As filed with the Securities and Exchange Commission on February 27, 1997
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. 19
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940[X]
Midas Fund, Inc. (File No. 811-4316): Post-Effective Amendment No. 19
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, 1997 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 20, 1997.
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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 "Investment Manager and Subadviser"; "Custodian and Transfer Agent"
5A "Performance Information"
6 Cover Page; "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"; "Investment Manager"; "Subadviser and
Subadvisory Agreement"; "Distribution of Shares"; "Custodian, Transfer
and Dividend Disbursing Agent"; "Auditors"
17 "Allocation of Brokerage"
18 Not Applicable
19 "Purchase of Shares"
20 "Distributions and Taxes"
21 Not Applicable
22 "Calculation of Performance Data"
23 "Financial Statements"
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[GRAPHIC OMITTED]
Prospectus Dated May 1, 1997
Midas Fund, Inc. ("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. The Fund may also borrow money from
banks from time to time to purchase or carry securities. Such borrowing is
speculative and increases both investment opportunity and investment risk. See
"Risk Factors." 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.
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."
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, 1997) with the Securities and Exchange
Commission ("SEC"). The Statement of Additional Information is available free of
charge by calling 1-800-400-MIDAS, and is incorporated by reference in this
prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
Fund's Statement of Additional Information, material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC, as does the Fund. 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.
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Expense Tables. The tables and the 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 Expenses
Sales Load Imposed on Purchases.............................. NONE
Sales Load Imposed on Reinvested Dividends................... NONE
Deferred Sales Load.......................................... NONE
Redemption Fee* within 30 days of purchase (value of shares
redeemed..................................................... 1.00%
Exchange Fee................................................. NONE
*There is no redemption fee after 30 days of purchase.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees (after reimbursement)................... 0.80%
12b-1 Fees.............................................. 0.25%
Other Expenses ......................................... 0.58%
Total Fund Operating Expenses (after reimbursement)..... 1.63%
Example
You would pay the following expenses on a $1,000 investment, assuming a
5% annual return and a redemption at the end of each time period................
1 year 3 years 5 years 10 years
$17 $51 $89 $193
The example set forth above assumes reinvestment of all dividends and other
distributions and assumes a 5% annual rate of return as required by the
Securities and Exchange Commission ("SEC"). The example is an illustration only
and should not be considered an indication of past or future returns and
expenses. Actual returns and expenses may be greater or less than those shown.
Without the Investment Manager's expense reimbursement, Management fees and
Total Fund Operating Expenses would have been 1.00% and 0.58% of average net
assets, respectively. 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, 1996. 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 accompanying
notes, appearing in the December 31, 1996 Annual Report to Shareholders and
incorporated by reference in the Statement of Additional Information. The
financial statements and notes for the fiscal year ended December 31, 1996, as
well as the information in the table below insofar as it relates to the fiscal
year ended December 31, 1996, have been audited by Tait, Weller & Baker, whose
report thereon is included in the Annual Report to Shareholders. Information in
the table below for the periods prior to December 31, 1994 was audited by other
auditors.
<TABLE>
Years Ended December 31,
-----------------------------------------------------------------------------------------------
1996* 1995* 1994 1993 1992 1991 1990 1989 1988 1987
PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year.. $4.25 $3.32 $4.16 $2.35 $2.55 $2.59 $3.12 $2.56 $3.16 $2.63
Income from investment operations:
Net investment income (loss)........ (0.05) (0.06) (0.05) (0.01) 0.01 0.03 - (0.01) (0.02) 0.00
Net realized and unrealized gain (loss)
on investments......................... 0.95 1.28 (0.67) 2.34 (0.19) (0.04) (0.53) 0.57 (0.58) 0.92
Total from investment operations.. 0.90 1.22 (0.72) 2.33 (0.18) (0.01) (0.53) 0.56 (0.60) 0.92
Less distributions:
Dividends from net investment income - - - - (0.01) (0.03) - - - -
Distributions from net realized gains - (0.29) (0.12) (0.52) (0.01) - - - - (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)
Net asset value, end of year........ $5.15 $4.25 $3.32 $4.16 $2.35 $2.55 $2.59 $3.12 $2.56 $3.16
TOTAL RETURN........................ 21.22% 36.73% (17.27)% 99.24%(7.16)% (0.20)% (16.99)% 21.88% (18.99)% 34.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's).. $200,457 $15,753 $7,052 $10,357 $4,943 $6,202 $7,571 $11,168 $12,726 $19,145
Ratio of expenses to average net assets(1.63%) 2.26% 2.15% 2.18% 2.25% 2.25% 2.25% 2.20% 1.82% 1.79%
(a)(b)
Ratio of net investment income (loss
assets(c):..........................) (0.92)% (1.47)% (1.26)% (0.28)% 0.56% 1.10% 0.06% (0.32)% (0.42)% 0.36%
Portfolio turnover ................. 23% 47.72% 52.62% 63.44% 72.23% 77.26% 58.46% 23.60% 7.52% 27.29%
Average commission per share........ $0.0204
*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. These computations had no effect on net asset value per share. (a)
Ratio prior to reimbursement by the Investment Manager was 1.83%, 2.52%,
2.53%,2.51% and 2.47% for the years ended December 31, 1996, 1995, 1992, 1991
and 1990, respectively.
