more than $15,000,000 and less or = $50,000,000 40% 30% 20%
less than $50,000,000 50% 40% 30%
</TABLE>
The Subadvisory Agreement is not assignable and automatically terminates
in the event of its assignment, or in the event of the termination of the
Investment Management Agreement. The Subadvisory Agreement may also be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the Fund, by the Board of Directors or by a vote of Fund
shareholders. The Subadvisory Agreement provides that the Subadviser shall not
be liable to the Fund for any error of judgment or mistake of law or for any
loss suffered by the Fund in connection with the matters to which the
Subadvisory Agreement relates. Nothing contained in the Subadvisory Agreement,
however, shall be construed to protect the Subadviser against liability to the
Fund by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties or by reason of its reckless disregard of obligations
and duties under the Subadvisory Agreement.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Fund may refer to the
Fund's "average annual total return" and "cumulative total return." All such
quotations are based upon historical earnings and are not intended to indicate
future performance. The investment return on and principal value of an
investment in the Fund will fluctuate, so that the investor's shares when
redeemed may be worth more or less than their original cost.
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;
5
<PAGE>
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of
the period of a hypothetical $1,000
payment made at the beginning of such
period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains 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 following table sets forth the average annual total return for the
Fund for the periods ended December 31, 1994, as set forth below:
Periods Ended December 31, 1994
Since inception (Jan. 8, 1986) 6.66%
Five Years 7.68%
One Year (17.27%)
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 capital gains 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 period beginning at the
inception of the Fund (January 8, 1986) and ending December 31, 1994 is 78.67%.
Effective August 28, 1995, the maximum initial sales charge of 4.5% of
the public offering price charged in connection with the sale of Fund shares was
discontinued.
Average Annual Total Returns For Periods Ended June 30, 1995 -- Assuming No
Initial Sales Charge
Since inception (Jan. 8, 1986) 10.49%
Five Years 14.01%
One Year 23.69%
Assuming no initial sales charge, the cumulative return for the Fund for
the period since the inception of the Fund (January 8, 1986), for the five
years, and for the one year ending June 30, 1995 is, respectively, 158.07%,
92.60% and 23.69%.
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 data.
Bloomberg, a computerized market data source and portfolio analysis system.
Bond Buyer Municipal Index (20 year) Bond. An index of municipal bonds provided
by a national periodical reporting on municipal securities.
6
<PAGE>
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.
Composite Index -- 70% Standard & Poor's 500 Composite Stock Price Index ("S&P
500") and 30% Nasdaq Industrial Index.
Composite Index -- 35% S&P 500 Index and 65% Salomon Brothers High Grade Bond
Index.
Composite Index -- 65% S&P 500 Index and 35% Salomon Brothers High Grade Bond
Index.
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.
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 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 3000 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.
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 -- is a market-weighted index that
contains approximately 4700 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.
S&P 500 -- is a well diversified list of 500 companies representing the U.S.
stock market.
7
<PAGE>
Standard & Poor's 100 Composite Stock Price Index -- is a well diversified list
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.
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.
USA Today, a national newspaper that periodically reports mutual fund
performance data.
U.S. News and World Report, a national weekly that periodically reports mutual
fund performance data.
Wall Street Journal, a nationally distributed newspaper which regularly covers
financial news.
Wilshire 5000 Equity Indexes -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the S&P 500.
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement, Investor Service Center acts as the
Distributor of the Fund's shares. Under the Distribution Agreement, the
Distributor shall use its best efforts, consistent with its other businesses, to
sell shares of the Fund. Fund shares are sold continuously. 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 shall not
be materially increased without the affirmative vote of the holders of a
majority of the outstanding voting securities of the Fund and (4) while the Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund shall be committed to the discretion of the
Directors who are not interested persons of the Fund.
With the approval of the vote of a majority of the entire Board of
Directors and of the Plan Directors of the Fund, the Distributor has entered
into a related agreement with Hanover Direct Advertising Company, Inc. ("Hanover
Direct"), a wholly-owned subsidiary of Group, in an attempt to obtain cost
savings on the marketing of the Fund's shares. Hanover Direct will provide
services to the Distributor on behalf of the Fund at standard industry rates,
which includes commissions. The amount of Hanover Direct's commissions over its
cost of providing Fund marketing will be credited to the Fund's distribution
expenses and represent a saving on marketing, to the benefit of the Fund. To the
extent Hanover Direct's costs exceed such commissions, Hanover Direct will
absorb any of such costs.
