As filed with the Securities and Exchange Commission on March 1, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933[X]
Midas Fund, Inc. (File No. 2-98229): Post-Effective Amendment No. 18
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940[X]
Midas Fund, Inc. (File No. 811-4316): Post-Effective Amendment No. 18
MIDAS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
11 HANOVER SQUARE, NEW YORK, NEW YORK, 10005 (Address of
Principal Executive Offices) (Zip Code)
(212) 785-0900
(Registrant's Telephone Number, including Area Code)
WILLIAM J. MAYNARD
11 HANOVER SQUARE, NEW YORK, NEW YORK, 10005
(Name and Address of Agent for Service)
Copy to:
R. Darrell Mounts, Esq.
Kirkpatrick & Lockhart
1800 M Street, N.W.
South Lobby --Ninth Floor
Washington, D.C. 20036-5891
immediately upon filing pursuant to paragraph (b) of rule 485
on (specify date) pursuant to paragraph (b) of rule 485 60
days after filing pursuant to paragraph (a) of rule 485
X on May 1, 1996 pursuant to paragraph (a) of rule 485
---------
The Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. A Rule 24f-2 Notice for the Registrant's most recent fiscal year
was filed with the Securities and Exchange Commission on February 29, 1996.
<PAGE>
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
Item No.
of Form N-lA Caption in Prospectus
1 Cover Page
2 "Fees and Expenses"
3 "Financial Highlights"; "Performance Information"
4 "The Fund's Investment Program"; "Risk Factors"
5 "The Investment Manager and Subadviser"; "Custodian and Transfer Agent"
5A "Performance Information"
6 Cover Page; "The Investment Manager and Subadviser"; "Distributions and
Taxes"; "Determination of Net Asset Value"; "Shareholder Services"
7 "How to Purchase Shares"; "Shareholder Services"; "Determination of Net
Asset Value"; "Distribution of Shares"
8 "How to Redeem Shares"; "Determination of Net Asset Value"
9 Not Applicable
Caption in Statement of Additional Information
10 Cover Page
11 "Table of Contents"
12 Not Applicable
13 "Investment Restrictions"; "Allocation of Brokerage"
14 "Officers and Directors"
15 "Officers and Directors"; "The Investment Manager"
16 "Officers and Directors"; "The Investment Manager"; "The Subadviser and the
Subadvisory Agreement"; "Distribution of Shares"; "Custodian, Transfer and
Dividend Disbursing Agent"; "Auditors"
17 "Allocation of Brokerage"
18 Not Applicable
19 "Purchase of Shares"
20 "Distributions and Taxes"
21 Not Applicable
22 "Calculation of Performance Data"
23 "Financial Statements"
MIDAS FUND
PROSPECTUS DATED MAY 1, 1996
Midas Fund, Inc. (the "Fund") seeks primarily capital appreciation and
protection against inflation and, secondarily, current income. Under normal
circumstances, the Fund invests at least 65% of its total assets in (i)
securities of companies primarily involved, directly or indirectly, in the
business of mining, processing, fabricating, distributing or otherwise dealing
in gold, silver, platinum or other natural resources and (ii) gold, silver and
platinum bullion. Such investments are considered speculative and subject to
substantial price fluctuations and risks. There can be no assurance that the
Fund will achieve its investment objectives.
Midas Management Corporation is the Fund's Investment Manager, and Lion
Resource Management Limited is the Fund's Subadviser. Since 1992, Mr. Kjeld
Thygesen, Managing Director of the Subadviser, has been a portfolio manager of
the Fund. Based in London (U.K.), the Subadviser is a part of Lion Mining Group,
which specializes in gold mining and resource company investment management,
corporate finance and consulting.
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NEWSPAPER LISTING. Shares of the Fund are
sold at the net asset value per share which
is shown daily in the mutual fund section of
newspapers nationwide under the heading
"Midas Fund."
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This prospectus contains information you should know about the Fund,
which is an open-end, management investment company, before investing. You
should read it to decide if an investment in the Fund is right for you. Please
keep it with your investment records for future reference. The Fund has filed a
Statement of Additional Information (also dated May 1, 1996) with the Securities
and Exchange Commission. The Statement of Additional Information is available
free of charge by calling 1-800-400-MIDAS, and is
<PAGE>
incorporated by reference in this prospectus. Fund shares are not
bank deposits or obligations of, or guaranteed or endorsed by any
bank or any affiliate of any bank, and are not Federally insured
by, obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2
<PAGE>
EXPENSE TABLE. The tables and example below are designed to help you understand
the various costs and expenses that you will bear directly or indirectly as an
investor in the Fund. A $2 monthly account fee is charged if your average
monthly balance is less than $100, unless you are in the Automatic Investment
Program (see "How to Purchase Shares").
SHAREHOLDER TRANSACTION EXPENS
ES
Sales Load Imposed on Purchases..................NONE
Sales Load Imposed on Reinvested Divi
dends............................................NONE
Deferred Sales Load..............................NONE
Redemption Fee within 30 days of
purchase (as a percentage of net asset
value of shares redeemed).......................1.00%
Redemption Fee after 30 days of
purchase.........................................NONE
Exchange Fee.............................................NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees ................................1.00%
12b-1 Fees......................................0.25%
Other Expenses .................................1.01%
Total Fund Operating Expenses...................2.26%
EXAMPLE 1 3 5 10
- - - --
year years years years
$23 $71 $121 $260
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and a
redemption at the end of each time period...............................
The example set forth above assumes reinvestment of all dividends and other
distributions and uses an assumed 5% annual rate of return as required by the
Securities and Exchange Commission ("SEC"). THE EXAMPLE IS AN ILLUSTRATION ONLY
AND SHOULD NOT BE CONSIDERED AN INDICATION OF PAST OR FUTURE RETURNS AND
EXPENSES. ACTUAL RETURNS AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The percentages given for annual Fund expenses are based on the Fund's operating
expenses and average daily net assets during its fiscal year ended December 31,
1995. Long term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.'s ("NASD") rules regarding investment companies. "Other
Expenses" includes amounts paid for certain custodian, accounting,
administrative and shareholder services, and does not include interest expense
from the Fund's bank borrowing.
FINANCIAL HIGHLIGHTS are presented below for a share of capital stock
outstanding throughout each period since the Fund's inception. The following
information is supplemental to the Fund's financial statements and report
thereon of Tait, Weller & Baker, independent accountants, appearing in the
December 31, 1995 Annual
3
<PAGE>
Report to Shareholders and incorporated by reference in the Statement of
Additional Information.
Years Ended December 31,
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986*
---- ---- ---- ---- ---- ---- ---- ---- ---- -----
PER SHARE DATA**
Net asset value, beginning of y$3.32 $4.16 $2.35 $2.55 $2.59 $3.12 $2.58 $3.16 $2.63 $2.33
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) (0.06) (0.05) (0.01) 0.01 0.03 - (0.01) (0.02) 0.00 (0.01)
Net realized and unrealized (0.67)
------
investments.................gain1.28s 2.34 (0.19) (0.04) (0.53) 0.57 (0.58) 0.92 0.31
---- ---- ------ ------ ------ ---- ------ ---- ----
Total from investment operatio1.22 (0.72) 2.33 (0.18) (0.01) (0.53) 0.56 (0.60) 0.92 0.30
Less distributions:
Dividends from net investment incom- - (0.52) (0.02) (0.03) - - - - -
Distributions from net realize(0.29)s(0.12) - - - - - - (0.33) -
Return of capital distributions - - - - - - - - (0.06) -
Total distributions....... (0.29) (0.12) (0.52) (0.02) (0.03) 0.00 0.00 0.00 (0.39) 0.00
------ ------ ------ ------ ------ ---- ---- ---- ------ ----
Net asset value, end of year $4.25 $3.32 $4.16 $2.35 $2.55 $2.59 $3.12 $2.56 $3.16 $2.63
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN................ 36.73%(17.27)% 99.24% (7.16)% (0.20)% (16.99)% 21.88% (18.99)% 34.77% 12.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 0$15,753 $7,052 $10,357 $4,943 $8,202 $7,571 $11,168 $12,726 $19,145 $7,367
Ratio of expenses to average
sets(a):.................... ne2.26% 2.15% 2.18% 2.25% 2.25% 2.25% 2.20% 1.82% 1.79% 1.97%
Ratio of net investment inco 1.26)%
average net assets(b):......m(1.47)%( (0.25)% 0.56% 1.10% 0.06% (0.32)% (0.42)% 0.36% (1.05)%
Portfolio Turnover ......... 47.72% 52.62% 63.44% 72.23% 77.26% 58.46% 23.60% 7.52% 27.29% 8.28%
- ----------------------------------
</TABLE>
*From commencement of operations, January 8, 1986. **Per share net investment
income (loss) and net realized and unrealized gain (loss) on investments have
been computed using the average number of shares outstanding. (a) Ratio prior to
reimbursement by the Investment Manager was 2.47%, 2.51%, 2.53%, and 2.52% for
1990, 1991, 1992, and 1995, respectively. (b) Ratio prior to reimbursement by
the Investment Manager was (0.16)%, 0.83%, 0.28%, and (1.73)% for 1990, 1991,
1992, and 1995, respectively.
4
<PAGE>
TABLE OF CONTENTS
Transaction and Operating Expenses.........Distributions and Taxes..............
Financial Highlights.......................Determination of Net Asset Value.....
The Fund's Investment Program..............The Investment Manager and Subadviser
Risk Factors...............................Distribution of Shares...............
How to Purchase Shares.....................Performance Information..............
Shareholder Services.......................Capital Stock........................
How to Redeem Shares.......................Custodian and Transfer Agent.........
THE FUND'S INVESTMENT PROGRAM
The investment objectives of the Fund are primarily capital appreciation and
protection against inflation and, secondarily, current income. The Fund seeks to
achieve these objectives by investing, under normal circumstances, at least 65%
of its total assets in (i) securities of companies primarily involved, directly
or indirectly, in the business of mining, processing, fabricating, distributing
or otherwise dealing in gold, silver, platinum or other natural resources and
(ii) gold, silver and platinum bullion. Additionally, up to 35% of the Fund's
total assets may be invested in securities of companies that derive a portion of
their gross revenues, directly or indirectly, from the business of mining,
processing, fabricating, distributing or otherwise dealing in gold, silver,
platinum or other natural resources, in securities of selected growth companies,
and in securities issued by the U.S. Government, its agencies or
instrumentalities. For purposes of the foregoing, natural resources include, but
are not limited to, ferrous and non-ferrous metals (such as iron, aluminum and
copper), strategic metals (such as uranium and titanium), hydrocarbons (such as
coal, oil and natural gases), chemicals, forest products real estate, food
products and other basic commodities, which historically have been produced and
marketed profitably during periods of rising inflation. See "Risk Factors."
The Fund retains the flexibility to respond promptly to changes in market
and economic conditions and the Investment Manager may employ a temporary
defensive investment strategy if it determines such a strategy to be warranted.
Under a defensive strategy, the Fund may hold cash and/or invest any portion or
all of its assets in high quality money market instruments of U.S. or foreign
government or corporate issuers. To the extent the Fund adopts a temporary
defensive posture, it will not be invested so as to directly achieve its
investment objectives. In addition, pending investment of proceeds from new
sales of Fund shares or in order to meet ordinary daily cash needs, the Fund may
hold cash and may invest in foreign or domestic high quality money market
instruments. Money market instruments in which the Fund may invest include, but
are not limited to, U.S. or foreign government securities; high grade commercial
paper; bank certificates of deposit; bankers' acceptances; and repurchase
agreements relating to any of the foregoing. Repurchase agreements are
transactions in which the Fund purchases securities from a bank or recognized
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.
Repurchase agreements carry certain risks not associated with direct investments
in securities, including possible decline in the market value of the underlying
securities and delays and cost to the Fund if the other party to the 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.
DEBT SECURITIES. When seeking to achieve its secondary objective of current
income, the Fund will normally invest in investment grade debt securities.
Investment grade securities are those rated in the top four categories by a
nationally recognized statistical rating organization such as Standard & Poor's
Ratings Services ("Standard & Poor's") or Moody's Investors Service, Inc.,
("Moody's") or, if unrated, are determined by the Investment Manager to be of
comparable quality. Moody's considers securities in the fourth highest category
to have speculative characteristics. Such securities may include long,
intermediate and short maturities, depending on the Investment Manager's
evaluation of
5
<PAGE>
market patterns and trends. The Fund may invest up to 35% of its assets in debt
securities rated below investment grade, although it has no current intention of
investing more than 5% of its assets in such securities during the coming year.
The Fund may also invest without limit in unrated securities if such securities
offer, in the Investment Manager's opinion, the opportunity for a high overall
return by reason of their yield, discount at purchase, or potential for capital
appreciation without undue risk. Securities rated below investment grade and
many unrated securities may be considered predominantly speculative and subject
to greater market fluctuations and risks of loss of income and principal than
higher rated debt securities. The market value of debt securities usually is
affected by changes in the level of interest rates. An increase in interest
rates tends to reduce the market value of such investments, and a decline in
interest rates tends to increase their value. In addition, debt securities with
longer maturities, which tend to produce higher yields, are subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities. Fluctuations in the market value of debt securities
subsequent to their acquisition do no affect cash income from such securities
but are reflected in the Fund's net asset value.
OPTIONS, FUTURES, AND FORWARD CURRENCY CONTRACTS. The Fund may purchase and sell
options (including options on precious metals, foreign currencies, equity and
debt securities, and securities indices), futures contracts including futures
contracts on precious metals, foreign currencies, securities and securities
indices), options on futures contracts and forward currency contracts. The Fund
may use options, futures and forward contracts for hedging and yield or income
enhancement purposes. For example, the Fund could purchase call options on
securities that the Investment Manager intends to include in the Fund's
portfolio in order to fix the cost of a future purchase or to attempt to enhance
return by, for example, participating in an anticipated price increase of a
security. The Fund could purchase put options on securities to hedge against a
decline in the market value of securities held in the Fund's portfolio or to
attempt to enhance yield or income. The Fund could write (sell) put and call
options on securities to enhance yield or income or as a limited hedge. The Fund
could purchase and sell these instruments in order to attempt to hedge against
changes in securities prices, interest rates or foreign currency exchange rates
or precious metal prices or to enhance yield or income.