</TABLE>
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(b) Ratio after transfer agent and custodian credits was 1.61% and 2.25% for the
years ending December 31, 1996 and 1995, respectively. Prior to 1995, such
credits were reflected in the ratio. There were no custodian credits for 1996.
(c) Ratio prior to reimbursement by the Investment Manager was (1.12)%, (1.73)%,
0.28%, 0.83% and (0.16)% for the periods ended December 31, 1996, 1995, 1992,
1991 and 1990, respectively.
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TABLE OF CONTENTS
Expense Tables.......................2 Distributions and Taxes................9
Financial Highlights.................2 Determination of Net Asset Value.......9
The Fund's Investment Program........3 Investment Manager and Subadviser.....10
Risk Factors.........................4 Distribution of Shares................10
How to Purchase Shares...............6 Performance Information...............10
Shareholder Services.................7 Capital Stock.........................11
How to Redeem Shares.................8 Custodian and Transfer Agent..........11
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 includes
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 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. Repurchase agreements are transactions in which the Fund
purchases securities from a bank or securities dealer and simultaneously commits
to resell the securities to the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the coupon rate or maturity of
the purchased securities. The Fund maintains custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or dealer
to pay the repurchase price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the other party to the agreement must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price that was paid by the Fund upon their acquisition is
accrued as interest and included in the Fund's net investment income. Repurchase
agreements carry certain risks not associated with direct investments in
securities, including possible declines in the market value of the underlying
securities and delays and costs to the Fund if the other party to a repurchase
agreement becomes insolvent. The Fund intends to enter into repurchase
agreements only with banks and dealers in transactions believed by the
Investment Manager to present minimum credit risks in accordance with guidelines
established by the Fund's board of directors. The Investment Manager reviews and
monitors the creditworthiness of those institutions under the board's general
supervision.
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 Group ("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 market patterns and trends. The Fund may invest up to 35% of its
total assets in debt
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securities rated below investment grade, although it has no current intention of
investing more than 5% of its net 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 not 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, as amended ("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 up to 15% of its net assets in illiquid
securities, including repurchase agreements with a maturity of more than seven
days. Illiquid securities may be more difficult to value than more widely traded
securities and the prices realized from the sales of illiquid securities may be
less than if such securities were more widely traded.
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 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 these countries
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. For
example, South Africa depends significantly on gold sales for the foreign
exchange necessary to finance its imports. Accordingly, investors should
understand the special considerations and risks related to such an investment
emphasis, and its potential effect
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on the Fund's per share value. National economic and political developments
could affect South Africa's policy regarding gold sales and in turn the price of
gold and the share values of mining companies involved in South Africa.
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
subjects the Fund's shares to greater risk than a fund whose portfolio is not so
concentrated in that the Fund's shares will be affected by economic, political,
legislative and regulatory developments impacting the companies or bullion in
which it may invest. As a result of such concentration the Fund may experience
increased problems of liquidity and the value of Fund shares may 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. Borrowing. The Fund may borrow money from banks (including its custodian
bank) to purchase and carry securities and will pay interest thereon. Such
borrowing is referred to as leverage, is speculative, and increases both
investment opportunity and investment risk. If the investment income on
securities purchased with borrowed money exceeds the interest paid on the
borrowing, the Fund's income will be correspondingly higher. If the investment
income fails to cover the Fund's costs, including interest on borrowings, or if
there are losses, the net asset value of the Fund's shares will decrease faster
than would otherwise be the case. The 1940 Act requires the Fund to maintain
asset coverage of at least 300% (including the amount borrowed) for all such
borrowings, and should such asset coverage at any time fall below 300%, the Fund
will be required to reduce its borrowing within three days to the extent
necessary to meet the requirements of the 1940 Act. To reduce its borrowing the
Fund might be required to sell securities at a disadvantageous time. Interest on
money borrowed is an expense the Fund would not otherwise incur, and it may
therefore have little or no investment income during periods of substantial
borrowings.
7. 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.
8. 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 prices 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.
9. 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 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
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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
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 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, 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).
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10. 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.
11. 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 Uniform Gifts/Transfers to Minors custody
accounts, and $100 for Midas retirement plans, which include individual
retirement accounts ("IRAs"), simplified employee pension plan IRAs
("SEP-IRAs"), rollover IRAs, profit sharing and money purchase plans, and 403(b)
plan accounts. The minimum subsequent investment is $50. The initial investment
minimums are waived if you elect to invest $50 or more each month in the Fund
through the Midas Automatic Investment Program (see "Additional Investments"
below).
The Fund in its discretion may waive or lower the investment minimums.
Initial Investment. The Account Application that accompanies this prospectus
should be completed, signed and, with a check or other negotiable bank draft
drawn to the order of 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 Fund shares on each pay date, depending upon your
employer's direct deposit program.
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 and the Plans do not assure a profit or protect
against loss in a declining market, and you should consider your ability to
make purchases when prices are low.
o Check. Mail a check or other negotiable bank draft ($50 minimum), drawn to
the order of 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).
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o Electronic Funds Transfer (EFT). With EFT, you may purchase additional Fund
shares 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.
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. No third party checks will be accepted and the
Fund reserves the right to reject any order for any reason. Accounts are charged
$30 by the Transfer Agent for submitting checks for investment which are not
honored by the investor's bank.