It is the opinion of the Board of Directors that the Plan is necessary to
maintain a flow of subscriptions to offset redemptions. Redemptions of mutual
fund shares are inevitable. If redemptions are not offset by subscriptions, a
fund shrinks in size and its ability to maintain quality shareholder services
declines. Eventually, redemptions could cause a fund to become uneconomic.
Furthermore, an extended period of significant net redemptions may be
detrimental to orderly management of the portfolio. The offsetting of
redemptions through sales efforts benefits shareholders by maintaining the
viability of a fund. In periods where net sales are achieved, additional
benefits may accrue relative to portfolio management and increased shareholder
servicing capability. Increased assets enable the Fund to further diversify its
portfolio, which spreads and reduces investment risk while increasing
opportunity. In addition, increased assets enable the establishment and
maintenance of a better shareholder servicing staff which can respond more
effectively and promptly to shareholder inquiries and needs. While net increases
in total assets are desirable, the primary goal of the Plan is to prevent a
decline in assets serious enough to cause disruption of portfolio management and
to impair the Fund's ability to maintain a high level of quality shareholder
services.
The Plan increases the overall expense ratio of the Fund; however, a
substantial decline in Fund assets is likely to increase the portion of the
Fund's expense ratio comprised of management fees and fixed costs (i.e., costs
other than the Plan), while a substantial increase in Fund assets would be
expected to reduce the portion of the expense ratio comprised of management fees
(reflecting a larger portion of the assets falling within fee scale-down
levels), as well as of fixed costs. Nevertheless, the net effect of the Plan is
to increase overall expenses. To the extent the Plan maintains a flow of
subscriptions to the Fund, there results an immediate and direct benefit to the
Investment Manager by maintaining or increasing its fee revenue base,
diminishing the obligation, if any, of the Investment Manager to make an expense
reimbursement to the Fund, and eliminating or reducing any contribution made by
the Investment Manager to marketing expenses.
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Other than as described herein, no Director or interested person of the Fund has
any direct or indirect financial interest in the operation of the Plan or any
related agreement.
The Glass-Steagall Act prohibits certain banks from engaging in the
business of underwriting, selling, or distributing securities such as shares of
a mutual fund. Although the scope of this prohibition under the Glass-Steagall
Act has not been fully defined, in the Distributor's opinion it should not
prohibit banks from being paid for administrative and accounting services under
the Plan. If, because of changes in law or regulation, or because of new
interpretations of existing law, a bank or the Fund were prevented from
continuing these arrangements, it is expected that other arrangements for these
services will be made. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
The Fund's portfolio securities are traded in the over the counter market
and are valued at the mean between the current bid and asked prices. Securities
for which such prices are not readily available or reliable and other assets may
be valued as determined in good faith by or under the general supervision of the
board of Directors. Short term securities are valued either at amortized cost or
at original cost plus accrued interest, both of which approximate current value.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
regular trading on the New York Stock Exchange ("NYSE") (currently 4:00 p.m.
eastern time) each business day of the Fund. The following are not business days
of the Fund: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Because a
substantial portion of the Fund's net assets may be invested in gold, platinum
and silver bullion, foreign securities and/or foreign currencies, trading in
each of which is also conducted in foreign markets which are not necessarily
closed on days when the NYSE is closed, the net asset value per share may be
significantly affected on days when shareholders have no access to the Fund or
its transfer agent.
Securities owned by the Fund are valued by various methods depending on
the market or exchange on which they trade. Securities traded on the NYSE, the
American Stock Exchange and the Nasdaq are valued at the last sales price, or if
no sale has occurred, at the mean between the current bid and asked prices.
Securities traded on other exchanges are valued as nearly as possible in the
same manner. Securities traded only OTC are valued at the mean between the last
available bid and ask quotations, if available, or at their fair value as
determined in good faith by or under the general supervision of the Board of
Directors. Short term securities are valued either at amortized cost or at
original cost plus accrued interest, both of which approximate current value.