OTHER INFORMATION. The Fund is "non-diversified," as defined in the Investment
Company Act of 1940 (the "1940 Act"), but intends to continue to qualify as a
regulated investment company for Federal income tax purposes. This means, in
general, that more than 5% of the Fund's total assets may be invested in the
securities of one issuer (including a foreign government), but only if at the
close of each quarter of the Fund's taxable year, the aggregate amount of such
holdings is less than 50% of the value of its total assets and no more than 25%
of the value of its total assets is invested in the securities of a single
issuer. To the extent that the Fund's portfolio at times may include the
securities of a smaller number of issuers than if it were "diversified," as
defined in the 1940 Act, the Fund will at such times be subject to greater risk
with respect to its portfolio securities than an investment company that invests
in a broader range of securities, in that changes in the financial condition or
market assessment of a single issuer may cause greater fluctuation in the Fund's
total return. The Fund may invest (i) up to 15% of its net assets in illiquid
securities, including repurchase agreements with a maturity of more than seven
days and (ii) up to 10% of its total assets in restricted securities.
In addition to the Fund's fundamental investment objectives and
concentration policy, the Fund has adopted certain investment restrictions set
forth in the Statement of Additional Information that are fundamental and may
not be changed without shareholder approval. The Fund's other investment
policies are not fundamental and may be changed by the Board of Directors
without shareholder approval.
RISK FACTORS
Because of the following considerations, Fund shares should be considered
speculative, are subject to substantial price fluctuations and risks and are not
a complete investment program. Risks in the Fund's investment policies include:
1. PRICE FLUCTUATIONS IN BULLION. The value of the Fund's investments may be
affected by changes in the price of gold, platinum, and silver. Gold, platinum,
and silver have been subject to substantial price fluctuations over short
periods of time. The prices have been influenced by industrial and commercial
demand, investment and speculation, and monetary and fiscal policies of central
banks and governmental and international agencies. Price fluctuations in bullion
can also cause large price fluctuations in the securities in which the Fund may
invest.
2. CONCENTRATION OF SOURCE OF SUPPLY AND CONTROL OF SALES. Currently, there are
only six major producers of gold: the Republic of South Africa ("South Africa"),
the United States, Australia, the Commonwealth of Independent States
(the "CIS," formerly the Union of Soviet
6
<PAGE>
Socialist Republics), Canada, and China. As South Africa, the CIS and China are
three major producers of gold and platinum, changes in political, social and
economic conditions affecting either country pose certain risks to the Fund's
investments. The social upheaval and related economic difficulties in South
Africa, the CIS and China, may, from time to time, influence the price of gold
and platinum and the share values of mining companies involved in South Africa,
the CIS, and China and elsewhere. Investors should understand the special
considerations and risks related to such an investment emphasis, and its
potential effect on the Fund's per share value. South Africa depends
predominantly on gold sales for the foreign exchange necessary to finance its
imports, and its sales policy is necessarily subject to national economic and
political developments.
3. CONCENTRATION. As a matter of fundamental investment policy, the Fund
concentrates its investments in (i) securities of companies primarily involved,
directly or indirectly in, or that derive a portion of their gross revenues,
directly or indirectly from, the business of mining, processing, fabricating,
distributing or otherwise dealing in gold, silver, platinum, or other natural
resources and (ii) gold, silver and platinum bullion. Such concentration
involves additional investment risks, increased problems of liquidity, and
causes the value of Fund shares to fluctuate more than if it invested in a
greater number of industries.
4. PRIVATE PLACEMENTS. The Fund may invest in securities that are sold in
private placement transactions between the issuers and their purchasers and that
are neither listed on an exchange nor traded in the secondary market. In many
cases, privately placed securities will be subject to contractual or legal
restrictions on transfer. As a result of the absence of a public trading market,
privately placed securities may in turn be less liquid and more difficult to
value than publicly traded securities. Although privately placed securities may
be resold in privately negotiated transactions, the prices realized from the
sales could, due to illiquidity, be less than if such securities were more
widely traded. In addition, issuers whose securities are not publicly traded may
not be subject to the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded. If any privately
placed securities held by the Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration.
5. SMALL CAPITALIZATION COMPANIES. The Fund may invest in companies that are
small or thinly capitalized, and may have a limited operating history. As a
result, investment in these securities involves greater risks and may be
considered speculative. For example, such companies may have more limited
product lines, markets or financial resources than companies with larger
capitalizations, and may be more dependent on a small management group. In
addition, the securities of such companies may trade less frequently and in
smaller volume, and may be subject to more abrupt or erratic price movements,
than securities of large companies. The Fund's positions in securities of such
companies may be substantial in relation to the market of such securities.
Accordingly, it may be difficult for the Fund to dispose of securities of these
companies at prevailing market prices. Full development of these companies takes
time, and for this reason the Fund should be considered a long term investment
and not a vehicle for seeking short term profit. The securities of small or
thinly capitalized companies may also be more sensitive to market changes than
the securities of large companies. Such companies may not be well known to the
investing public and may not have institutional ownership. Such companies may
also be more vulnerable than larger companies to adverse business or economic
developments.
6. TAX OR CURRENCY LAWS. Changes in tax or currency laws of the United States or
foreign countries, such as imposition of withholding taxes or other taxes or of
exchange controls on foreign currencies, may inhibit or increase the cost of the
Fund's pursuit of its investment program.
7. UNPREDICTABLE INTERNATIONAL MONETARY POLICIES, ECONOMIC AND POLITICAL
CONDITIONS. Under unusual international monetary or political conditions, the
Fund's assets might be less liquid and the change in value of its assets more
volatile than would be the case with other investments. In particular, because
the price of gold and platinum may be affected by unpredictable international
monetary policies and economic conditions there may be greater likelihood of a
more dramatic impact upon the market prices of securities of companies mining,
processing or dealing in gold and other precious metals than would occur in
other industries.
8. FOREIGN SECURITIES, MARKETS AND CURRENCIES. All or a portion of the Fund's
assets may be invested in foreign securities. Investing in foreign securities,
which are generally denominated in foreign currencies, and utilization of
forward contracts on foreign currencies involve certain considerations
comprising both risk and opportunity not typically associated with investing in
U.S. securities. These considerations include: fluctuations in currency exchange
rates; restrictions on foreign investment and repatriation of capital; costs of
converting foreign
7
<PAGE>
currency into U.S. dollars; greater price volatility and trading illiquidity;
less public information on issuers of securities; non-negotiable brokerage
commissions; difficulty in enforcing legal rights outside of the United States;
lack of uniform accounting, auditing and financial reporting standards; the
possible imposition of foreign taxes, exchange controls (which may include
suspension of the ability to transfer currency from a given country), and
currency restrictions; and the possible greater political, economic, and social
instability of developing as well as developed countries including without
limitation nationalization, expropriation of assets, and war. Furthermore,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, and balance of payments
position. These risks are often heightened when the Fund's investments are
concentrated in a small number of countries. In addition, because transactional
and custodial expenses for foreign securities are generally higher than for
domestic securities, the Fund's expense ratio can be expected to be higher than
for investment companies investing exclusively in domestic securities.
The Fund may invest in securities of issuers located in emerging market
countries. The risks of investing in foreign securities may be greater with
respect to securities of issuers in, or denominated in the currencies of,
emerging market countries. The possibility of revolution and the dependence on
foreign economic assistance may be greater in emerging market countries than in
developed countries. The economies of emerging market countries generally are
heavily dependent upon international trade and accordingly, have been and may
continue to be adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade. The securities markets of emerging market
countries are substantially smaller, less developed, less liquid and more
volatile than the securities markets of the U.S. and other developed countries.
Disclosure and regulatory standards in many respects are less stringent in
emerging market countries than in the U.S. and other major markets. There also
may be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets, and enforcement of existing regulations
may be extremely limited. Investing in local markets, particularly in emerging
market countries, may require the Fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve additional
costs to the Fund. Certain emerging market countries may also restrict
investment opportunities in issuers in industries deemed important to national
interests.
The Fund may purchase securities on U.S. and foreign stock exchanges or in
the over-the-counter market. Foreign stock markets are generally not as
developed or efficient as those in the United States. In most foreign markets
volume and liquidity are less than in the United States and, at times,
volatility of price can be greater than in the United States. Fixed commissions
on some foreign stock exchanges are higher than the negotiated commissions on
U.S. exchanges. There is generally less government supervision and regulation of
foreign stock exchanges, brokers and companies than in the United States. If the
Fund invests in countries in which settlement of transactions is subject to
delay, the Fund's ability to purchase and sell portfolio securities at the time
it desires may be hampered. Delays in settlement practices in foreign countries
may also affect the Fund's liquidity, making it more difficult to meet
redemption requests, or require the Fund to maintain a greater portion of its
assets in money market investments in order to meet such requests. Some of the
securities in which the Fund invests may not be widely traded, and the Fund's
position in such securities may be substantial in relation to the market for
such securities. Accordingly, it may be difficult for the Fund to dispose of
such securities at prevailing market prices in order to meet redemption
requests.
Since investment in foreign securities usually involves foreign currencies
and since the Fund may temporarily hold cash in bank deposits in foreign
currencies in order to facilitate portfolio transactions, the value of the
Fund's assets as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations. For example, if the value of the U.S. dollar decreases relative to
a foreign currency in which a Fund investment is denominated or which is
temporarily held by the Fund to facilitate portfolio transactions, the value of
such Fund assets and the Fund's net asset value per share will increase, all
else being equal. Conversely, an increase in the value of the U.S. dollar
relative to such a foreign currency will result in a decline in the value of
such Fund assets and its net asset value per share. The Fund may incur
additional costs in connection with conversions of currencies and securities
into U.S. dollars. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis, or through entering into
forward contracts. The Fund generally will not enter into a forward contract
with a term of greater than one year.
The Fund may hold a portion or all of its cash in the form of foreign
currencies. Since investments in foreign currencies, bullion and coins do not
yield income, the Fund may not achieve its secondary objective during periods
when it holds significant positions in such investments. The Fund purchases or
sells gold, platinum, and silver bullion primarily of standard weight at the
best available prices in the New
8
<PAGE>
York bullion market (see "Determination of Net Asset Value"). The Investment
Manager retains discretion, however, to purchase or sell bullion in other
markets, including foreign markets, if better prices can be obtained.
When purchasing foreign securities, the Fund will ordinarily purchase
securities which are traded in the U.S. or purchase American Depository Receipts
("ADRs") which are certificates issued by U.S. banks representing the right to
receive securities of a foreign issuer deposited with that bank or a
correspondent bank. However, the Fund may purchase foreign securities directly
in foreign markets so long as in management's judgment an established public
trading market exists (that is, there are a sufficient number of shares traded
regularly relative to the number of shares to be purchased by the Fund).
9. OPTIONS, FUTURES, AND FORWARD CURRENCY CONTRACTS. Strategies with options,
futures, and forward currency contracts may be limited by market conditions,
regulatory limits and tax considerations, and the Fund might not employ any of
the strategies described above. There can be no assurance that any strategy used
will be successful. The loss from investing in certain of these instruments is
potentially unlimited. Options and futures may fail as hedging techniques in
cases where price movements of the instruments underlying the options and
futures do not follow the price movements of the instrument subject to the
hedge. Gains and losses on investments in options and futures depend on the
Investment Manager's ability to predict correctly the direction of stock prices,
interest rates, foreign currency exchange rates, precious metals prices, and
other economic factors. In addition, the Fund will likely be unable to control
losses by closing its position where a liquid secondary market does not exist
and there is no assurance that a liquid secondary market for all of these
instruments will always exist. It also may be necessary to defer closing out
hedged positions to avoid adverse tax consequences. The percentage of the Fund's
assets set aside to cover its obligations under options, futures, or forward
currency contracts could impede effective portfolio management or the ability to
meet redemption or other current obligations.
10. LACK OF INCOME ON GOLD, SILVER AND PLATINUM INVESTMENTS. Investments in
gold, silver and platinum bullion do not generate income and will subject the
Fund to taxes and insurance, shipping and storage costs. The sole source of
return to the Fund from such investments would be gains realized on sales, and a
negative return would be realized if such investments are sold at a loss.
HOW TO PURCHASE SHARES
The Fund's shares are sold on a continuing basis at the net asset value per
share next determined after receipt and acceptance of the order by Investor
Service Center (see "Determination of Net Asset Value"). The minimum initial
investment is $500 for regular and gifts/transfers to minors custody accounts,
and $100 for Midas retirement plans, which include Individual Retirement
Accounts ("IRAs"), SEP- IRAs, rollover IRAs, profit sharing and money purchase
plans, and 403(b) plan accounts. The minimum subsequent investment is $50. The
initial investment minimums are waived if you elect to invest $50 or more each
month in the Fund through the Midas Automatic Investment Program (see
"Additional Investments" below).
INITIAL INVESTMENT. The Account Application that accompanies this prospectus
should be completed, signed and, with a check or other negotiable bank draft
payable to Midas Fund, mailed to Investor Service Center, Box 419789, Kansas
City, MO 64141-6789. Initial investments also may be made by having your bank
wire money, as set forth below, in order to avoid mail delays.
ADDITIONAL INVESTMENTS. Additional investments may be made conveniently at any
time by any one or more of the following methods:
o MIDAS AUTOMATIC INVESTMENT PROGRAM. With the Midas Automatic Investment
Program, you can establish a convenient and affordable long term investment
program through one or more of the Plans explained below. Each Plan is
designed to facilitate an automatic monthly investment of $50 or more into
your Fund account.
The MIDAS BANK TRANSFER PLAN lets you purchase Fund shares on a certain
day each month by transferring electronically a specified dollar amount
from your regular checking account, NOW account, or bank money market
deposit account.
In the MIDAS SALARY INVESTING PLAN, part or all of your salary may be
invested electronically in shares of the Fund on each pay date,
depending upon your employer's direct deposit program.
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The MIDAS GOVERNMENT DIRECT DEPOSIT PLAN allows you to deposit
automatically part or all of certain U.S. Government payments into your
Fund account. Eligible U.S. Government payments include Social
Security, pension benefits, military or retirement benefits, salary,
veteran's benefits and most other recurring payments.
For more information concerning these Plans, or to request the necessary
authorization form(s), please call Investor Service Center, 1-800-400-MIDAS. You
may modify or terminate the Bank Transfer Plan at any time by written notice
received at least 10 days prior to the scheduled investment date. To modify or
terminate the Salary Investing Plan or Government Direct Deposit Plan, you
should contact, respectively, your employer or the appropriate U.S. government
agency. The Fund reserves the right to redeem any account if participation in
the Program is terminated and the account's value is less than $500. The Program
does not assure a profit or protect against loss in a declining market, and you
should consider your ability to make purchases when prices are low.
o CHECK. Mail a check or other negotiable bank draft ($50 minimum), made
payable to Midas Fund, together with a Midas FastDeposit form to Investor
Service Center, Box 419789, Kansas City, MO 64141-6789. If you do not use
that form, please send a letter indicating the account number to which the
subsequent investment is to be credited, and name(s) of the registered
owner(s).
o ELECTRONIC FUNDS TRANSFER (EFT). With EFT, you may purchase additional
shares of the Fund quickly and simply, just by calling Investor Service
Center, 1-800-400-MIDAS. We will contact the bank you designate on your
Account Application or Authorization Form to arrange for the EFT, which is
done through the Automated Clearing House system, to your Fund account. For
requests received by 4 p.m., eastern time, the investment will be credited
to your Fund account ordinarily within two business days. There is a $50
minimum for each EFT investment. Your designated bank must be an Automated
Clearing House member and any subsequent changes in bank account information
must be submitted in writing with a voided check or deposit slip.
o FEDERAL FUNDS WIRE. You may wire money, by following the procedures set forth
below, to receive that day's net asset value per share.