SHAREHOLDER SERVICES
You may modify or terminate your participation in any of the Fund's special
plans or services at any time. Shares or cash should not be withdrawn from any
tax-advantaged retirement plan described below, however, without consulting a
tax adviser concerning possible adverse tax consequences. Additional information
regarding any of the following services is available from Investor Service
Center, 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 and other distributions 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 Transfer Agent
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 (or
non-deductible) for Federal income tax purposes as noted below. Information on
any of these plans is available from Investor Service Center by calling
toll-free at 1-800-400-MIDAS.
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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 1/2 at 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. For married
couples, each spouse may contribute up to $2,000 into an IRA
regardless of whether each spouse has $2,000 of earned
income, provided, however, that their aggregate earned
income is at least $4,000 (where such income is less than
$4,000, special rules apply). 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. Also, although a
Salary Reduction SEP ("SARSEP") may no longer be established
after that date, a small employer instead may establish a
Savings Incentive Match Plan for Employees ("SIMPLE"), which
will allow certain employees to make elective contributions
of up to $6,000 per year and will require the employer to
make matching contributions up to 3% of each such employee's
salary.
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
1997 tax year through April 15, 1998 and for the 1998 tax year from January
1, 1998 through April 15, 1999.
Deductibility. IRA contributions are fully deductible for many taxpayers.
For a taxpayer who is an active participant in an employer-maintained
retirement plan (or whose spouse is), a portion of IRA contributions is
deductible if adjusted gross income (before the IRA deductions) is
$40,000-$50,000 (if married) and $25,000-$35,000 (if single). Only IRA
contributions by a taxpayer who is an active participant in an
employer-maintained retirement plan (or whose spouse is) and has adjusted
gross income of more than $50,000 (if married) and $35,000 (if single) will
not be deductible at all. 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 that you may
receive as a payment from a qualified pension or profit sharing plan due to
retirement, job termination or termination of the plan, so long as the
assets are put into an IRA Rollover account within 60 days of the 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 Plans 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 estab lishment of
custodial accounts on behalf of employees of public school systems and
certain tax-exempt organizations. A partici pant 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,
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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.
Redemption Price and Fees. The redemption price is the net asset value per share
next determined after receipt of the redemption request in proper form. The Fund
is designed as a long term investment, and short term trading is discouraged.
Accordingly, if shares of the Fund held for 30 days or less are redeemed or
exchanged, the Fund will deduct a redemption fee equal to one percent of the net
asset value of shares redeemed or exchanged. The fee will be retained by the
Fund and used to offset the transaction costs that short term trading imposes on
the Fund and its shareholders. If an account contains shares with different
holding periods (i.e. some shares held 30 days or less, some shares held 31 days
or more), the shares with the longest holding period will be redeemed first to
determine if the Fund's redemption fee applies. Shares acquired through the
reinvestment of dividends and 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 ordinarily be made within
seven days after receipt of a redemption request in proper form. The right of
redemption may not be suspended, or date of payment delayed more than seven
days, except for any period (i) when the New York Stock Exchange is closed or
trading thereon is restricted as determined by the SEC; (ii) under emergency
circumstances as determined by the SEC that make it not reasonably practicable
for the Fund to dispose of securities owned by it or fairly to determine the
value of its assets; or (iii) as the SEC may otherwise permit. The mailing of
proceeds on redemption requests involving any shares purchased by personal,
corporate, or government check or EFT transfer is generally subject to a fifteen
business day delay to allow the check or transfer to clear. The fifteen day
clearing period does not affect the trade date on which a purchase or redemption
order is priced, or any dividends and capital gain 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 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
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are to be assigned, the Transfer Agent may require that your signature be
guaranteed by an entity acceptable to the Transfer Agent, such as a commercial
bank or trust company or member firm of a national securities exchange or of the
NASD. A notary public may not guarantee signatures. The Transfer Agent may
require further documentation, and may restrict the mailing of redemption
proceeds to your address of record within 60 days of such address being changed
unless you provide a signature guarantee as described above.
DISTRIBUTIONS AND TAXES
Distributions. The Fund pays dividends annually to its shareholders from its net
investment income, if any. The Fund also makes an annual distribution to its
shareholders out of any net realized capital gains, after offsetting any capital
loss carryover, and any net realized gains from foreign currency transactions.
Dividends and other distributions, if any, are declared and payable to
shareholders of record on a date in December of each year. Such distributions
may be paid in January of the following year, in which event they will be deemed
received by the shareholders on the preceding December 31 for tax purposes. The
Fund may also make an additional distribution following the end of its fiscal
year out of any undistributed income and capital gains. Dividends and other
distributions are made in additional Fund shares, unless you elect to receive
cash on the Account Application or so elect subsequently by calling Investor
Service Center, 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.