Foreign securities and bullion, if any, are valued at the price in a
principal market where they are traded, or, if last sale prices are unavailable,
at the mean between the last available bid and ask quotations. Foreign security
prices are expressed in their local currency and translated into U.S. dollars at
current exchange rates. Any changes in the value of forward contracts due to
exchange rate fluctuations are included in the determination of the net asset
value. Foreign currency exchange rates are generally determined prior to the
close of trading on the NYSE. Occasionally, events affecting the value of
foreign securities and such exchange rates occur between the time at which they
are determined and the close of trading on the NYSE, which events will not be
reflected in a computation of the Fund's net asset value on that day. If events
materially affecting the value of such securities or exchange rates occur during
such time period, the securities will be valued at their fair value as
determined in good faith under the direction of the Fund's Board of Directors.
Price quotations generally are furnished by pricing services, which may
also use a matrix system to determine valuations. This system considers such
factors as security prices, yields, maturities, call features, ratings, and
developments relating to specific securities in arriving at valuations.
PURCHASE OF SHARES
The Fund will not issue shares for consideration other than cash. Third
party checks, except those payable to an existing shareowner who is a natural
person (as opposed to a corporation or partnership), credit cards, and cash will
not be accepted. The Fund reserves the right to reject any order, to cancel any
order due to nonpayment, to accept initial orders by telephone or telegram, and
to waive the limit on subsequent orders by telephone, with respect to any person
or class of persons. Orders to purchase shares are not binding on the Fund until
they are confirmed by the Transfer Agent. In order to permit the Fund's
shareholder base to expand, to avoid certain shareholder hardships, to correct
transactional errors, and to address similar exceptional situations, the Fund
may waive or lower the investment minimums with respect to any person or class
of persons.
ALLOCATION OF BROKERAGE
The Fund seeks to obtain prompt execution of orders at the most favorable
net prices. The Fund is not currently obligated to deal with any particular
broker, dealer or group thereof. Fund transactions in debt and OTC securities
generally are with dealers acting as principals at net prices with little or no
brokerage costs. In certain circumstances, however, the Fund may engage a broker
as agent for a commission to effect transactions for such securities. Purchases
of securities from underwriters include a commission or concession paid to the
underwriter, and purchases from dealers include a spread between the bid and
asked price. While the Investment Manager generally seeks reasonably competitive
spreads or commissions, payment of the lowest spread or commission is not
necessarily consistent with obtaining the best net results. Accordingly, the
Fund will not necessarily be paying the lowest spread or commission available.
The Investment Manager directs portfolio transactions to broker/dealers
for execution on terms and at rates which it believes, in good faith, to be
reasonable in view of the overall nature and quality of services provided by a
particular broker/dealer, including brokerage and research services, sales of
Fund shares, and allocation of commissions to the Fund's Custodian. With respect
to brokerage and research services, consideration may be given in the selection
of broker/dealers to brokerage or research provided and payment may be made for
a fee higher than that charged by another broker/dealer which does not furnish
brokerage or research services or which furnishes brokerage or research services
deemed to be of lesser value, so long as the criteria of Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "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
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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
on-going relationships with quality brokers.
Currently, it is not possible to determine the extent to which
commissions that reflect an element of value for brokerage or research services
might exceed commissions that would be payable for execution alone, nor
generally can the value of such services to the Fund be measured, except to the
extent such services have a readily ascertainable market value. There is no
certainty that services so purchased, or the sale of Fund shares, if any, will
be beneficial to the Fund. Such services being largely intangible, no dollar
amount can be attributed to benefits realized by the Fund or to collateral
benefits, if any, conferred on affiliated entities. These services may include
(1) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities and the availability of
securities or purchasers or sellers of securities, (2) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). Pursuant to arrangements with certain
broker/dealers, such broker/dealers provide and pay for various computer
hardware, software and services, market pricing information, investment
subscriptions and memberships, and other third party and internal research of
assistance to the Investment Manager in the performance of its investment
decision-making responsibilities for transactions effected by such
broker/dealers for the Fund. Commission "soft dollars" may be used only for
"brokerage and research services" provided directly or indirectly by the
broker/dealer and under no circumstances will cash payments be made by such
broker/dealers to the Investment Manager. To the extent that commission "soft
dollars" do not result in the provision of any "brokerage and research services"
by a broker/dealer to whom such commissions are paid, the commissions,
nevertheless, are the property of such broker/dealer. To the extent any such
services are utilized by the Investment Manager for other than the performance
of its investment decision-making responsibilities, the Investment Manager makes
an appropriate allocation of the cost of such services according to their use.