INVESTING BY WIRE. For an initial investment by wire, you must first telephone
Investor Service Center, 1-800-400-MIDAS, to give the name(s) under which the
account is to be registered, tax identification number, the name of the bank
sending the wire, and to be assigned a Midas Fund account number. You may then
purchase shares by requesting your bank to transmit immediately available funds
("Federal funds") by wire to: United Missouri Bank NA, ABA #10-10-00695; for
Account 98-7052-724-3; Midas Fund. Your account number and name(s) must be
specified in the wire as they are to appear on the account registration. You
should then enter your account number on your completed Account Application and
promptly forward it to Investor Service Center, Box 419789, Kansas City, MO
64141-6789. This service is not available on days when the Federal Reserve wire
system is closed. Subsequent investments by wire may be made at any time without
having to call Investor Service Center by simply following the same wiring
procedures.
SHAREHOLDER ACCOUNTS. When you invest in the Fund, your account will be credited
with all full and fractional shares (to three decimal places), together with any
dividends and other distributions that are paid in additional shares (see
"Distributions and Taxes"). For joint tenant accounts, any account owner has the
authority to act on the account without notice to the other account owners.
Investor Service Center in its sole discretion and for its protection may, but
is not obligated to, require the written consent of all account owners of a
joint tenant account prior to acting upon the instructions of any account owner.
Stock certificates will be issued only for full shares when requested in
writing. In order to facilitate redemptions and provide safekeeping, we
recommend that you do not request certificates. You will receive transaction
confirmations upon purchasing or selling shares, and quarterly statements.
WHEN ORDERS ARE EFFECTIVE. The purchase price for Fund shares is the net asset
value of such shares next determined after receipt and acceptance by Investor
Service Center of a purchase order in proper form. All purchases are accepted
subject to collection at full face value in Federal funds. Checks must be drawn
in U.S. dollars on a U.S. bank. The Fund reserves the right to reject any order.
Accounts are charged $30 by the Transfer Agent for submitting checks for
investment which are not honored by the investor's bank. The Fund may in its
discretion waive or lower the investment minimums.
SHAREHOLDER SERVICES
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You may modify or terminate your participation in any of the Fund's special
plans or services at any time. Shares or cash should not be withdrawn from any
tax-advantaged retirement plan described below, however, without consulting a
tax adviser concerning possible adverse tax consequences. Additional information
regarding any of the following services is available from Investor Service
Center, 1-800-400- MIDAS.
ELECTRONIC FUNDS TRANSFER (EFT). You automatically have the privilege of linking
your bank account designated on your Account Application or Authorization Form
and your Fund account with Midas EFT service. With EFT, you use the Automated
Clearing House system to electronically transfer money quickly and safely
between your bank and Fund accounts. EFT may be used for purchasing and
redeeming Fund shares, direct deposit of dividends into your bank account, the
Automatic Investment Program, the Systematic Withdrawal Plan, and systematic IRA
distributions. You may decline this privilege by checking the indicated box on
the Account Application. Any subsequent changes in bank account information must
be submitted in writing (and the Fund may require the signature to be
guaranteed), with a voided check.
SYSTEMATIC WITHDRAWAL PLAN. If you own Fund shares with a value of at least
$20,000 you may elect an automatic monthly or quarterly withdrawal of cash from
your Fund account in fixed or variable amounts, subject to a minimum amount of
$100. Under the Systematic Withdrawal Plan, all dividends and other
distributions, if any, are reinvested in the Fund.
ASSIGNMENT. Fund shares may be transferred to another owner. Instructions are
available from Investor Service Center, 1-800-400-MIDAS.
TAX-ADVANTAGED RETIREMENT PLANS. These plans provide an opportunity to set aside
money for retirement in a tax-advantaged account in which earnings can be
compounded without incurring a tax liability until the money and earnings are
withdrawn. Contributions may be fully or partially deductible for Federal income
tax purposes as noted below. Information on any of the plans described below is
available from Investor Service Center, 1-800-400-MIDAS.
The minimum investment to establish a Midas IRA or other retirement plan is
$100. Minimum subsequent investments are $50. The initial investment minimums
are waived if you elect to invest $50 or more each month in the Fund through the
Midas Automatic Investment Program. There are no set-up fees for any Midas
Retirement Plans. Subject to change on 30 days' notice, the plan custodian
charges Midas IRAs a $10 annual fiduciary fee, $10 for each distribution prior
to age 59 1/2, and a $20 plan termination fee; however, the annual fiduciary fee
is waived if your IRA has assets of $10,000 or more or if you invest regularly
through the Midas Automatic Investment Program.
|X| IRA AND SEP-IRA ACCOUNTS. Anyone with earned income who is less than
age 70 1/2at the end of the tax year, even if also participating in another
type of retirement plan, may establish an IRA and contribute each year up
to $2,000 or 100% of earned income, whichever is less, and an aggregate of
up to $2,250 when a non-working spouse is also covered in a separate
spousal account. If each spouse has at least $2,000 of earned income each
year, they may contribute up to $4,000 annually. Employers may also make
contributions to an IRA on behalf of an individual under a Simplified
Employee Pension Plan ("SEP") in any amount up to 15% of up to $150,000 of
compensation. Generally, taxpayers may contribute to an IRA during the tax
year and through the next year until the income tax return for that year is
due, without regard to extensions. Thus, most individuals may contribute
for the 1996 tax year from January 1, 1996 through April 15, 1997.
DEDUCTIBILITY. IRA contributions are fully deductible for most taxpayers.
For a taxpayer who is an active participant in an employer- maintained
retirement plan (or whose spouse is), a portion of IRA contributions is
deductible if adjusted gross income (before the IRA deductions) is
$40,000-$50,000 (if married) and $25,000-$35,000 (if single). Only IRA
contributions by a taxpayer who is an active participant in an
employer-maintained retirement plan (or whose spouse is) and has adjusted
gross income of more than $50,000 (if married) and $35,000 (if single) will
not be deductible. An eligible individual may establish a Midas IRA under
the prototype plan available through the Fund, even though such individual
or spouse actively participates in an employer-maintained retirement plan.
o IRA TRANSFER AND ROLLOVER ACCOUNTS. Special forms are available from
Investor Service Center, 1-800-400-MIDAS, which make it easy to transfer or
roll over IRA assets to a Midas IRA. An IRA may be transferred from one
financial institution to another without adverse tax consequences.
Similarly, no taxes need be paid on a lump-sum distribution which you may
receive as a payment from a qualified pension or profit sharing plan due to
retirement, job termination or termination of the plan, so long as the
assets are put into
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an IRA Rollover account within 60 days of the receipt of the payment.
Withholding for Federal income tax purposes is required at the rate of 20%
for "eligible rollover distributions" made from any retirement plan (other
than an IRA) that are not directly transferred to an "eligible retirement
plan," such as a Midas Rollover Account.
o PROFIT SHARING AND MONEY PURCHASE PLANS. These provide an opportunity to
accumulate earnings on a tax-deferred basis by permitting corporations,
self-employed individuals (including partners) and their employees generally
to contribute (and deduct) up to $30,000 annually or, if less, 25% (15% for
profit sharing plans) of compensation or self-employment earnings of up to
$150,000. Corporations and partnerships, as well as all self-employed
persons, are eligible to establish these Plans. In addition, a person who is
both salaried and self-employed, such as a college professor who serves as a
consultant, may adopt these retirement plans based on self-employment
earnings.
|X| SECTION 403(B) ACCOUNTS. Section 403(b)(7) of the Internal Revenue Code
of 1986, as amended ("Code"), permits the establishment of custodial
accounts on behalf of employees of public school systems and certain
tax-exempt organizations. A participant in such a plan does not pay taxes
on any contributions made by the participant's employer to the
participant's account pursuant to a salary reduction agreement, up to a
maximum amount, or "exclusion allowance." The exclusion allowance is
generally computed by multiplying the participant's years of service times
20% of the participant's compensation included in gross income received
from the employer (reduced by any amount previously contributed by the
employer to any 403(b) account for the benefit of the participant and
excluded from the participant's gross income). However, the exclusion
allowance may not exceed the lesser of 25% of the participant's
compensation (limited as above) or $30,000. Contributions and subsequent
earnings thereon are not taxable until withdrawn, when they are received as
ordinary income.
HOW TO REDEEM SHARES
Generally, you may redeem by any of the methods explained below. Requests
for redemption should include the following information: your account
registration information including address, account number and taxpayer
identification number; dollar value, number or percentage of shares to be
redeemed; how and to where the proceeds are to be sent; if applicable, the
bank's name, address, ABA routing number, bank account registration and account
number, and a contact person's name and telephone number; and your daytime
telephone number.
BY MAIL. You may request that the Fund redeem any amount of shares by submitting
a written request to Investor Service Center, Box 419789, Kansas City, MO
64141-6789, signed by the record owner(s). If the written request is sent to the
Fund, it will be forwarded to the above address. If stock certificates have been
issued for shares being redeemed, they must accompany the written request.
BY TELEPHONE. You may telephone Investor Service Center, 1-800-400-MIDAS, to
expedite redemption of Fund shares if share certificates have not been issued.
You may redeem as little as $250 worth of shares by requesting Electronic
Funds Transfer (EFT) service. With EFT, you can redeem Fund shares quickly
and conveniently because Investor Service Center will contact the bank
designated on your Account Application or Authorization Form to arrange for
the electronic transfer of your redemption proceeds (through the Automated
Clearing House system) to your bank account. EFT proceeds are ordinarily
available in your bank account within two business days.
If you are redeeming $1,000 or more worth of shares, you may request that
the proceeds be mailed to your address of record or mailed or wired to your
authorized bank.
Telephone requests received on Fund business days by 4 p.m. eastern time
will be redeemed from your account that day, and if after, on the next Fund
business day. Any subsequent changes in bank account information must be
submitted in writing, signature guaranteed, with a voided check. Redemptions by
telephone may be difficult or impossible to implement during periods of rapid
changes in economic or market conditions.
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REDEMPTION PRICE AND FEES. The redemption price is the net asset value per share
next determined after receipt of the redemption request in proper form. The Fund
is designed as a long term investment, and short term trading is discouraged.
Accordingly, if shares of the Fund held for 30 days or less are redeemed or
exchanged, the Fund will deduct a redemption fee equal to one percent of the net
asset value of shares redeemed or exchanged. The fee will be retained by the
Fund and used to offset the transaction costs that short term trading imposes on
the Fund and its shareholders. If an account contains shares with different
holding periods (i.e. some shares held 30 days or less, some shares held 31 days
or more), the shares with the longest holding period will be redeemed first to
determine if the Fund's redemption fee applies. Shares acquired through the
Dividend Sweep Privilege and the reinvestment of dividends and capital gains or
redeemed under the Systematic Withdrawal Plan are exempt from the redemption
fee. Registered broker/dealers, investment advisers, banks, and insurance
companies may open accounts and redeem shares by telephone or wire and may
impose a charge for handling purchases and redemptions when acting on behalf of
others.
REDEMPTION PAYMENT. Payment for shares redeemed will be made as soon as
possible, ordinarily within seven days after receipt of the redemption request
in proper form. The right of redemption may not be suspended, or date of payment
delayed more than seven days, except for any period (i) when the New York Stock
Exchange is closed or trading thereon is restricted as determined by the SEC;
(ii) under emergency circumstances as determined by the SEC that make it not
reasonably practicable for the Fund to dispose of securities owned by it or
fairly to determine the value of its assets; or (iii) as the SEC may otherwise
permit. The mailing of proceeds on redemption requests involving any shares
purchased by personal, corporate, or government check or EFT transfer is
generally subject to a ten business day delay to allow the check or transfer to
clear. The ten day clearing period does not affect the trade date on which a
purchase or redemption order is priced, or any dividends and other distributions
to which you may be entitled through the date of redemption. The clearing period
does not apply to purchases made by wire. Due to the relatively higher cost of
maintaining small accounts, the Fund reserves the right, upon 45 days' notice,
to redeem any account, other than IRA and other Midas prototype retirement plan
accounts, worth less than $500 except if solely from market action, unless an
investment is made to restore the minimum value.
TELEPHONE PRIVILEGES. You automatically have all telephone privileges to, among
other things, authorize purchases and redemptions with EFT or by other means,
unless declined on the Account Application or otherwise in writing. Neither the
Fund nor Investor Service Center shall be liable for any loss or damage for
acting in good faith upon instructions received by telephone and believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine and if it does not, it may be liable for
losses due to unauthorized or fraudulent transactions. These procedures include
requiring personal identification prior to acting upon telephone instructions,
providing written confirmation of such transactions, and tape recording
telephone conversations. The Fund may modify or terminate any telephone
privileges or shareholder services (except as noted) at any time without notice.
SIGNATURE GUARANTEES. No signature guarantees are required when payment is to be
made to you at your address of record. If the redemption proceeds are to be paid
to a non-shareholder of record, or to an address other than your address of
record, or the shares are to be assigned, the Transfer Agent may require that
your signature be guaranteed by an entity acceptable to the Transfer Agent, such
as a commercial bank or trust company or member firm of a national securities
exchange or of the National Association of Securities Dealers, Inc. A notary
public may not guarantee signatures. The Transfer Agent may require further
documentation, and may restrict the mailing of redemption proceeds to your
address of record within 30 days of such address being changed unless you
provide a signature guarantee as described above.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. The Fund pays dividends annually to its shareholders from its net
investment income, if any. The Fund also makes an annual distribution to its
shareholders out of any net realized capital gains, after offsetting any capital
loss carryover, and any net realized gains from foreign currency transactions.
Dividends and other distributions, if any, are declared, and payable to
shareholders of record, on a date in December of each year. Such distributions
may be paid in January of the following year, in which event they will be deemed
received by the shareholders on the preceding December 31 for tax purposes. The
Fund may also make an additional distribution following the end of its fiscal
year out of any undistributed income and capital gains. Dividends and other
distributions are made in additional Fund shares, unless you elect to receive
cash on the Account Application or so elect subsequently by calling Investor
Service Center, 1-800-400-MIDAS. For Federal income tax purposes, dividends and
other distributions are treated in the same manner whether received in
additional Fund shares or in cash. Any election will remain in effect until you
notify Investor Service Center to the contrary.