Taxes. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Code ("RIC") so that it will be relieved of Federal
income tax on that part of its investment company taxable income (generally
consisting of net investment income, net short term capital gains, and net gains
from certain foreign currency transactions) and net capital gain (the excess of
net long term capital gain over net short term capital loss) that is distributed
to its shareholders. Dividends paid by the Fund from its investment company
taxable income (whether paid in cash or in additional shares) generally are
taxable to its shareholders, other than shareholders that are not subject to tax
on their income, as ordinary income to the extent of the Fund's earnings and
profits; a portion of those dividends may be eligible for the corporate
dividends-received deduction. Distributions by the Fund of its net capital gain
(whether paid in cash or in additional shares) when designated as such by the
Fund, are taxable to its 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 tax. The Fund's investments in gold, platinum, and silver bullion and coins
may cause it to fail certain income or asset tests that must be satisfied to
qualify as a RIC under the Code. Accordingly, the Investment Manager will
endeavor to manage the Fund's portfolio so that (1) income and gains derived
from investments in bullion and coins (and any other "non-qualified" income)
will not exceed 10% of the Fund's gross annual income and (2) less than 50% of
the value of the Fund's total assets as of the close of each quarter of its
taxable year will be invested in bullion and coins (and any other "non-qualified
assets"). If the Fund did not qualify for taxation as a RIC, it would be
required to pay Federal income tax on its net income, which would reduce the
amount available for distribution to its shareholders. The Fund is required to
withhold 31% of all dividends, capital gain distributions, and redemption
proceeds payable to any individuals and certain other noncorporate shareholders
who do not provide the Fund with a correct taxpayer identification number.
Withholding at that rate also is required from dividends and capital gain
distributions payable to such shareholders who are otherwise subject to backup
withholding.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. Since other
Federal, state and local tax considerations may apply, you should consult your
tax adviser.
DETERMINATION OF NET ASSET VALUE
The value of a share of the Fund is based on the value of its net assets.
The Fund's net assets are the total of its investments and all other assets
minus any liabilities. The value of one share is determined by dividing the net
assets by the total number of shares outstanding. This is referred to as "net
asset value per share" and is determined as of the close of regular trading on
the New York Stock Exchange (currently, 4 p.m. eastern time, unless weather,
equipment failure or other factors contribute to an earlier closing) each
business day of the Fund. A business day of the Fund is any day on which the New
York Stock Exchange is open for trading. The following are not business days of
the Fund: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities and other assets of the Fund are valued primarily on
the basis of market quotations, if readily available. 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.
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INVESTMENT MANAGER AND SUBADVISER
Midas Management Corporation ("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.
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, 1996, investment management fees paid by the Fund after
expense reimbursement represented approximately 0.80% 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 Group provides technical, consulting, and investor relations services.
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, Investor Service Center, Inc., 11
Hanover Square, New York, NY 10005 ("Distributor"), acts as the Fund's principal
agent for the sale of its shares. The Investment Manager is an affiliate of the
Distributor. The Fund has also adopted a plan of distribution ("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 or to the
Distributor. The Fund will pay the fee to the Distributor until either the Plan
is terminated or not renewed. In that event, the Distributor's expenses in
excess of fees received or accrued through the termination day will be the
Distributor's sole responsibility and not obligations of the Fund. During the
period they are in effect, the Distribution Agreement and Plan obligate the Fund
to pay a fee to the Distributor as 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 Morningstar, Inc., Lipper Analytical Services, Inc.
and other sources. "Average annual total return" is the average annual
compounded rate of return on a hypothetical $1,000 investment made at the
beginning of the advertised period. In calculating average annual total return,
all dividends and distributions are assumed to be reinvested. "Cumulative total
return" is calculated by subtracting a hypothetical $1,000 payment to the Fund
from the ending redeemable value of such payment (at the end of the relevant
advertised period), dividing such difference by $1,000 and multiplying the
quotient by 100. In calculating ending redeemable value, all dividends and other
distributions are assumed to be reinvested in additional Fund shares. Although
the Fund imposes a 1% redemption fee on the redemption of shares held for 30
days or less, all of the periods for which performance is quoted are longer than
30 days, and therefore the 1% fee is not reflected in the performance
calculations. In addition, there is no sales charge upon reinvestment of
dividends or other
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distributions. Until August 28, 1995, the maximum sales charge imposed on
purchases of Fund shares was 4.5%. This sales charge is not reflected in the
calculation of returns since the sales charge has been discontinued. For more
information regarding how the Fund's average annual total return and cumulative
total return is calculated, see "Calculation of Performance Data" in the
Statement of Additional Information. Additional information regarding the Fund's
performance is available in its Annual Report to Shareholders, which is
available at no charge upon request to Investor Service Center, 1-800-400-MIDAS.
CAPITAL STOCK
The Fund is a non-diversified open-end management investment company
organized as a Maryland corporation in 1995. Prior to August 28, 1995, the Fund
operated under the name "Excel Midas Gold Shares, Inc.," a Minnesota corporation
organized in 1985. The Fund is authorized to issue up to 1,000,000,000 shares
($.01 par value). The Fund's Board of Directors 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 that would be submitted to shareholders for their
approval are the election of Directors and ratification of the Directors'
selection of accountants, although holders of 25% 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, performs certain accounting services for the
Fund, and may appoint one or more subcustodians provided such subcustodianship
is in compliance with the rules and regulations promulgated under the 1940 Act.
The Fund 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 Fund's transfer and dividend disbursing agent ("Transfer Agent") is DST
Systems, Inc., Box 419789, Kansas City, MO 64141- 6789. The Distributor provides
certain shareholder administration services to the Fund and is reimbursed its
cost by the Fund. The Fund may also enter into agreements with brokers, banks
and others who may perform on behalf of their customers certain shareholder
services not otherwise provided by the Transfer Agent or the Distributor.