Bull & Bear Securities, Inc. ("BBSI"), a wholly owned subsidiary of Group
and the Investment Manager's affiliate, provides discount brokerage services to
the public as an introducing broker clearing through unaffiliated firms on a
fully disclosed basis. The Investment Manager is authorized to place Fund
brokerage through BBSI at its posted discount rates and indirectly through a
BBSI clearing firm. The Fund will not deal with BBSI in any transaction in which
BBSI acts as principal. The clearing firm will execute trades in accordance with
the fully disclosed clearing agreement between BBSI and the clearing firm. BBSI
will be financially responsible to the clearing firm for all trades of the Fund
until complete payment has been received by the Fund or the clearing firm. BBSI
will provide order entry services or order entry facilities to the Investment
Manager, arrange for execution and clearing of portfolio transactions through
executing and clearing brokers, monitor trades and settlements and perform
limited back-office functions including the maintenance of all records required
of it by the National Association of Securities Dealers, Inc. ("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 procedures in conformity with
Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to
BBSI are reasonable and fair. Although BBSI's posted discount rates may be lower
than those charged by full cost brokers, such rates may be higher than some
other discount brokers and certain brokers may be willing to do business at a
lower commission rate on certain trades. The Fund's Board of Directors 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.
Investment decisions for the Fund and for the other Funds managed by the
Investment Manager or its affiliates are made independently based on each Fund's
investment objectives and policies. The same investment decision, however, may
occasionally be made for two or more Funds. In such a case, the Investment
Manager may combine orders for two or more Funds for a particular security if it
appears that a combined order would reduce brokerage commissions and/or result
in a more favorable transaction price. Combined purchase or sale orders are then
averaged as to price and allocated as to amount according to a formula deemed
equitable to each Fund. While in some cases this practice could have a
detrimental effect upon the price or quantity available of the security with
respect to the Fund, the Investment Manager believes that the larger volume of
combined orders can generally result in better execution and prices.
The Fund is not obligated to deal with any particular broker, dealer or
group thereof. Certain broker/dealers that the Fund does business with may, from
time to time, own more than 5% of the publicly traded Class A non-voting Common
Stock of Group, the parent of the Investment Manager, and may provide clearing
services to BBSI.
The Fund's portfolio turnover rate may vary from year to year and will
not be a limiting factor when the Investment Manager deems portfolio changes
appropriate. The portfolio turnover rate is calculated by dividing the lesser of
the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of securities in the
portfolio during the year.
From time to time, certain brokers may be paid a fee for record keeping,
shareholder communications and other services provided by them to investors
purchasing shares of the Fund through the "no transaction fee" programs offered
by such brokers. This fee is based on the average daily value of the investments
in the Fund made by such brokers on behalf of investors participating in their
"no transaction fee" programs. The Fund's directors have further authorized the
Investment Manager to place a portion of the Fund's brokerage transactions with
any such brokers, if the Investment Manager reasonably believes that, in
effecting the Fund's transactions in portfolio securities, such broker or
brokers are able to provide the best execution of orders at the most favorable
prices. Commissions earned by such brokers from executing portfolio transactions
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.
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DISTRIBUTIONS AND TAXES
If the U.S. Postal Service cannot deliver a shareholder's check, or if a
shareholder's check remains uncashed for six months, the Fund reserves the right
to credit the shareholder's account with additional shares of the Fund at the
then current net asset value in lieu of the cash payment and to thereafter issue
such shareholder's distributions in additional shares of the Fund.
The Fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"). To qualify for this treatment, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short term
capital gain and net gains from certain foreign currency transactions) and must
meet several additional requirements. Among these requirements are the
following: (1) at least 90% of the Fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies, or
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Fund must derive less than 30% of its
gross income each taxable year from the sale or other disposition of securities,
or any of the following, that were held for less than three months - options,
futures, or forward contracts (other than those on foreign currencies), or
foreign currencies (or options, futures, or forward contracts thereon) that are
not directly related to the Fund's principal business of investing in securities
(or options and futures with respect thereto) ("Short-Short Limitation"); and
(3) the Fund's investments must satisfy certain diversification requirements. In
any year during which the applicable provisions of the Code are satisfied, the
Fund will not be liable for Federal income taxes on net income and gains that
are distributed to its shareholders. If for any taxable year the Fund does not
qualify for treatment as a RIC, all of its taxable income will be taxed at
corporate rates.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or in additional Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by the Fund from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
A loss on the 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 seller received any capital gain distributions attributable to those
shares.