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TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of Federal income
tax on that part of its investment company taxable income (generally consisting
of net investment income, net short term capital gains, and net gains from
certain foreign currency transactions) and net capital gain (the excess of net
long term capital gain over net short term capital loss) that is distributed to
its shareholders. Dividends paid by the Fund from its investment company taxable
income (whether paid in cash or in additional Fund shares) generally are taxable
to shareholders, other than shareholders that are not subject to tax on their
income, as ordinary income to the extent of the Fund's earnings and profits; a
portion of those dividends may be eligible for the corporate dividends received
deduction. Distributions by the Fund of its net capital gain (whether paid in
cash or in additional Fund shares), when designated as such by the Fund, are
taxable to the shareholders as long term capital gains, regardless of how long
they have held their Fund shares. The Fund notifies its shareholders following
the end of each calendar year of the amounts of dividends and capital gain
distributions paid (or deemed paid) that year and of any portion of those
dividends that qualifies for the corporate dividends-received deduction. Any
dividend or other distribution paid by the Fund will reduce the net asset value
of Fund shares by the amount of the distribution. Furthermore, such
distribution, although similar in effect to a return of capital, will be subject
to taxes.
The Fund is required to withhold 31% of all dividends, capital gain
distributions, and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Such withholding also is required with respect
to shareholders who are otherwise subject to backup withholding.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. Since other tax
considerations may apply, you should consult your tax adviser.
DETERMINATION OF NET ASSET VALUE
The value of a share of the Fund is based on the value of its net assets.
The Fund's net assets are the total of the Fund's investments and all other
assets minus any liabilities. The value of one share is determined by dividing
the net assets by the total number of shares outstanding. This is referred to as
"net asset value per share," and is determined as of the close of regular
trading on the New York Stock Exchange (currently, 4 p.m. eastern time, unless
weather, equipment failure or other factors contribute to an earlier closing)
each business day of the Fund. A business day of the Fund is any day on which
the New York Stock Exchange is open for trading. The following are not business
days of the Fund: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities and other assets of the Fund are valued primarily on
the basis of market quotations, if readily available. Foreign securities are
valued on the basis of quotations from a primary market in which they are traded
and are translated from the local currency into U.S. dollars using current
exchange rates. Securities and other assets for which quotations are not readily
available will be valued at fair value as determined in good faith by or under
the direction of the Board of Directors.
THE INVESTMENT MANAGER AND SUBADVISER
Midas Management Corporation (the "Investment Manager") acts as general
manager of the Fund, being responsible for the various functions assumed by it,
including regularly furnishing advice with respect to portfolio transactions.
The Investment Manager also furnishes or obtains on behalf of the Fund all
services necessary for the proper conduct of the Fund's business and
administration. The Investment Manager retains final discretion in the
investment and reinvestment of the Fund's assets, subject to the control and
oversight of the Board of Directors. The Investment Manager is authorized to
place portfolio transactions with an affiliated broker/dealer, and may allocate
brokerage transactions by taking into account the sales of shares of the Fund
and other affiliated investment companies. The Investment Manager may allocate
transactions to broker/dealers that remit a portion of their commissions as a
credit against the Fund's expenses.
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For its services, the Investment Manager receives a fee based on the average
daily net assets of the Fund, at the annual rate of 1% on the first $200 million
and declining thereafter as a percentage of average daily net assets. This fee
is higher than fees paid by most other investment companies. During the fiscal
year ended December 31, 1994, investment management fees paid by the Fund to
Excel Advisors, Inc., its former investment adviser, represented approximately
1.00% of average daily net assets. The Investment Manager provides certain
administrative services to the Fund at cost. Bassett S. Winmill may be deemed a
controlling person of the Investment Manager.
The Investment Manager has entered into a subadvisory agreement with 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. The Investment
Manager, not the Fund, pays the Subadviser monthly a percentage of the
Investment Manager's net fees based upon the Fund's performance and its total
net assets ranging from ten to fifty percent. The Subadviser, whose principal
business address is 7 - 8 Kendrick Mews, London, U.K. SW7 3HG, is a
majority-owned subsidiary of Lion Mining Group, which is controlled by Andrew F.
Malim. The Fund's investments may include securities of companies for which Lion
Mining Finance provides technical, consulting, and investor relations services.
The Subadviser also serves as an investment adviser to another U.S. mutual fund
with net assets of approximately $32 million as of March 1, 1996. Mr. Kjeld
Thygesen, the Subadviser's Managing Director, has been the Fund's portfolio
manager since January 1992 and currently serves as the Fund's portfolio manager
together with the Investment Manager's Investment Policy Committee. Mr. Thygesen
has been a Managing Director of the Subadviser since 1989.
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement between the Fund and Investor Service
Center, Inc., 11 Hanover Square, New York, NY 10005, (the "Distributor"), the
Distributor acts as the Fund's principal agent for the sale of Fund shares. The
Investment Manager is an affiliate of the Distributor. The Fund has also adopted
a plan of distribution (the "Plan") pursuant to Rule 12b-1 under the 1940 Act.
Pursuant to the Plan, the Fund pays the Distributor a distribution fee in an
amount of 0.25% per annum of the Fund's average daily net assets for
distribution and service activities. This fee may be retained by the Distributor
or passed through to brokers, banks and others who provide services to their
customers who are Fund shareholders at the rate of 0.25% on such customer
balances. The Fund will pay the fee to the Distributor until either the Plan is
terminated or not renewed. In that event, the Distributor's expenses in excess
of fees received or accrued through the termination day will be the
Distributor's sole responsibility and not obligations of the Fund. During the
period they are in effect, the Distribution Agreement and Plan obligate the Fund
to pay fees to the Distributor as compensation for its service and distribution
activities. If the Distributor's expenses exceeds the fee, the Fund will not be
obligated to pay any additional amount to the Distributor. If the Distributor's
expenses are less than the fee, it may realize a profit.
PERFORMANCE INFORMATION
Advertisements and other sales literature for the Fund may refer to the
Fund's "average annual total return" and "cumulative total return." All such
quotations are based upon historical earnings and are not intended to indicate
future performance. The investment return on and principal value of an
investment in the Fund will fluctuate, so that the investor's shares when
redeemed may be worth more or less than their original cost. In addition to
advertising average annual total return and cumulative total return, comparative
performance information may be used from time to time in advertising the Fund's
shares, including data from Lipper Analytical Services, Inc., the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Toronto Stock
Exchange Gold Sub-Index Average and other industry publications. "Average annual
total return" is the average annual compounded rate of return on a hypothetical
$1,000 investment made at the beginning of the advertised period. In calculating
average annual total return, all dividends and distributions are assumed to be
reinvested. "Cumulative total return" is calculated by subtracting a
hypothetical $1,000 payment to the Fund from the ending redeemable value of such
payment (at the end of the relevant advertised period), dividing such difference
by $1,000 and multiplying the quotient by 100. In calculating ending redeemable
value, all income and capital gain distributions are assumed to be reinvested in
additional Fund shares. Until August 28, 1995, the maximum sales charge imposed
on purchases of Fund shares was 4.5%. This sales charge is not reflected in the
calculation of returns since the sales charge has been discontinued. For more
information regarding how the Fund's average annual total return and cumulative
total return
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is calculated, see "Calculation of Performance Data" in the Statement of
Additional Information. The Fund's annual report to shareholders contains
further information about the Fund's performance, and is available free of
charge upon request.
CAPITAL STOCK
The Fund is a non-diversified open-end management investment company
organized as a Maryland corporation ("Corporation") in 1995. Prior to August 28,
1995, the Fund operated under the name "Excel Midas Gold Shares, Inc.," a
Minnesota corporation organized in 1985. The Corporation is authorized to issue
up to 1,000,000,000 shares ($.01 par value). The Board of Directors of the
Corporation may establish additional series or classes of shares, although it
has no current intention of doing so.
The Fund's stock is freely assignable by way of pledge (as, for example,
for collateral purposes), gift, settlement of an estate and also by an investor
to another investor. Each share has equal dividend, voting, liquidation and
redemption rights with every other share. The shares have no preemptive,
conversion or cumulative voting rights and they are not subject to further call
or assessment.
The Fund's By-Laws provide that there will be no annual meeting of
shareholders in any year except as required by law. In practical effect, this
means that the Fund will not hold an annual meeting of shareholders in years in
which the only matters which would be submitted to shareholders for their
approval are the election of Directors and ratification of the Directors'
selection of accountants, although holders of 10% of the Fund's shares may call
a meeting at any time. There will normally be no meetings of shareholders for
the purpose of electing Directors unless fewer than a majority of the Directors
holding office have been elected by shareholders. Shareholder meetings will be
held in years in which shareholder vote on the Fund's investment management
agreement, plan of distribution, or fundamental investment objectives, policies
or restrictions is required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111, acts as
custodian of the Fund's assets and may appoint one or more subcustodians
provided such subcustodianship is in compliance with the rules and regulations
promulgated under the 1940 Act. The Fund may maintain a portion of its assets in
foreign countries pursuant to such subcustodianships and related foreign
depositories. Utilization by the Fund of such foreign custodial arrangements and
depositories will increase the Fund's expenses. All of the Fund's gold,
platinum, and silver bullion is held by Wilmington Trust Company, Rodney Square
North, Wilmington, DE 19890. The custodian also performs certain accounting
services for the Fund.
The Fund's transfer and dividend disbursing agent is DST Systems, Inc., Box
419789, Kansas City, MO 64141-6789. The Distributor provides certain shareholder
administration services to the Fund and is reimbursed its cost by the Fund.
16
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[Left Side of Back Cover Page]
MIDAS FUND
- -----------------------------------------------------
11 HANOVER SQUARE
NEW YORK, NY 10005
1-800-400-MIDAS 1-212-480-MIDAS
- -----------------------------------------------------
CALL TOLL-FREE FOR FUND PERFORMANCE, TELEPHONE PURCHASES, AND TO OBTAIN
INFORMATION CONCERNING YOUR ACCOUNT.
1-800-400-MIDAS 1-212-480-MIDAS
- -----------------------------------------------------
[Right Side of Back Cover Page]
MIDAS FUND
- ---------------------------------------------------------
SEEKING CAPITAL APPRECIATION AND PROTECTION AGAINST
INFLATION AND, SECONDARILY, CURRENT INCOME
ELECTRONIC FUNDS TRANSFERS
AUTOMATIC INVESTMENT PROGRAM
RETIREMENT PLANS: IRA, SEP-IRA, QUALIFIED PROFIT
SHARING/MONEY
PURCHASE, 403(B), KEOGH
- ---------------------------------------------------------
MINIMUM INITIAL INVESTMENT:
REGULAR ACCOUNTS, $500;
IRAS, $100; AUTOMATIC
INVESTMENT PROGRAM, $50
MINIMUM SUBSEQUENT INVESTMENTS: $50
- ---------------------------------------------------------
PROSPECTUS
MAY 1, 1996
17
<PAGE>
Statement of Additional Information May 1, 1996
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 May 1, 1996. 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
THE FUND'S INVESTMENT PROGRAM........................................ 2
INVESTMENT RESTRICTIONS.............................................. 4
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES............ 6
OFFICERS AND DIRECTORS............................................... 12
THE INVESTMENT MANAGER............................................... 13
THE SUBADVISER AND THE SUBADVISORY AGREEMENT......................... 14
CALCULATION OF PERFORMANCE DATA...................................... 15
DISTRIBUTION OF SHARES............................................... 18
DETERMINATION OF NET ASSET VALUE..................................... 19
PURCHASE OF SHARES................................................... 19
ALLOCATION OF BROKERAGE.............................................. 19
DISTRIBUTIONS AND TAXES.............................................. 21
REPORTS TO SHAREHOLDERS.............................................. 22
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT.................... 22
AUDITORS ............................................................ 22
FINANCIAL STATEMENTS................................................. 22
APPENDIX--DESCRIPTIONS OF BOND RATINGS............................... 23
<PAGE>
THE FUND'S INVESTMENT PROGRAM
The following information supplements the information concerning the
investment objectives, policies and limitations of the Fund found in the
Prospectus.
FOREIGN SECURITIES. Because the Fund may invest in foreign securities,
investment in the Fund involves investment risks of adverse political and
economic developments that are different from an investment in a fund which
invests only in the securities of U.S. issuers. Such risks may include adverse
movements in the market value of foreign securities during days on which the
Fund's net asset value per share is not determined (see "Determination of Net
Asset Value"), the possible imposition of withholding taxes by foreign
governments on dividend or interest income payable on the securities held in the
portfolio, possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of dividends
or principal and interest on securities in the portfolio.
The Fund may invest in foreign securities by purchasing American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other
securities convertible into securities of issuers based in foreign countries.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund may
invest include direct obligations of the U.S. Government (such as Treasury
bills, notes and bonds) and obligations issued by U.S. government agencies and
instrumentalities backed by the full faith and credit of the U.S. government,
such as those issued by the Government National Mortgage Association. In
addition, the U.S. government securities in which the Fund may invest include
securities supported primarily or solely by the creditworthiness of the issuer,
such as securities issued by the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and the Tennessee Valley Authority. In
the case of obligations not backed by the full faith and credit of the U.S.
government, the Fund must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the U.S. government itself in the event the
agency or instrumentality does not meet its commitments. Accordingly, these
securities may involve more risk than securities backed by the U.S. government's
full faith and credit.
BORROWING. The Fund may incur overdrafts at its custodian bank from time
to time in connection with redemptions and/or the purchase of portfolio
securities. In lieu of paying interest to the custodian bank, the Fund may
maintain equivalent cash balances prior or subsequent to incurring such
overdrafts. If cash balances exceed such overdrafts, the custodian bank may
credit interest thereon against fees.
ILLIQUID ASSETS. The Fund may not purchase or otherwise acquire any
security or invest in a repurchase agreement if, as a result, (a) more than 15%
of the Fund's net assets (taken at current value) would be invested in illiquid
assets, including repurchase agreements not entitling the holder to payment of
principal within seven days, or (b) more than 10% of the Fund's total assets
would be invested in securities that are illiquid by virtue of restrictions on
the sale of such securities to the public without registration under the
Securities Act of 1933 ("1933 Act"). The term "illiquid assets" for this purpose
includes securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued the
securities.
Illiquid restricted securities may be sold by the Fund only in privately
negotiated transactions or in a public offering with respect to which a
registration statement is in effect under the 1933 Act. Such securities include
those that are subject to restrictions contained in the securities laws of other
countries. 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. Securities that are
freely marketable in the country where they are principally traded, but would
not be freely marketable in the U.S., are not included within the meaning of the
term "illiquid assets."