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<PAGE>
MIDAS FUND
Seeking capital appreciation and protection against inflation and, secondarily,
current income.
Shareholder Services:
o Electronic Funds Transfers
o Automatic Investment Program
o Retirement Plans:
IRA, SEP-IRA, Qualified Profit Sharing/
Money Purchase, 403(b), Keogh
Minimum Investments:
o Regular Accounts, $500
o IRAs, $100
o Automatic Investment Program, $50
o Subsequent Investments, $50
Prospectus
May 1, 1997
MIDAS FUND
Discovering Opportunities
11 Hanover Square
New York, NY 10005
1-800-400-MIDAS
Call toll-free 1-800-400-MIDAS for Fund performance, telephone purchases, and to
obtain information concerning your account.
15
<PAGE>
Midas Fund
Discovering Opportunities
Account Application
Use this Account Application to open a regular Midas Fund account. For a Midas
Fund IRA Application, call 1-800-400-MIDAS. Return this completed Account
Application in the enclosed envelope or mail to: Investor Service Center, Box
419789, Kansas City, MO 64141-6789.
1. Registration. If you need assistance in completing this Account Application,
please call 1-800-400-MIDAS.
Individual:
First Name:
Middle Initial:
Last Name:
Social Security Number:
Joint Owner (if any):
First Name:
Middle Initial:
Last Name:
Social Security Number:
Note: Registration will be Joint Tenants with Right of Survivorship, unless
otherwise specified.
Gift/Transfer to a Minor:
Name of Custodian (only one):
as Custodian for
Name of Minor:
under the (Custodian's State of Residence) Uniform Gifts/Transfers to Minors Act
Minor's Social Security Number:
Minor's Date of Birth:
Corporations, Partnerships, Trusts and others:
Name of Corporation, Partnership, or other Organization:
Name of Individual(s) Authorized to Act for the Corporation, Partnership, or
other Organization:
Tax I.D. Number:
Name of Trustee(s):
Date of Trust Instrument:
2. Mailing Address, Telephone Number, and Citizenship
Street:
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City:
State/Zip:
Daytime Telephone:
E-Mail Address:
Owner:
Citizen of: U.S. Other:
Joint Owner
Citizen of: U.S. Other:
3. Amount Invested ($500 Minimum)
Note: The $500 minimum initial investment is waived if you elect to invest
through the Midas Bank Transfer Plan, the Midas Salary Investing Plan, and/or
the Midas Government Direct Deposit Plan (see Section 4).
Investment: $
By Check*
By Wire
Date**
Assigned Account Number***
*Please make your check(s) payable to Midas Fund and enclose with this
Application.
**Indicate date on which money was wired.
***Please call 1-800-400-MIDAS to be assigned an account number before making an
initial investment by wire.
4. Midas Automatic Investment Program
( ) Midas Bank Transfer Plan Automatically purchase shares each month by
transferring the dollar amount you specify from your regular checking account,
NOW account, or bank money market account. Please attach a voided bank account
check.
Amount $
Day of month:
10th:
15th:
20th:
( ) Midas Salary Investing Plan The enrollment form will be sent to the above
address or call 1-800-400-MIDAS to have the form sent to your place of
employment.
( ) Midas Government Direct Deposit Plan Your request will be processed and you
will receive the enrollment form.
5. Distributions If no circle is checked, the Automatic Compounding Option will
be assigned to reinvest all dividends and distributions in your account to
increase the shares you own.
( ) Automatic Compounding Option Dividends and distributions reinvested in
additional shares.
( ) Payment Option ( ) Dividends in cash, distributions reinvested
( ) Dividends and distributions in cash
6. Investments and Redemptions by Telephone
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<PAGE>
Shareholders automatically enjoy the privilege of calling 1-800-400-MIDAS to
purchase additional shares of the Fund or to expedite a redemption and have the
proceeds sent directly to their address or to their bank account, unless
declined by checking the following circle ( ). The Midas link with your bank
offers flexible access to your money. Transfers occur only when you initiate
them and may be made by either bank wire or bank clearinghouse transfer with
Midas Fund's Electronic Funds Transfer service.
To establish the Midas link to your bank, please attach a voided check from your
bank account. One common name must appear on your Midas Fund account and bank
account.
7. Signature and Certification to Avoid Backup Witholding
"I certify that I have received and read the prospectus for Midas Fund, agree to
its terms, and have the legal capacity to purchase its shares. I understand
telephone conversations with Investor Service Center, Inc. ("ISC")
representatives are recorded and hereby consent to such recording. I agree that
neither the Fund nor ISC will be liable for acting on instructions believed to
be genuine and under reasonable procedures designed to prevent unauthorized
transactions. I certify (1) the Social Security or taxpayer identification
number provided above is correct, and (2) I am not subject to backup witholding
because (a) I am exempt from backup witholding, or (b) I have not been notified
by the IRS that I am subject to backup witholding, or (c) I have been notified
by the IRS that I am no longer subject to backup witholding." (Please cross out
item 2 if it does not apply to you.) The Internal Revenue Service does not
require your consent to any provision of this document other than the
certifications required to avoid backup witholding.