Any dividend or other distribution will have the effect of reducing the
net asset value of the Fund's shares on the payment date by the amount thereof.
Furthermore, any such dividend or other distribution, although similar in effect
to a return of capital, will be subject to taxes. Dividends and other
distributions may also be subject to state and local taxes.
The Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year 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, income and
gain not distributed or subject to corporate tax in the prior calendar year. The
Fund intends to avoid imposition of this excise tax by making adequate
distributions.
Dividends and interest received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible to, and may, file an election
with the Internal Revenue Service that would enable its shareholders, in effect,
to receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions' income taxes paid by it. Pursuant to the election, the Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by the shareholder, the shareholder's proportionate share of those taxes, (2)
treat the shareholder's share of those taxes and of any dividend paid by the
Fund that represents income from foreign or U.S. possessions sources as the
shareholder's own income from those sources, and (3) either deduct the taxes
deemed paid by the shareholder in computing the shareholder's taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the shareholder's Federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of the
Fund's income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to Federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain from disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If the Fund invests in a PFIC and elects to treat the PFIC
as a "qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long term capital gain over net short term
capital loss), even if they are not distributed to the Fund; those amounts would
be subject to the distribution requirements described above. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Fund, would
be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-tomarket," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
Options, Futures, and Forward Contracts. The Fund's use of hedging strategies,
such as selling (writing) and purchasing options and futures contracts and
entering into forward contracts, involves complex rules that will determine for
income tax purposes the timing of recognition and character of the gains and
losses the Fund realizes in connection therewith. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations), and
income from transactions in options, futures, and forward contracts derived by
the Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options, futures, and forward contracts
(other than those
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on foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures, and forward contracts on foreign currencies,
also will be subject to the Short-Short Limitation if they are held for less
than three months and are not directly related to the Fund's principal business
of investing in securities (or options and futures with respect thereto).
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of the that limitation. The
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not so qualify, it may be
forced to defer the closing out of certain options, futures, and forward
contracts beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.
The foregoing discussion of Federal tax consequences is based on the tax
law in effect on the date of this Statement of Additional Information, which is
subject to change by legislative, judicial, or administrative action. The Fund
may be subject to state or local tax in jurisdictions in which it may be deemed
to be doing business.
REPORTS TO SHAREHOLDERS
The Fund issues, at least semi-annually, reports to its shareholders
including a list of investments held and statements of assets and liabilities,
income and expense, and changes in net assets of the Fund. The Fund's fiscal
year ends on December 31.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, P.O. Box 2197, Boston, MA 02111 has been
retained by the Fund to act as Custodian of the Fund's investments and may
appoint one or more subcustodians. The Custodian also performs certain
accounting services for the Fund. As part of its agreement with the Fund, the
Custodian may apply credits or charges for its services to the Fund for,
respectively, positive or deficit cash balances maintained by the Fund with the
Custodian. DST Systems, Inc., P.O. Box 419789, Kansas City, Missouri 64141-6789,
is the Fund's Transfer and Dividend Disbursing Agent.
AUDITORS
Tait, Weller & Baker, Two Penn Center, Suite 700, Philadelphia, PA
19101-1707, are the independent accountants for the Fund. Financial statements
of the Fund are audited annually.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended December 31,
1994, 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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APPENDIX--DESCRIPTIONS OF BOND RATINGS
Moody's Investors Service, Inc.'s Corporate Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality and carry the
smallest degree of investment risk. Interest payments are protected by a large
or an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards
and, together with the Aaa group, comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities of fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the longer term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Standard & Poor's Corporate Bond Ratings
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA Bonds rated AA also qualify as high quality debt obligations. Capacity to pay
interest and repay principal is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB Bonds rated BBB are regarded as having adequate capacity to pay interest and
repay principal. Whereas they normally exhibit protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this capacity
than for bonds in higher rated categories.
BB, B, CCC, CC and C Bonds rated BB, B, CCC, CC and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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