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. These instruments are often
restricted securities because the securities are either themselves exempt from
registration or sold in transactions not requiring registration. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend either on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to satisfy share redemption orders
on a timely basis. Such markets might include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified buyers interested
in purchasing certain restricted securities held by the Fund, however, could
affect adversely the marketability of such portfolio securities, and the Fund
might be unable to dispose of such securities promptly or at favorable prices.
The Board of Directors of the Fund has delegated the function of making
day-to-day determinations of liquidity to Midas Management Corporation (the
"Investment Manager") pursuant to guidelines approved by the Board. The
Investment Manager takes into account a number of factors in reaching liquidity
2
<PAGE>
decisions, including (1) the frequency of trades and quotes for the security,
(2) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers, (3) dealer undertakings to make a market
in the security, and the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). The Investment Manager
monitors the liquidity of restricted securities in the Fund's portfolio and
reports periodically on such decisions to the Board of Directors.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which
the Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. The Fund maintains custody
of the underlying securities prior to their repurchase; thus, the obligation of
the bank or dealer to pay the repurchase price on the date agreed to is, in
effect, secured by such securities. If the value of these securities is less
than the repurchase price, plus any agreed-upon additional amount, the other
party to the agreement must provide additional collateral so that at all times
the collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price that was paid by the Fund upon their
acquisition is accrued as interest and included in the Fund's net investment
income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
a repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
the Investment Manager to present minimum credit risks in accordance with
guidelines established by the Fund's board of directors. The Investment Manager
reviews and monitors the creditworthiness of those institutions under the
board's general supervision.
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 of good standing and when, in
the Investment Manager's judgment, the consideration which can be earned
currently from such lending transactions justifies the attendant risk. Any loan
made by the Fund will provide that it may be terminated by either party upon
reasonable notice to the other party. [The Fund has no current intention of
engaging in lending transactions.]
CONVERTIBLE SECURITIES. The Fund may invest 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 objectives. 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.
PREFERRED SECURITIES. The Fund may invest in preferred stocks of U.S. and
foreign issuers that, in the Investment Manager's judgment, offer potential for
growth of capital and income. Such equity securities involve greater risk of
loss of income than debt securities because issuers are not obligated to pay
dividends. In addition, equity securities are subordinate to debt securities,
and are more subject to changes in economic and industry conditions and in the
financial condition of the issuers of such securities.
LOWER RATED DEBT SECURITIES. The Fund is authorized to invest up to 35%
of its total assets in debt securities rated below investment grade, although it
has no current intention of investing more than 5% of its total assets in such
securities during the coming year. Ratings of investment grade or
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<PAGE>
better include, the four highest ratings of Standard & Poor's Ratings Services
("S&P") (AAA, AA, A, or BBB) and Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A, or Baa). Moody's considers securities rated Baa to have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity for such securities to make principal and
interest payments than is the case for higher grade debt securities. Debt
securities rated below investment grade are deemed by these rating agencies to
be predominantly speculative with respect to the issuers' capacity to pay
interest and repay principal and may involve major risk exposure to adverse
conditions. Debt securities rated lower than B may include securities that are
in default or face the risk of default with respect to principal or interest.
Ratings of debt securities represent the rating agencies, opinions
regarding their quality, are not a guarantee of quality and may be reduced after
the Fund has acquired the security. The Investment Manager will consider such an
event in determining whether the Fund should continue to hold the security but
is not required to dispose of it. Credit ratings attempt to evaluate the safety
of principal and interest payments and do not evaluate the risks of fluctuations
in market value. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates. See the Appendix to
this Statement of Additional Information for further information regarding S&P's
and Moody's ratings.
Lower rated debt securities generally offer a higher current yield than
that available from higher grade issues. However, lower rated securities involve
higher risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
adverse changes in the financial condition of the issuers and to price
fluctuations in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of interest and principal and increase the possibility of default. In
addition, the market for lower rated securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically, but such higher yields did not reflect the value of the income
stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructuring or default. There can be no
assurance that such decline in price will not recur. The market for lower rated
debt securities may be thinner and less active than that for higher quality
securities, which may limit the Fund's ability to sell such securities at their
fair value in response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the value and liquidity of lower rated securities,
especially in a thinly traded market.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
that may not be changed without the approval of the lesser of (a) 67% or more of
the voting securities of the Fund present at a meeting if the holders of more
than 50% of the outstanding voting securities of the Fund are present or
represented by proxy or (b) more than 50% of the outstanding voting securities
of the Fund. Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
of securities or assets of, or borrowing by, the Fund. The Fund may not:
1. Borrow money, except to the extent permitted by the Investment Company Act of
1940 ("1940 Act");
2. Engage in the business of underwriting the securities of other issuers,
except to the extent that the Fund may be deemed to be an underwriter under the
Federal securities laws in connection with the disposition of the Fund's
authorized investments;
3. Purchase or sell real estate, provided that the Fund may invest in
securities (excluding limited partnership interests) secured by real
estate or interests therein or issued by companies which invest in real
estate or interests therein;
4. Purchase or sell physical commodities (other than precious metals),
although it may enter into (a) commodity and other futures contracts and
options thereon, (b) options on commodities, including foreign currencies
and precious metals, (c) forward contracts on commodities, including
foreign currencies and precious metals, 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,
precious metals, and other asset loan transactions to the extent
permitted by the 1940 Act; or
6. Issue senior securities as defined in the 1940 Act. The following will
not be deemed to be senior securities prohibited by this provision: (a)
evidences of indebtedness that the Fund is permitted to incur, (b) the
issuance of additional series or classes of securities that the Board of
Directors may establish, (c) the Fund's futures, options, and forward
transactions, and (d) to the extent consistent with the 1940 Act and
applicable rules and policies adopted by the Securities and Exchange
Commission, (i) the establishment or use of a margin account with a
broker for the purpose of effecting securities transactions on margin and
(ii) short sales.
The Fund's Board of Directors has established the following
non-fundamental investment limitations that may be changed by the Board without
shareholder approval:
(i) The Fund's investments in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets, which amount
may include warrants which are not listed on the New York or American
Stock Exchange provided that such warrants, valued at the lower of cost
or market, do not exceed 2% of the Fund's net assets, and further
provided that this restriction does not apply to warrants attached to, or
sold as a unit with, other securities;
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(ii) The Fund may not invest in interests in oil, gas or other mineral
exploration or development programs or leases, although it may invest in
the securities of issuers which invest in or sponsor such programs or
such leases;
(iii) The Fund may not invest more than 5% of its assets in securities of
companies having a record of less than three years continuous operations
(including operations of predecessors);
(iv) The Fund may not purchase or otherwise acquire any security or invest in
a repurchase agreement if, as a result, (a) more than 15% of the Fund's
net assets (taken at current value) would be invested in illiquid assets,
including repurchase agreements not entitling the holder to payment of
principal within seven days, or (b) more that 10% of the Fund's total
assets would be invested in securities that are illiquid by virtue of
restrictions on the sale of such securities to the public without
registration under the 1933 Act;
(v) The Fund may not make short sales of securities or maintain a short
position, except (a) the Fund may buy and sell options, futures
contracts, options on futures contracts, and forward contracts, and (b)
the Fund may sell "short against the box" where, by virtue of its
ownership of other securities, the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold and, if
the right is conditional, the sale is made upon the same conditions;
(vi) The Fund may not purchase securities on margin, except that the Fund may
obtain such short term credits as are necessary for the clearance of
transactions, and provided that margin payments and other deposits made
in connection with transactions in options, futures contracts, forward
contracts and other derivative instruments shall not be deemed to
constitute purchasing securities on margin;
(vii) The Fund may not purchase or retain securities of any issuer if those
officers or Directors of the Fund, its investment manager or its
subadviser who each own beneficially more than 1/2% of 1% of the
securities of an issuer own beneficially together more than 5% of the
securities of that issuer;
(viii) The Fund may not purchase the securities of any investment company except
(a) by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase, provided that immediately
after such purchase no more than: 10% of the Fund's total assets are
invested in securities issued by investment companies, 5% of the Fund's
total assets are invested in securities issued by any one investment
company, or 3% of the voting securities of any one such investment
company are owned by the Fund, and (b) when such purchase is part of a
plan of merger, consolidation, reorganization or acquisition of assets;
(ix) The Fund may not borrow money, except (a) from a bank for temporary or
emergency purposes (not for leveraging or investment) or (b) by engaging
in reverse repurchase agreements, provided however, that borrowings
pursuant to (a) and (b) do not exceed an amount equal to one third of the
total value of the Fund's assets taken at market value, less liabilities
other than borrowings. The Fund may not purchase securities for
investment while any bank borrowing equaling 5% or more of its total
assets is outstanding. If at any time the Fund's borrowings come to
exceed the limitation set forth in (5) above, such borrowing will be
promptly (within three days, not including Sundays and holidays) reduced
to the extent necessary to comply with this limitation;
(x) The aggregate value of securities underlying put options on securities
written by the Fund, determined as of the date the put options are
written, will not exceed 25% of the Fund's net assets, and the aggregate
value of securities underlying call options on securities written by the
Fund, determined as of the date the call options are written, will not
exceed 25% of the Fund's net assets;
(xi) The Fund may purchase a put or call option on a security or a security
index, including any straddles or spreads, only if the value of its
premium, when aggregated with the premiums on all other such instruments
held by the Fund, does not exceed 5% of the Fund's total assets;
(xii) To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a
CFTC-regulated exchange, in each case that are not for bona fide hedging
purposes (as defined by the Commodity Futures Trading Commission
("CFTC")), the aggregate initial margin and premiums required to
establish these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized
losses on any contracts the Fund has entered into; and
(xiii) The Fund may not mortgage, pledge or hypothecate any assets in excess of
one-third of the Fund's total assets.
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES
REGULATION OF THE USE OF OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT
STRATEGIES. As discussed in the Prospectus, the Investment Manager may purchase
and sell options (including options on precious metals, foreign currencies,
equity and debt securities, and securities indices), futures contracts (or
"futures") (including futures contracts on precious metals, foreign currencies,
securities and securities indices), options on futures contracts and forward
currency contracts. Certain special characteristics of and risks associated with
using these instruments are discussed below. In addition to the non- fundamental
investment restrictions described above in sections (x), (xi) and (xii), use of
options, forward currency contracts and futures by the Fund is subject to the
applicable regulations of the SEC, the several options and futures exchanges
upon which such instruments may be traded, the CFTC and the various state
regulatory authorities.
The Fund's ability to use options, forward contracts and futures may be
limited by market conditions, regulatory limits and tax considerations, and the
Fund might not employ any of the strategies described above. There can be no
assurance that any hedging or yield or income enhancement strategy used will be
successful. The Fund's ability to successfully utilize these instruments will
depend on the Investment Manager's ability to predict accurately movements in
the prices of the assets being hedged and movements in securities, interest
rates, foreign currency exchange rates and precious metals prices. There is no
5
<PAGE>
assurance that a liquid secondary market for options and futures will always
exist, and the correlation between hedging instruments and the assets being
hedged may be imperfect. It also may be necessary to defer closing out hedged
positions to avoid adverse tax consequences.
In addition to the products, strategies and risks described below and in
the Prospectus, the Investment Manager may discover additional opportunities in
connection with options, futures and forward currency contracts. These new
opportunities may become available as the Investment Manager develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures and forward currency contracts are
developed. The Investment Manager may utilize these opportunities to the extent
they are consistent with the Fund's investment objective, permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund's
registration statement will be supplemented to the extent that new products and
strategies involve materially different risks than those described below and in
the Prospectus.
COVER FOR OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES.
Transactions using these instruments, other than purchased options, expose the
Fund to an obligation to another party. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies or other options, futures contracts or forward contracts,
or (2) cash, receivables and short-term debt securities, with a value sufficient
at all times to cover its potential obligations to the extent not covered as
provided in (1) above. The Fund would comply with SEC guidelines regarding cover
for these instruments and will, if the guidelines so require, set aside cash,
U.S. Government securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount as determined
daily on a mark-to-market basis.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding instrument is open, unless they are replaced
with other appropriate assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregate accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTION INCOME AND HEDGING STRATEGIES. The Fund may purchase and write
(sell) both exchange-traded options and options traded on the over-the-counter
("OTC") market. Exchange-traded options in the U.S. are issued by a clearing
organization affiliated with the exchange on which the option is listed, which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its counterparty with
no clearing organization guarantee. Thus, when the Fund purchases an OTC option,
it relies on the dealer from which it has purchased the OTC option to make or
take delivery of the securities or other instrument underlying the option.
Failure by the dealer to do so would result in the loss of any premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
The Fund may purchase call options on securities (both equity and debt)
that the Investment Manager intends to include in the Fund's portfolio in order
to fix the cost of a future purchase. Call options also may be used as a means
of enhancing returns by, for example, participating in an anticipated price
increase of a security. In the event of a decline in the price of the underlying
security, use of this strategy would serve to limit the potential loss to the
Fund to the option premium paid; conversely, if the market price of the
underlying security increases above the exercise price and the Fund either sells
or exercises the option, any profit eventually realized would be reduced by the
premium paid.
The Fund may purchase put options on securities in order to hedge against
a decline in the market value of securities held in its portfolio or to attempt
to enhance return. The put option enables the Fund to sell the underlying
security at the predetermined exercise price; thus, the potential for loss to
the Fund below the exercise price is limited to the option premium paid. If the
market price of the underlying security is higher than the exercise price of the
put option, any profit the Fund realizes on the sale of the security would be
reduced by the premium paid for the put option less any amount for which the put
option may be sold.
The Fund may on certain occasions wish to hedge against a decline in the
market value of securities held in its portfolio at a time when put options on
those particular securities are not available for purchase. The Fund may
therefore purchase a put option on other carefully selected securities, the
values of which historically have a high degree of positive correlation to the
value of such portfolio securities. If the Investment Manager's judgment is
correct, changes in the value of the put options should generally offset changes
in the value of the portfolio securities being hedged. However, the correlation
between the two values may not be as close in these transactions as in
transactions in which the Fund purchases a put option on a security held in its
portfolio. If the Investment Manager's judgment is not correct, the value of the
securities underlying the put option may decrease less than the value of the
Fund's portfolio securities and therefore the put option may not provide
complete protection against a decline in the value of the Fund's portfolio
securities below the level sought to be protected by the put option.
The Fund may write call options on securities for hedging or to increase
return in the form of premiums received from the purchasers of the options. A
call option gives the purchaser of the option the right to buy, and the writer
(seller) the obligation to sell, the underlying security at the exercise price
during the option period. The strategy may be used to provide limited protection
against a decrease in the market price of the security, in an amount equal to
the premium received for writing the call option less any transaction costs.