Signature of:
Owner:
Trustee:
Custodian:
Date:
Signature of Joint Owner (if any):
Date:
Midas Fund
Discovering Opportunities
11 Hanover Square
New York, NY 10005
MF-PW-5/6
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<PAGE>
Statement of Additional Information May 1, 1997
MIDAS FUND, INC.
11 Hanover Square
New York, NY 10005
1-800-400-MIDAS
This Statement of Additional Information regarding Midas Fund, Inc.
("Fund") is not a prospectus and should be read in conjunction with the Fund's
Prospectus dated May 1, 1997. 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.............................................5
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES...........7
OFFICERS AND DIRECTORS.............................................16
INVESTMENT MANAGER.................................................18
CALCULATION OF PERFORMANCE DATA....................................21
DISTRIBUTION OF SHARES.............................................24
DETERMINATION OF NET ASSET VALUE...................................26
PURCHASE OF SHARES.................................................27
ALLOCATION OF BROKERAGE............................................27
DISTRIBUTIONS AND TAXES............................................29
REPORTS TO SHAREHOLDERS............................................31
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT..................31
AUDITORS ..........................................................32
FINANCIAL STATEMENTS...............................................32
APPENDIX--DESCRIPTIONS OF BOND RATINGS.............................33
<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, more than 15% of
the Fund's net assets would be invested in illiquid assets, including repurchase
agreements not entitling the holder to payment of principal within seven days.
The term "illiquid assets" for this purpose includes securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities.
Illiquid restricted securities may be sold by the Fund only in privately
negotiated transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). 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,
2
<PAGE>
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 Fund's Board of Directors has delegated the function of making
day-to-day determinations of liquidity to Midas Management Corporation (
"Investment Manager") pursuant to guidelines approved by the Board. The
Investment Manager takes into account a number of factors in reaching liquidity
determinations, including (1) the frequency of trades and quotes for the
security, (2) the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, (3) dealer undertakings to make a
market in the security, and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). The Investment Manager
monitors the liquidity of restricted securities in the Fund's portfolio and
reports periodically on liquidity determinations to the Board of Directors.
Lending. The Fund may lend up to one-third of its total assets to other
parties, although it has no current intention of doing so. If the Fund engages
in lending transactions, it will enter into lending agreements that require that
the loans be continuously secured by cash, securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, or any combination of
cash and such securities, as collateral equal at all times to at least the
market value of the assets lent. To the extent of such activities, the custodian
will apply credits against its custodial charges. There are risks to the Fund of
delay in receiving additional collateral and risks of delay in recovery of, and
failure to recover, the assets lent should the borrower fail financially or
otherwise violate the terms of the lending agreement. Loans will be made only to
borrowers deemed by the Investment Manager to be of good standing and when, in
the Investment Manager's judgment, the consideration which can be earned
currently from such lending transactions justifies the attendant risk. Any loan
made by the Fund will provide that it may be terminated by either party upon
reasonable notice to the other party.
Convertible Securities. The Fund may invest 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
3
<PAGE>
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 net assets in such
securities during the coming year. Ratings of investment grade or better
include, the four highest ratings of Standard & Poor's Ratings Group ("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
4
<PAGE>
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
5
<PAGE>
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 ("SEC"), (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:
1. The Fund may not purchase or otherwise acquire any security or invest in a
repurchase agreement if, as a result, more than 15% of the Fund's net assets
(taken at current value) would be invested in illiquid assets, including
repurchase agreements not entitling the holder to payment of principal within
seven days;
2. The Fund may not purchase the securities of any investment company (as
defined in the 1940 Act) except (a) by purchase in the open market where no
commission or profit to a sponsor or dealer results from such purchase, provided
that immediately after such purchase no more than: 10% of the Fund's total
assets are invested in securities issued by investment companies, 5% of the
Fund's total assets are invested in securities issued by any one investment
company, or 3% of the voting securities of any one such investment company are
owned by the Fund, and (b) when such purchase is part of a plan of merger,
consolidation, reorganization or acquisition of assets;
3. The aggregate value of securities underlying put options on securities
written by the Fund, determined as of the date the put options are
written, will not exceed 25% of the Fund's net assets, and the aggregate
value of securities underlying call options on securities written by the
Fund, determined as of the date the call options are written, will not
exceed 25% of the Fund's net assets;
4. The Fund may purchase a put or call option on a security or a security
index, including any straddles or spreads, only if the value of its
premium, when aggregated with the premiums on all other such instruments
held by the Fund, does not exceed 5% of the Fund's total assets;
5. To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a Commodity
Futures Trading Commission ("CFTC") regulated exchange, in each case that
is not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money") may
not exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into;
6. The Fund may not purchase securities on margin, except that the Fund may
obtain such short term credits as are necessary for the clearance of
transactions, and provided that margin payments and other deposits made
in connection with transactions in options, futures contracts, forward
contracts and other derivative instruments shall not be deemed to
constitute purchasing securities on margin;
7. The Fund may not mortgage, pledge or hypothecate any assets in excess of
one-third of the Fund's total assets; and
8. The Fund may not make short sales of securities or maintain a short
position, except (a) the Fund may buy and sell options, futures
contracts, options on futures contracts, and forward contracts, and (b)
the Fund may sell "short against the box" where the Fund
contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short.