Thus, if the market price of the underlying security held by the Fund declines,
the amount of such decline will be offset wholly or in part by the amount of the
premium received by the Fund. If, however, there is an increase in the market
price of the underlying security and the option is exercised, the Fund would be
obligated to sell the security at less than its market value. The Fund would
give up the ability to sell any portfolio securities used to cover the call
option while the call option was outstanding. In addition, the Fund could lose
the ability to participate in an increase in the value of such securities above
the exercise price of the call option because such an increase would likely be
offset by an increase in the cost of closing out the call option (or could be
negated if the buyer chose to exercise the call option at an exercise price
below the current market value). Portfolio securities used to cover OTC options
written also may be considered illiquid, and therefore subject to the Fund's
limitation on investing no more than 15% of its net assets in illiquid
securities, unless the OTC options are sold to qualified dealers who agree that
the Fund may repurchase any OTC options it writes for a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an OTC
option written subject to this procedure would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
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The Fund also may write put options on securities. A put option gives the
purchaser of the option the right to sell, and the writer (seller) the
obligation to buy, the underlying security at the exercise price during the
option period. So long as the obligation of the writer continues, the writer may
be assigned an exercise notice by the broker/dealer through whom such option was
sold, requiring it to make payment of the exercise price against delivery of the
underlying security. If the put option is not exercised, the Fund will realize
income in the amount of the premium received. This technique could be used to
enhance current return during periods of market uncertainty. The risk in such a
transaction would be that the market price of the underlying security would
decline below the exercise price less the premiums received, in which case the
Fund would expect to suffer a loss.
The Fund may purchase and sell put and call options on securities
indices, precious metals and currencies, in much the same manner as the more
traditional securities options discussed above. Index options may serve as a
hedge against overall fluctuations in the securities markets (or a market
sector) rather than anticipated increases or decreases in the value of a
particular security. A securities index assigns values to the securities
included in the index and fluctuates with changes in such values. Settlements of
securities index options are effected with cash payments and do not involve
delivery of securities. Thus, upon settlement of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the index. The
effectiveness of hedging techniques using securities index options will depend
on the extent to which price movements in the securities index selected
correlate with price movements of the securities in which the Fund invests.
The Fund may purchase and write straddles on securities and securities
indexes. A long straddle is a combination of a call and a put purchased on the
same security or index where the exercise price of the put is less than or equal
to the exercise price on the call. The Fund would enter into a long straddle
when the Investment Manager believes that it is likely that securities prices
will be more volatile during the term of the options than is implied by the
option pricing. A short straddle is a combination of a call and a put written on
the same security where the exercise price on the put is less than or equal to
the exercise price of the call; the same issue of the security can be considered
"cover" for both the put and the call. The Fund would enter into a short
straddle when the Investment Manager believes that it is unlikely that
securities prices will be as volatile during the term of the options as is
implied by the option pricing. In such case, the Fund will set aside cash and/or
liquid, high-grade debt securities in a segregated account with its custodian
equivalent in value to the amount, if any, by which the put is "in-the-money,"
that is, that amount by which the exercise price of the put exceeds the current
market value of the underlying security.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS. The Fund may purchase and
sell options on foreign currencies to hedge against the risk of foreign exchange
rate fluctuations on foreign securities that the Fund holds in its portfolio or
that it intends to purchase or to enhance return. For example, if the Fund
enters into a contract to purchase securities denominated in a foreign currency,
it could effectively fix the maximum U.S. dollar cost of the securities by
purchasing call options on that foreign currency. Similarly, if the Fund held
securities denominated in a foreign currency and anticipated a decline in the
value of that currency against the U.S. dollar, the Fund could hedge against
such a decline by purchasing a put option on the currency involved. The Fund can
also purchase and sell options on foreign currencies in order to attempt to
increase the Fund's yield.
The Fund's ability to establish and close out positions in such options
is subject to the maintenance of a liquid secondary market. Although many
options on foreign currencies are exchange-traded, the majority are traded on
the OTC market. Options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers and other market resources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the inter-bank market and thus may not reflect relatively
smaller transactions (that is, less than $1 million) where rates may be less
favorable. The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are closed
while the markets for the underlying currencies remain open, significant price
and rate movements may take place in the underlying markets that cannot be
reflected in the options markets until they reopen.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If the Fund wishes to terminate its obligation to purchase
or sell under a put or a call option it has written, the Fund may purchase a put
or a call option of the same series (that is, an option identical in its terms
to the option previously written); this is known as a closing purchase
transaction. Conversely, in order to terminate its right to purchase or sell
under a call or put option it has purchased, the Fund may sell an option of the
same series as the option held; this is known as a closing sale transaction.
Closing transactions essentially permit the Fund to realize profits or limit
losses on its options positions prior to the exercise or expiration of the
option.
In considering the use of options to enhance return or to hedge the
Fund's portfolio, particular note should be taken of the following:
(1) The value of an option position will reflect, among other things, the
current market price of the underlying security, securities index, precious
metal or currency, the time remaining until expiration, the relationship of the
exercise price to the market price, the historical price volatility of the
underlying security, securities index, precious metal or currency and general
market conditions. For this reason, the successful use of options depends upon
the Investment Manager's ability to forecast the direction of price fluctuations
in the underlying securities, precious metals or currency markets or, in the
case of securities index options, fluctuations in the market sector represented
by the selected index.
(2) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the current market
value of the underlying security, securities index, precious metal or currency
during the term of the option. Purchased options that expire unexercised have no
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value. Unless an option purchased by the Fund is exercised or unless a closing
transaction is effected with respect to that position, the Fund will realize a
loss in the amount of the premium paid and any transaction costs.
(3) A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Most
exchange-listed options relate to securities and securities indices. Although
the Fund intends to purchase or write only those exchange-traded options for
which there appears to be a liquid secondary market, there is no assurance that
a liquid secondary market will exist for any particular option at any particular
time. Closing transactions may be effected with respect to options traded in the
OTC markets (currently the primary markets for options on debt securities and a
significant market for foreign currencies) only by negotiating directly with the
other party to the option contract or in a secondary market for the option if
such market exists. Although the Fund will enter into OTC options with dealers
that agree to enter into, and that are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund
would be able to liquidate an OTC option at a favorable price at any time prior
to expiration. In the event of insolvency of the counterparty to an OTC option,
the Fund may be unable to liquidate an OTC option. Accordingly, it may not be
possible to effect closing transactions with respect to certain options, which
would result in the Fund having to exercise those options that it has purchased
in order to realize any profit. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in material losses to
the Fund. For example, because the Fund may maintain a covered position with
respect to call options it writes on a security, currency, precious metal or
securities index, the Fund may not sell the underlying securities, precious
metal or currency (or invest any cash securities used to cover the option)
during the period it is obligated under such option. This requirement may impair
the Fund's ability to sell a portfolio security or make an investment at a time
when such a sale or investment might be advantageous.
(4) Securities index options are settled exclusively in cash. If the Fund
writes a call option on an index, the Fund cannot cover its obligation under the
call index option by holding the underlying securities. In addition, a holder of
a securities index option who exercises it before the closing index value for
that day is available, runs the risk that the level of the underlying index may
subsequently change.
(5) The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs and taxes; however, the
Fund also may save on commissions by using options as a hedge rather than buying
or selling individual securities in anticipation or as a result of market
movements.
FUTURES AND RELATED OPTIONS STRATEGIES. The Fund may engage in futures
strategies for hedging purposes to attempt to reduce the overall investment risk
that would normally be expected to be associated with ownership of the
securities in which it invests (or intends to acquire) or to enhance yield.
Hedging strategies may involve, among other things, using futures strategies to
manage the effective duration of the Fund. If the Investment Manager wishes to
shorten the effective duration of the Fund's fixed-income portfolio, the Fund
may sell an interest rate futures contract or a call option thereon, or purchase
a put option on that futures contract. If the Investment Manager wishes to
lengthen the effective duration of the Fund's fixed-income portfolio, the Fund
may buy an interest rate futures contract or a call option thereon, or sell a
put option.
The Fund may use interest rate futures contracts and options thereon to
hedge its portfolio against changes in the general level of interest rates. The
Fund may purchase an interest rate futures contract when it intends to purchase
debt securities but has not yet done so. This strategy may minimize the effect
of all or part of an increase in the market price of the debt security that the
Fund intends to purchase in the future. A rise in the price of the debt security
prior to its purchase may either be offset by an increase in the value of the
futures contract purchased by the Fund or avoided by taking delivery of the debt
securities under the futures contract. Conversely, a fall in the market price of
the underlying debt security may result in a corresponding decrease in the value
of the futures position. The Fund may sell an interest rate futures contract in
order to continue to receive the income from a debt security, while endeavoring
to avoid part or all of the decline in market value of that security that would
accompany an increase in interest rates.
The Fund may purchase a call option on an interest rate futures contract
to hedge against a market advance in debt securities that the Fund plans to
acquire at a future date. The purchase of a call option on an interest rate
futures contract is analogous to the purchase of a call option on an individual
debt security, which can be used as a temporary substitute for a position in the
security itself. The Fund also may write put options on interest rate futures
contracts as a partial anticipatory hedge and may write call options on interest
rate futures contracts as a partial hedge against a decline in the price of debt
securities held in the Fund's portfolio. The Fund may also purchase put options
on interest rate futures contracts in order to hedge against a decline in the
value of debt securities held in the Fund's portfolio.
The Fund may sell securities index futures contracts in anticipation of a
general market or market sector decline. To the extent that a portion of the
Fund's portfolio correlates with a given index, the sale of futures contracts on
that index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. For example,
if the Fund correctly anticipates a general market decline and sells securities
index futures to hedge against this risk, the gain in the futures position
should offset some or all of the decline in the value of the portfolio. The Fund
may purchase securities index futures contracts if a market or market sector
advance is anticipated. Such a purchase of a futures contract could serve as a
temporary substitute for the purchase of individual securities, which securities
may then be purchased in an orderly fashion. This strategy may minimize the
effect of all or part of an increase in the market price of securities that the
Fund intends to purchase. A rise in the price of the securities should be in
part or wholly offset by gains in the futures position.
As in the case of a purchase of a securities index futures contract, the
Fund may purchase a call option on a securities index futures contract to hedge
against a market advance in securities that the Fund plans to acquire at a
future date. The Fund may write put options on securities index futures as a
partial anticipatory hedge and may write call options on securities index
futures as a partial hedge against a decline in the price of securities held in
the Fund's portfolio. This is analogous to writing call options on securities.
The Fund also may purchase put options on securities index futures contracts.
The purchase of put options on securities index futures contracts can be
analogous to the purchase of protective put options on individual securities
where a level of protection is sought below which no additional economic loss
would be incurred by the Fund.
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The Fund may sell foreign currency futures contracts to hedge against
possible variations in the exchange rate of foreign currency in relation to the
U.S. dollar. In addition, the Fund may sell foreign currency futures contracts
when the Investment Manager anticipates a general weakening of the foreign
currency exchange rate that could adversely affect the market value of the
Fund's foreign securities holdings or interest payments to be received in that
foreign currency. In this case, the sale of futures contracts on the underlying
currency may reduce the risk to the Fund of a reduction in market value caused
by foreign currency exchange rate variations and, by so doing, provide an
alternative to the liquidation of securities positions and resulting transaction
costs. When the Investment Manager anticipates a significant foreign exchange
rate increase while intending to invest in a security denominated in that
currency, the Fund may purchase a foreign currency futures contract to hedge
against the increased rates pending completion of the anticipated transaction.
Such a purchase would serve as a temporary measure to protect the Fund against
any rise in the foreign currency exchange rate that may add additional costs to
acquiring the foreign security position. The Fund may also purchase call or put
options on foreign currency futures contracts to obtain a fixed foreign currency
exchange rate at limited risk. The Fund may purchase a call option on a foreign
currency futures contract to hedge against a rise in the foreign currency
exchange rate while intending to invest in a security denominated in that
currency. The Fund may purchase put options on foreign currency futures
contracts as a hedge against a decline in the foreign currency exchange rates or
the value of its foreign portfolio securities. The Fund may write a put option
on a foreign currency futures contract as a partial anticipatory hedge and may
write a call option on a foreign currency futures contract as a partial hedge
against the effects of declining foreign currency exchange rates on the value of
foreign securities.
The Fund may also purchase these instruments to enhance return, for
example by writing options on futures contracts. In addition, the Fund can use
these instruments to change its exposure to securities or precious metals price
changes, or interest or foreign currency exchange rate changes, for example, by
changing the Fund's exposure from one foreign currency exchange rate to another.
The Fund may also write put options on interest rate, securities index,
precious metal or foreign currency futures contracts while, at the same time,
purchasing call options on the same interest rate, securities index, precious
metal or foreign currency futures contract in order to synthetically create an
interest rate, securities index, precious metal or foreign currency futures
contract. The options will have the same strike prices and expiration dates. The
Fund will only engage in this strategy when it is more advantageous to the Fund
to do so as compared to purchasing the futures contract.
The Fund may also purchase and write straddles on futures contracts. A
long straddle is a combination of a call and a put purchased on the same futures
contract at the same exercise price. The Fund would enter into a long straddle
when it believes that it is likely that the futures contract's price will be
more volatile during the term of the options than is implied by the option
pricing. A short straddle is a combination of a call and put written on the same
futures contract at the same exercise price where the same futures contract is
considered "cover" for both the put and the call. The Fund would enter into a
short straddle when it believes that it is unlikely that the futures contract's
price will be as volatile during the term of the options as is implied by the
option pricing. In such case, the Fund will set aside cash and/or liquid, high
grade debt securities in a segregated account with its custodian equal in value
to the amount, if any, by which the put is "in-the-money," that is the amount by
which the exercise price of the put exceeds the current market value of the
underlying security.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING.
No price is paid upon entering into a futures contract. Instead, upon entering
into a futures contract, the Fund is required to deposit with its custodian in a
segregated account in the name of the futures broker through whom the
transaction is effected an amount of cash or U.S. Government securities
generally equal to 10% or less of the contract value. This amount is known as
"initial margin." When writing a call or a put option on a futures contract and
certain options on currencies, margin also must be deposited in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin does not involve borrowing to finance the futures or options
transactions. Rather, initial margin is in the nature of a performance bond or
good-faith deposit on the contract that is returned to the Fund upon termination
of the transaction, assuming all obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment. Additionally,
initial margin requirements may be increased generally in the future by
regulatory action. Subsequent payments, called "variation margin," to and from
the broker, are made on a daily basis as the value of the futures or options
position varies, a process known as "marking to the market." For example, when
the Fund purchases a contract and the value of the contract rises, the Fund
receives from the broker a variation margin payment equal to that increase in
value. Conversely, if the value of the futures position declines, the Fund is
required to make a variation margin payment to the broker equal to the decline
in value. Variation margin does not involve borrowing to finance the transaction
but rather represents a daily settlement of the Fund's obligations to or from a
clearing organization.
Buyers and sellers of futures positions and options thereon can enter
into offsetting closing transactions, similar to closing transactions on options
on securities, by selling or purchasing an offsetting contract or option.
Futures contracts or options thereon may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts or options.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses, because
prices could move to the daily limit for several consecutive trading days with
little or no trading and thereby prevent prompt liquidation of unfavorable
positions. In such event, it may not be possible for the Fund to close a
position and, in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin (except in the case of purchased
options). However, if futures contracts or options have been used to hedge
portfolio securities, such securities will not be sold until the contracts can
be terminated. In such circumstances, an increase in the price of the
securities, if any, may partially or completely offset losses on the contract.
However, there is no guarantee that the price of the securities will, in fact,
correlate with the price movements in the contracts and thus provide an offset
to losses on the contracts.
In considering the Fund's use of futures contracts and options,
particular note should be taken of the following:
(1) Successful use by the Fund of futures contracts and options will
depend upon the Investment Manager's ability to predict movements in the
direction of the overall securities, currencies, precious metals and interest
rate markets, which requires different skills and techniques than predicting
changes
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in the prices of individual securities. Moreover, these contracts relate not
only to the current price level of the underlying instrument or currency but
also to the anticipated price levels at some point in the future. There is, in
addition, the risk that the movements in the price of the contract will not
correlate with the movements in the prices of the securities, precious metals or
currencies being hedged. For example, if the price of the securities index
futures contract moves less than the price of the securities that are the
subject of the hedge, the hedge will not be fully effective, but if the price of
the securities being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the securities being hedged has moved in a favorable direction, the advantage
may be partially offset by losses in the futures position. In addition, if the
Fund has insufficient cash, it may have to sell assets from its portfolio to
meet daily variation margin requirements. Any such sale of assets may or may not
be made at prices that reflect a rising market. Consequently, the Fund may need
to sell assets at a time when such sales are disadvantageous to the Fund. If the
price of the contract moves more than the price of the underlying securities,
the Fund will experience either a loss or a gain on the contract that may or may
not be completely offset by movements in the price of the securities that are
the subject of the hedge.
(2) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures or
options position and the securities, precious metals or currencies being hedged,
movements in the prices of these contracts may not correlate perfectly with
movements in the prices of the hedged securities, precious metals or currencies
due to price distortions in the futures and options market. There may be several
reasons unrelated to the value of the underlying securities, precious metals or
currencies that cause this situation to occur. First, as noted above, all
participants in the futures and options market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts or options through offsetting transactions,
distortions in the normal price relationship between the securities, precious
metals, currencies and the futures and options markets may occur. Second,
because the margin deposit requirements in the futures and options market are
less onerous than margin requirements in the securities market, there may be
increased participation by speculators in the futures market; such speculative
activity in the futures market also may cause temporary price distortions. As a
result, a correct forecast of general market trends may not result in successful
hedging through the use of futures contracts or options over the short term. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage and other investment strategies may result in temporary
price distortions.
(3) Positions in futures contracts and options on futures may be closed
out only on an exchange or board of trade that provides a secondary market for
such contracts. Although the Fund intends to purchase and sell such contracts
only on exchanges or boards of trade where there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange or board of trade will exist for any particular contract at any
particular time. In such event, it may not be possible to close a position, and
in the event of adverse price movements, the Fund would continue to be required
to make variation margin payments.
(4) Like options on securities and currencies, options on futures
contracts have limited life. The ability to establish and close out options on
futures will be subject to the maintenance of liquid secondary markets on the
relevant exchanges or boards of trade.
(5) Purchasers of options on futures contracts pay a premium at the time
of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on futures contracts, however, must post initial margin and
are subject to additional margin calls that could be substantial in the event of
adverse price movements. In addition, although the maximum amount at risk when
the Fund purchases an option is the premium paid for the option and the
transaction costs, there may be circumstances when the purchase of an option on
a futures contract would result in a loss to the Fund when the use of a futures
contract would not, such as when there is no movement in the level of the
underlying securities index value or the underlying securities, precious metals
or currencies.
(6) As is the case with options, the Fund's activities in the futures and
options on futures markets may result in a higher portfolio turnover rate and
additional transaction costs in the form of added brokerage commissions and
taxes; however, the Fund also may save on commissions by using futures contracts
or options thereon rather than buying or selling individual securities or
currencies in anticipation or as a result of market movements.
SPECIAL RISKS RELATED TO FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS. Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described above.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. Compared to
the purchase or sale of foreign currency futures contracts, the purchase of call
or put options thereon involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the option (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a foreign currency futures contract would result in a loss, such as
when there is no movement in the price of the underlying currency or futures
contract, when the purchase of the underlying futures contract would not result
in such a loss.
FORWARD CURRENCY CONTRACTS. The Fund may use forward currency contracts
to protect against uncertainty in the level of future foreign currency exchange
rates. The Fund may also use forward currency contracts in one currency or
basket of currencies to attempt to hedge against fluctuations in the value of
securities denominated in a different currency if the Investment Manager
anticipates that there will be a correlation between the two currencies.
The Fund may enter into forward currency contracts with respect to
specific transactions. For example, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or the Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds or anticipates purchasing, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such payment, as the case may be, by entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars or foreign currency, of the
amount of foreign currency involved in the underlying transaction. The Fund will
thereby be able to protect itself against a possible loss resulting from an
adverse
10
<PAGE>
change in the relationship between the currency exchange rates during the period
between the date on which the security is purchased or sold, or on which the
payment is declared, and the date on which such payments are made or received.
The Fund also may hedge by using forward currency contracts in connection with
portfolio positions.
The Fund may also use forward currency contracts to shift the Fund's
exposure from one foreign currency to another. For example, if the Fund owns
securities denominated in a foreign currency and the Investment manager believes
that currency will decline relative to another currency, it might enter into a
forward contract to sell the appropriate amount of the first currency with
payment to be made in the second currency. Transactions that use two foreign
currencies are sometimes referred to as "cross hedging." Use of a different
foreign currency magnifies the Fund's exposure to foreign currency exchange rate
fluctuations. The Fund may also purchase forward currency contracts to enhance
income when the Investment Manager anticipates that the foreign currency will
appreciate in value, but securities denominated in that foreign currency do not
present attractive investment opportunities.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (that is, cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
the market value of the security exceeds the amount of foreign currency the Fund
is obligated to deliver. The projection of short-term currency market movements
is extremely difficult and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Fund to sustain losses on these contracts and transaction costs. Under normal
circumstances, consideration of the prospects for currency parities will be
incorporated into the longer term decisions made with regard to overall
investment strategies. However, the Investment Manager believes that it is
important to have the flexibility to enter into forward contracts when it
determines that the best interests of the Fund will be served.
At or before the maturity date of a forward contract requiring the Fund
to sell a currency, the Fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, the Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward currency
contract under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the first
contract and the offsetting contract.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currencies involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. The use of forward currency contracts does not eliminate fluctuations
in the prices of the underlying securities the Fund owns or intends to acquire,
but it does fix a rate of exchange in advance. In addition, although the use of
forward currency contracts for hedging purposes limits the risk of loss due to a
decline in the value of the hedged currencies, at the same time it limits any
potential gain that might result should the value of the currencies increase.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
OFFICERS AND DIRECTORS
The 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, ChFC, MSFS -- Director (since 1995). 3443 Highway 66,
Neptune, NJ 07753. He is Senior Consultant with The Berger Financial Group, LLC
specializing in financial, estate and insurance matters. From March 1995 to
December 31, 1995, he was President of Huber Hogan Knotts Consulting, Inc. From
1990 to March 1995, he was President of Huber-Hogan Associates. 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.
11
<PAGE>
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 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* -- Chairman of the Board (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 and the SEC Rules Committee of
the Investment Company Institute. He is a brother of Mark C. Winmill. He was
born June 25, 1959.
The executive officers of 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.
JOSEPH LEUNG, CPA -- Treasurer and Chief Accounting Officer (since 1995). He is
Treasurer and Chief Accounting Officer of the Investment Manager and its
affiliates. From 1992 to 1995 he held various positions with Coopers & Lybrand
L.L.P., a public accounting firm. From 1991 to 1992, he was the accounting
supervisor at Retirement Systems Group, a mutual fund company. From 1987 to
1991, he held various positions with Ernst & Young, a public accounting firm.
He is a member of the American Institute of Certified Public Accountants. He was
born September 15, 1965.
WILLIAM J. MAYNARD -- Vice President and Secretary (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 previously paid and
anticipated to be paid during the fiscal year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C>
Pension or Retirement Benefit Total Compensation From
Accrued as Part of Fund Expen
Fund and Investment
Aggregate Compensa- Estimated Annual Benefits Company Complex Paid To
NAME OF PERSON, POSITION tion From Fund ses Upon Retirement Directors
THOMAS B. WINMILL None None None None
CHAIRMAN OF THE BOARD,
CO-PRESIDENT
Mark C. Winmill None None None None
Co-President
Robert D. Anderson None None None None
Vice Chairman
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Russell E. Burke III $1,500 None None $9,000 from
Director 3 Investment Companies
Bruce B. Huber $1,500 None None $12,500 from
Director 6 Investment Companies
James E. Hunt $1,500 None None $12,500 from
Director 6 Investment Companies
Frederick A. Parker $1,500 None None $12,500 from
Director 6 Investment Companies
John B. Russell $1,500 None None $12,500 from
Director 6 Investment Companies
============================================================================= ==
</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.
13
<PAGE>
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.
As of December 31, 1995, the Fund paid the Investment Manager $92,847.
Reimbursement for the year ended December 31, 1995 was $23,879. The Fund
reimbursed the Investment Manager $2,506 for providing certain administrative
and accounting services at cost.
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 $290,000,000 as of February 29, 1996.
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:
14
<PAGE>
RELATIVE PERFORMANCE a
<TABLE>
<S> <C> <C> <C>
TOTAL NET ASSETS b More than 50 basis points better than Within 50 basis points of More than 50 basis points
BTR BRT below BTR
$15,000,000 30% 20% 10%
$15,000,000 and $50,000,000 40% 30% 20%
$50,000,000 50% 40% 30%
</TABLE>
As of December 31, 1995, the Investment Manager paid the Subadviser
$27,241.
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;
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.
15
<PAGE>
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.
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, 1995 is 160.37%.
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 DECEMBER 31, 1995 -- ASSUMING NO
INITIAL SALES CHARGE
Since inception (Jan. 8, 1986) 10.08%
Five Years 15.87%
One Year 36.73%
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 December 31, 1995 is, respectively, 160.37%,
108.82% and 36.73%.
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.
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.
16
<PAGE>
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.
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.
17
<PAGE>
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. 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.
Pursuant to the Plan the Fund compensates the Distributor in an amount up
to one-quarter of one percent per annum of the Fund's average daily net assets
for expenditures that were primarily intended to result in the sale of Fund
shares. Of the amounts paid to the Distributor during the Fund's fiscal year
ended December 31, 1995, approximately $26,150 represented paid expenses
incurred for advertising, $56,996 printing and mailing prospectuses and other
information
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to other than current shareholders, $64,533 for salaries of marketing and sales
personnel, $787 for payments to third parties who sold shares of the Fund and
provided certain services in connection therewith, and $48,774 for overhead and
miscellaneous expenses. These amounts have been derived by determining the ratio
each such category represents to the total expenditures incurred by the
Distributor in performing services pursuant to the Plan and then applying such
ratio to the total amount of compensation received by the Distributor pursuant
to the Plan. The Distributor also received $3,516 for shareholder administration
services which it provided to the Fund at cost during the year ended December
31, 1995.
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
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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 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.
During the fiscal years ended December 31, 1993, 1994, and 1995, the
Fund paid total brokerage commissions of $54,725, $74,869 and $92,224. For
the fiscal year ended 1995, $___ in brokerage commissions (representing
$90,000 in portfolio transactions) was allocated to broker/dealers that
provided research services. No transactions were directed to broker/dealers
during such periods for selling shares of the Fund or any affiliated funds.
During the Fund's fiscal years ended December 31, 1993 and 1994, the Fund
paid no brokerage commissions to BBSI, and in 1995 the Fund paid $2,224
which represented 2.41% of the total brokerage commissions paid by the Fund
and 98% of the aggregate dollar amount of transactions involving the
payment of commissions.
Investment decisions for the Fund and for the other Funds managed by the
Investment Manager or its affiliates are made independently based on each Fund's
investment objectives and policies. The same investment decision, however, may
occasionally be made for two or more Funds. In such a case, the Investment
Manager may combine orders for two or more Funds for a particular security 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.
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The Fund's portfolio turnover rate may vary from year to year and will
not be a limiting factor when the Investment Manager deems portfolio changes
appropriate. The portfolio turnover rate is calculated by dividing the lesser of
the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of securities in the
portfolio during the year. For the fiscal years ended December 31, 1995 and
1994, the Fund's portfolio turnover rate was 47.72% and 52.62%, respectively. A
higher portfolio turnover rate involves correspondingly greater transaction
costs and increases the potential for short-term capital gains and taxes.
From time to time, certain brokers may be paid a fee for record keeping,
shareholder communications and other services provided by them to investors
purchasing shares of the Fund through the "no transaction fee" programs offered
by such brokers. This fee is based on the average daily value of the investments
in the Fund made by such brokers on behalf of investors participating in their
"no transaction fee" programs. The Fund's directors have further authorized the
Investment Manager to place a portion of the Fund's brokerage transactions with
any such brokers, if the Investment Manager reasonably believes that, in
effecting the Fund's transactions in portfolio securities, such broker or
brokers are able to provide the best execution of orders at the most favorable
prices. Commissions earned by such brokers from executing portfolio transactions
on behalf of the Fund may be credited by them against the fee they charge the
Fund, on a basis which has resulted from negotiations between the Investment
Manager and such brokers.
DISTRIBUTIONS AND TAXES
If the U.S. Postal Service cannot deliver a shareholder's check, or if a
shareholder's check remains uncashed for six months, the Fund reserves the right
to credit the shareholder's account with additional shares of the Fund at the
then current net asset value in lieu of the cash payment and to thereafter issue
such shareholder's distributions in additional shares of the Fund.
The Fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"). To qualify for this treatment, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short term
capital gain and net gains from certain foreign currency transactions) 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
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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-to- market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value of
each such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
OPTIONS, FUTURES, 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 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, Box 2197, Boston, MA 02111 has been
retained by the Fund to act as Custodian of the Fund's investments and may
appoint one or more subcustodians. The Custodian also performs certain
accounting services for the Fund. As part of its agreement with the Fund, the
Custodian may apply credits or charges for its services to the Fund for,
respectively, positive or deficit cash balances maintained by the Fund with the
Custodian. DST Systems, Inc., Box 419789, Kansas City, Missouri 64141-6789, is
the Fund's Transfer and Dividend Disbursing Agent.
AUDITORS
Tait, Weller & Baker, Two Penn Center, Suite 700, Philadelphia, PA
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,
1995, together with the Report of the Fund's independent accountants thereon,
appear in the Fund's Annual Report to Shareholders and are incorporated herein
by reference.
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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. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." 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 or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-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 RATINGS SERVICES 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 have a very strong capacity to pay interest and repay
principal and differ from the higher rated 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 than debt in higher rated categories.
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 category
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.
23
<PAGE>
<PAGE>
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements: Financial statements of the Registrant are included in
the Registrant's Statement of Additional Information filed as part of this
Registration Statement.
(b) Exhibits:
1 Articles of Incorporation of Midas Fund, Inc., filed with the
Securities and Exchange Commission on August 24, 1995.
Bylaws of Midas Fund, Inc., filed with the Securities
and Exchange Commission on August 24, 1995.
Not applicable.
Specimen copy of share certificate of Midas Fund,
Inc., filed with the Securities and Exchange
Commission on August 24, 1995.
Form of Investment Management Agreement of Midas Fund, Inc., filed with the
Securities and Exchange Commission on August 24, 1995.
Form of Subadvisory Agreement of Midas Fund, Inc.,
filed with the Securities and Exchange Commission on
August 24, 1995.
Form of Distribution Agreement of Midas Fund, Inc.,
filed with the Securities and Exchange Commission on
August 24, 1995.
Not applicable.
Form of Custodian Agreement of Midas Fund, Inc.,
filed with the Securities and Exchange Commission on
August 24, 1995.
8(b) Form of Precious Metals Storage Agreement of Midas Fund, Inc., filed with
the Securities and Exchange Commission on August 24, 1995.
8(c) Service and Agency Agreement, filed with the Securities and Exchange
Commission on August 24, 1995.
8(d) Custodial Account and IRA Disclosure Statement, filed
with the Securities and Exchange Commission on August
24, 1995.
8(e) IRA Agreement, filed with the Securities and Exchange Commission on August
24, 1995.
9(c) Transfer Agency Agreement, filed with the Securities and Exchange
Commission on August 24, 1995.
9(d) Agency Agreement, filed with the Securities and Exchange Commission on
August 24, 1995.
9(e) Shareholder Administration Agreement, filed with the Securities and
Exchange Commission on August 24, 1995.
12 Not applicable.
14(a) Standardized Profit Sharing Adoption Agreement, filed with the Securities
and Exchange Commission on August 24, 1995.
Part C-1
<PAGE>
14(b) Defined Contribution Basic Plan Document, filed with the Securities and
Exchange Commission on August 24, 1995.
14(c) Standardized Money Purchase Adoption Agreement, filed with the Securities
and Exchange Commission on August 24, 1995.
14(d) Simplified Profit Sharing Adoption Agreement, filed with the Securities
and Exchange Commission on August 24, 1995.
14(e) Simplified Money Purchase Adoption Agreement, filed with the Securities
and Exchange Commission on August 24, 1995.
15 Form of Plan of Distribution of Midas Fund, Inc.,
filed with the Securities and Exchange Commission on
August 24, 1995.
17. Financial Data Schedule, filed herewith.
18. Not Applicable.
Item 25. Persons Controlled by or Under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
The following table sets forth the number of holders of shares of Midas
Fund, Inc. as of February 29, 1996:
(1) (2)
Title of Class Number of Record Holders
Common stock, par value 5,286
$.01 per share
Item 27. Indemnification
Indemnification. The Registrant is incorporated under Maryland
law. Section 2-418 of the Maryland General Corporation Law requires the
Registrant to indemnify its directors, officers and employees against expenses,
including legal fees, in a successful defense of a civil or criminal proceeding.
The law also permits indemnification of directors, officers, employees and
agents unless it is proved that (a) the act or omission of the person was
material and was committed in bad faith or was the result of active or
deliberate dishonesty, (b) the person received an improper personal benefit in
money, property or services or (C) in the case of a criminal action, the person
had reasonable cause to believe that the act or omission was unlawful.
Registrant's Articles of Incorporation: (1) provide that, to the
maximum extent permitted by applicable law, a director or officer will not be
liable to the Registrant or its stockholders for monetary damages; (2) require
the Registrant to indemnify and advance expense as provided in the By-laws to
its present and past directors, officers, employees and agents, and persons who
are serving or have served at the request of the Registrant in similar
capacities for other entities in advance of final disposition of any action
against that person to the extent permitted by Maryland law and the 1940 Act;
(3) allow the corporation to purchase insurance for any present or past
director, officer, employee, or agent; and (4) require that any repeal or
modification of the amended and restated Articles of Incorporation by the
shareholders, or adoption or modification of any provision of the Articles of
Incorporation inconsistent with the indemnification provisions, be prospective
only to the extent such repeal or modification would, if applied
retrospectively, adversely affect any limitation on the liability of or
indemnification available to any person covered by the indemnification
provisions of the amended and restated Articles of Incorporation.
Section 11.01 of Article XI of the By-Laws sets forth the procedures by
which the Registrant will indemnify its directors, officers, employees and
agents. Section 11.02 of Article XI of the By-Laws further
Part C-2
<PAGE>
provides that the Registrant may purchase and maintain insurance or other
sources of reimbursement to the extent permitted by law on behalf of any person
who is or was a director or officer of the Registrant, or is or was serving at
the request of the Registrant as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in or arising out of his
or her position.
Registrant's Investment Management Agreement between the Registrant and
Midas Management Corporation (the "Investment Manager") provides that the
Investment Manager shall not be liable to the Registrant or any shareholder of
the Registrant for any error of judgment or mistake of law or for any loss
suffered by the Registrant in connection with the matters to which the
Investment Management Agreement relates. However, the Investment Manager is not
protected against any liability to the Registrant by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
Investment Management Agreement.
Section 9 of the Distribution Agreement between the Registrant and
Investor Service Center, Inc. ("Service Center") provides that the Registrant
will indemnify Service Center and its officers, directors and controlling
persons against all liabilities arising from any alleged untrue statement of
material fact in the Registration Statement or from any alleged omission to
state in the Registration Statement a material fact required to be stated in it
or necessary to make the statements in it, in light of the circumstances under
which they were made, not misleading, except insofar as liability arises from
untrue statements or omissions made in reliance upon and in conformity with
information furnished by Service Center to the Registrant for use in the
Registration Statement; and provided that this indemnity agreement shall not
protect any such persons against liabilities arising by reason of their bad
faith, gross negligence or willful misfeasance; and shall not inure to the
benefit of any such persons unless a court of competent jurisdiction or
controlling precedent determines that such result is not against public policy
as expressed in the Securities Act of 1933. Section 9 of the Distribution
Agreement also provides that Service Center agrees to indemnify, defend and hold
the Registrant, its officers and Directors free and harmless of any claims
arising out of any alleged untrue statement or any alleged omission of material
fact contained in information furnished by Service Center for use in the
Registration Statement or arising out of any agreement between Service Center
and any retail dealer, or arising out of supplementary literature or advertising
used by Service Center in connection with the Distribution Agreement.
The Registrant undertakes to carry out all indemnification provisions
of its Articles of Incorporation and By-Laws and the above-described contract in
accordance with Investment Company Act Release No. 11330 (September 4, 1980) and
successor releases.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to directors, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant with the successful defense of any action, suit or
proceeding or payment pursuant to any insurance policy) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
Item 28. Business and other Connections of Investment Adviser
Information on the business of the Registrant's investment
adviser is described in the section of the Statement of Additional Information
entitled "The Investment Manager" filed as part of this Registration Statement.
The directors and officers of the Investment Manager are also directors
and officers of other Funds managed by Bull & Bear Advisers, Inc., a
wholly-owned subsidiary of Bull & Bear Group, Inc. (the "Bull & Bear Funds"). In
addition, such officers are officers and directors of Bull & Bear Group, Inc.
and its other subsidiaries; Service Center, the distributor of the Registrant
and the Bull & Bear Funds and a registered broker/dealer, and Bull & Bear
Securities, Inc., a discount brokerage firm. Bull & Bear Group, Inc.'s
predecessor was organized in 1976. In 1978, it acquired control of and
subsequently merged with Investors
Part C-3
<PAGE>
Counsel, Inc., a registered investment adviser organized in 1959. The principal
business of both companies since their founding has been to serve as investment
manager to registered investment companies. Bull & Bear Advisers, Inc. serves as
investment manager of Bull & Bear Dollar Reserves, Bull & Bear Global Income
Fund, and Bull & Bear U.S. Government Securities Fund, each a series of shares
issued by Bull & Bear Funds II, Inc.; Bull & Bear Municipal Income Fund, a
series of shares issued by Bull & Bear Municipal Securities, Inc.; Bull & Bear
Gold Investors Ltd.; Bull & Bear U.S. and Overseas Fund, and Bull & Bear Quality
Growth Fund, each a series of Bull & Bear Funds I, Inc.; and Bull & Bear Special
Equities Fund, Inc.
Item 29. Principal Underwriters
a) In addition to the Registrant, Service Center serves as principal
underwriter of Bull & Bear Funds II, Inc., Bull & Bear Special Equities Fund,
Inc., Bull & Bear Funds I, Inc., Bull & Bear Gold Investors Ltd. and Bull & Bear
Municipal Securities, Inc.
b) Service Center serves as the Registrant's principal underwriter. The
directors and officers of Service Center, their principal business addresses,
their positions and offices with Service Center and their positions and offices
with the Registrant (if any) are set forth below.
<TABLE>
<S> <C> <C>
Name and Principal Position and Offices
Business Address Position and Offices with Service with Registrant
Center
- ----------------------------------------- ----------------------------------------- -----------------------------------------
Robert D. Anderson Vice Chairman and Director N/A
11 Hanover Square
New York, NY 10005
Steven A. Landis Senior Vice President Senior Vice President
11 Hanover Square
New York, NY 10005
Brett B. Sneed Senior Vice President Senior Vice President
11 Hanover Square
New York, NY 10005
Mark C. Winmill Chairman, Director and Chief Co-President and Co-Chief Executive
11 Hanover Square Financial Officer Officer
New York, NY 10005
Thomas B. Winmill President, Director, General Counsel Co-President, Director, and Co-
11 Hanover Square Chief Executive Officer
New York, NY 10005
Kathleen B. Fliegauf Vice President and Assistant None
11 Hanover Square Treasurer
New York, NY 10005
William J. Maynard Vice President, Secretary, Chief Vice President, Secretary, Chief
11 Hanover Square Compliance Officer Compliance Officer
New York, NY 10005
Irene K. Kawczynski Vice President None
11 Hanover Square
New York, NY 10005
Joseph Leung Treasurer, Chief Accounting Officer Treasurer, Chief Accounting Officer
11 Hanover Square
New York, NY 10005
Michael J. McManus Vice President None
11 Hanover Square
New York, NY 10005
</TABLE>
Part C-4
<PAGE>
<TABLE>
<S> <C> <C>
H. Matthew Kelly Vice President None
11 Hanover Square
New York, NY 10005
</TABLE>
Item 30. Location of Accounts and Records
The minute books of Registrant and copies of its filings with the
Commission are located at 11 Hanover Square, New York, NY 10005 (the offices of
Registrant and its Investment Manager). All other records required by Section
31(a) of the Investment Company Act of 1940 are located at Investors Bank &
Trust Company, 89 South Street, Boston, MA 02111 (the offices of Registrant's
custodian) and DST Systems, Inc., 1055 Broadway, Kansas City, MO 64105-1594 (the
offices of the Registrant's Transfer and Dividend Disbursing Agent). Copies of
certain of the records located at Investors Bank & Trust Company & DST Systems,
Inc. are kept at 11 Hanover Square, New York, NY 10005 (the offices of
Registrant and the Investment Manager).
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
Part C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City, County and State of New York on this 1st day of March,
1996.
MIDAS FUND, INC.
Thomas B. Winmill
By: Thomas B. Winmill
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Mark C. Winmill Director, Co-President and Co-Chief March 1, 1996
---------------
Mark C. Winmill Executive Officer
Thomas B. Winmill Director, Co-President and Co-Chief March 1, 1996
-----------------
Thomas B. Winmill Executive Officer
Joseph Leung Treasurer, Principal March 1, 1996
Joseph Leung Accounting Officer
Bruce B. Huber Director March 1, 1996
Bruce B. Huber
James E. Hunt Director March 1, 1996
James E. Hunt
Frederick A. Parker, Jr. Director March 1, 1996
------------------------
Frederick A. Parker, Jr.
John B. Russell Director March 1, 1996
John B. Russell
Russell E. Burke III Director March 1, 1996
--------------------
Russell E. Burke III
Part C-6
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Annual
Report and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-01-1995
<PERIOD-END> Dec-31-1995
<INVESTMENTS-AT-COST> 14,779,773
<INVESTMENTS-AT-VALUE> 16,478,028
<RECEIVABLES> 464,398
<ASSETS-OTHER> 3,483
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,945,909
<PAYABLE-FOR-SECURITIES> 1,088,563
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104,303
<TOTAL-LIABILITIES> 1,192,866
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,971,842
<SHARES-COMMON-STOCK> 3,707,726
<SHARES-COMMON-PRIOR> 2,126,114
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 83,138
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,698,063
<NET-ASSETS> 15,753,043
<DIVIDEND-INCOME> 43,280
<INTEREST-INCOME> 28,875
<OTHER-INCOME> 0
<EXPENSES-NET> 208,899
<NET-INVESTMENT-INCOME> 136,744
<REALIZED-GAINS-CURRENT> 2,109,455
<APPREC-INCREASE-CURRENT> 351,869
<NET-CHANGE-FROM-OPS> 2,324,580
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 974,250
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,169,918
<NUMBER-OF-SHARES-REDEEMED> 800,677
<SHARES-REINVESTED> 212,371
<NET-CHANGE-IN-ASSETS> 15,753,043
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2,484,769)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 92,847
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 233,508
<AVERAGE-NET-ASSETS> 9,285,513
<PER-SHARE-NAV-BEGIN> 3.32
<PER-SHARE-NII> (0.06)
<PER-SHARE-GAIN-APPREC> 1.28
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.29)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.25
<EXPENSE-RATIO> 2.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