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
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using these instruments are discussed below. In addition to the non-fundamental
investment restrictions described above in sections 4 and 5, the 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
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 or liquid securities whose value is marked to the market daily, 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 or liquid securities whose value is marked to the market daily in
a segregated account with its custodian in the prescribed amount.
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
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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.
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
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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.
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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
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
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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 liquid securities whose value is
marked to the market daily 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
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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 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
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<PAGE>
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.
14
<PAGE>
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 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.
15
<PAGE>
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. 900 Park Avenue, New York, NY 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 five other investment
companies advised by subsidiaries of Bull & Bear Group, Inc. ("Investment
Company Complex"). He was born August 23, 1946.
BRUCE B. HUBER, CLU, ChFC, MSFS -- Director. 3443 Highway 66, Neptune, NJ 07753.
He is Senior Consultant with The Berger Financial Group, LLC specializing in
financial, estate and insurance matters. From March 1995 to December 31, 1995,
he was President of Huber Hogan Knotts Consulting, Inc. From 1990 to March 1995,
he was President of Huber-Hogan Associates. From 1988 to 1990, he was Chairman
of Bruce Huber Associates. He is also a Director of eight other investment
companies in the Investment Company Complex. He was born February 7, 1930.
JAMES E. HUNT -- Director. 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 eight other investment companies in the
Investment Company Complex. He was born December 14, 1930.
FREDERICK A. PARKER, JR. -- Director. 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 eight other investment companies in the Investment Company Complex. He was
born November 14, 1926.
JOHN B. RUSSELL -- Director. 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 eight other investment companies in the Investment Company
Complex. He was born February 9, 1923.
THOMAS B. WINMILL* -- Chairman of the Board, Co-President, Co-Chief Executive
Officer, and General Counsel. 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 five other investment
companies in the Investment Company 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 Fund's executive officers, each of whom serves at the pleasure of the
Board of Directors, are as follows:
16
<PAGE>
MARK C. WINMILL -- Co-President, Co-Chief Executive Officer, and Chief Financial
Officer. He is Chief Financial Officer of the Investment Manager and its
affiliates. He is also a Director of five other investment companies in the
Investment Company Complex. He received his M.B.A. from the Fuqua School of
Business at Duke University in 1987. 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).
ROBERT D. ANDERSON -- Vice Chairman. 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 seven other investment
companies in the Investment Company Complex. He was born December 7, 1929.
STEVEN A. LANDIS -- Senior Vice President. He is Senior Vice President of the
Investment Manager and certain of its affiliates. From 1993 to 1995, he was
Associate Director -- Proprietary Trading at Barclays De Zoete Wedd Securities
Inc., 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.
JOSEPH LEUNG, CPA -- Treasurer and Chief Accounting Officer. He is Treasurer and
Chief Accounting Officer of the Investment Manager and its affiliates. From 1992
to 1995 he held various positions with Coopers & Lybrand L.L.P., a public
accounting firm. From 1991 to 1992, he was the accounting supervisor at
Retirement Systems Group, a mutual fund company. From 1987 to 1991, he held
various positions with Ernst & Young, a public accounting firm. He is a member
of the American Institute of Certified Public Accountants. He was born September
15, 1965.
WILLIAM J. MAYNARD -- Vice President and Secretary. He is Vice President and
Secretary of the Investment Manager and its affiliates. From 1991 to 1994 he was
associated with the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. He is
a member of the New York State Bar.
He was born September 13, 1964.
* Thomas B. Winmill is an "interested person" of the Fund as defined by the 1940
Act, because of his positions with the Investment Manager.
Information in the following table is based on fees paid during the
fiscal year ending December 31, 1996.
Compensation Table
<TABLE>
Total Compensation
From
Fund and Investment
Aggregate Pension or Retirement Estimated Annual Company Complex Paid
<S> <C> <C> <C> <C>
Name of Person, Compensa- Benefits Accrued as Benefits Upon To
Position tion From Fund Part of Fund Expenses Retirement Directors
Russell E. Burke $2,000 None None $9,500 from
III, 6 Investment
Director
Companies
Bruce B. Huber, $2,000 None None $12,500 from
Director 9 Investment
Companies
James E. Hunt, $2,000 None None $12,500 from
Director 9 Investment
Companies
17
<PAGE>
Frederick A. $2,000 None None $12,500 from
Parker, 9 Investment
Director Companies
John B. Russell, $2,000 None None $12,500 from
Director 9 Investment
Companies
</TABLE>
============================================================================= =
No officer, Director or employee of the Fund's Investment Manager
received any compensation from the Fund for acting as an officer, Director, or
employee of the Fund. As of April __, 1997, officers and Directors of the Fund
owned less than 1% of the outstanding shares of the Fund. As of April __, 1997,
[Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104 owned
_____%] of the outstanding shares of the Fund.
INVESTMENT MANAGER
The Investment Manager acts as general manager of the Fund, being
responsible for the various functions assumed by it, including the regular
furnishing of advice with respect to portfolio transactions. The Investment
Manager also furnishes or obtains on behalf of the Fund all services necessary
for the proper conduct of the Fund's business and administration. As
compensation for its services to the Fund, the Investment Manager is entitled to
a fee, payable monthly, based upon the Fund's average daily net assets. Under
the Fund's Investment Management Agreement dated August 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 of Directors 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 registra tions, 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
18
<PAGE>
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 Fund is not subject to any such state-imposed
limitations. Certain expenses, such as brokerage commissions, taxes, interest,
distribution fees, certain expenses attributable to investing outside the United
States and extraordinary items, are excluded from this limitation. In addition,
the Investment Manager also has agreed to be subject to the following expense
limitation for a period of two years from the effective date of the Investment
Management Agreement, which limitation is calculated as an amount not in excess
of the fee payable by the Fund if and to the extent that the aggregate operating
expenses of the Fund (excluding interest expense, Rule 12b-1 Plan of
Distribution fees, taxes and brokerage fees and commissions) are in excess of
2.0% of the first $10 million of average net assets of the Fund, plus 1.5% of
the next $20 million of average net assets, plus 1.25% of average net assets
above $30 million.
For the years ended 1993 and 1994, Excel Advisors, Inc., the Fund's
previous investment adviser, earned, before reimbursement of certain expenses,
$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,
1996, the Fund paid the Investment Manager $1,549,358. Reimbursement for the
year ended December 31, 1996 was $308,230. The Fund reimbursed the Investment
Manager $56,751 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, Bull & Bear Advisers, Inc. and Rockwood Advisers,
Inc., registered investment advisers, and Bull & Bear Securities, Inc., a
registered broker-dealer providing discount brokerage services.
Group is a publicly-owned company whose securities are listed on the
Nasdaq Stock Market 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 Fund and its investment company affiliates had net assets in excess
of $__________ as of April __, 1997.
SUBADVISER AND SUBADVISORY AGREEMENT
The Investment Manager has entered into a subadvisory agreement with Lion
Resource Management Limited ("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 Subadviser also serves as an investment adviser to
another U.S. mutual fund with net assets of approximately $22 million as of
February 1, 1997.
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:
SUBADVISER'S FEE AS A PERCENTAGE OF INVESTMENT MANAGER'S NET FEES
19
<PAGE>
<TABLE>
RELATIVE PERFORMANCE a
TOTAL NET ASSETS b More than 50 basis Within 50 basis More than 50
points better than BTR points of BTR basis points
below BTR
<S> <C> <C> <C> <C>
Less than or equal to $15,000,000 30% 20% 10%
Greater than $15,000,000 and 40% 30% 20%
Less than or equal to $50,000,000
Greater than $50,000,000 50% 40% 30%
- - --------------------------------------- ------------------------------------ ---------------------------- -----------------------
</TABLE>
For the year ended December 31, 1996, the Investment Manager (and not the
Fund) paid the Subadviser $620,602.
Under the Subadvisory Agreement's fee structure, the Investment Manager
retains more of its fee (and therefore passes on a lower portion of its fee to
the Subadviser) when the Fund underperforms the BTR by more than 50 basis points
than when the Fund outperforms the BTR by more than 50 basis points.
The Subadvisory Agreement is not assignable and automatically terminates
in the event of its assignment, or in the event of the termination of the
Investment Management Agreement. 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.
20
<PAGE>
The Fund's performance prior to December 31, 1995 was achieved during a
period when the Fund's asset size was small relative to its asset size as of the
date of this Statement of Additional Information. In addition, the extent of the
Fund's positive performance achieved during the fiscal year ended December 31,
1995 was due in large part to the Fund's investment in a single issuer, Diamond
Fields Resources Inc. No assurances can be given that the Fund will achieve
similar performance in the future.
Average Annual Total Return
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and other distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectus, and includes all recurring fees, such as investment advisory and
management fees, charged to all shareholder accounts.
Cumulative Total Return
Cumulative total return is calculated by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = ( ERV-P )100
P
CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a hypothetical
$1,000 payment made at the beginning of such period
P = initial payment of $1,000
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and other distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectus, and includes all recurring fees, such as investment advisory and
management fees, charged to all shareholder accounts.
The cumulative return for the Fund for the periods ending December 31,
1996 and beginning at the inception of the Fund (January 8, 1986), and for the
five year and one year periods is _____%, ______%, and _____%, respectively.
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. The
21
<PAGE>
performance information provided below has been calculated without reflecting
the deduction of the sales charge.
Average Annual Total Returns For Periods Ended December 31, 1996
Since inception (Jan. 8, 1986) _____%
Five Years _____%
One Year _____%
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, 1996 is, respectively, _____%,
_____% and _____%.
Source Material From time to time, in marketing pieces and other Fund
literature, the Fund's performance may be compared to the performance of broad
groups of comparable mutual funds or unmanaged indexes of comparable securities.
Evaluations of Fund performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for Fund performance information may
include, but are not limited to, the following:
Bank Rate Monitor, a weekly publication which reports yields on various bank
money market accounts and certificates of deposit.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance and other data.
Bloomberg, a computerized market data source and portfolio analysis system.
Bond Buyer Municipal Bond Index (20 year), an index of municipal bonds provided
by a national periodical reporting on municipal securities.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CDA/Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' back grounds, management policies, salient features,
management results, income and dividend records, and price ranges.
Consumer's Digest, a bimonthly magazine that periodically features the
performance of a variety of investments, including mutual funds.
Financial Times, Europe's business newspaper, which from time to time reports
the performance of specific investment companies in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Goldman Sachs Convertible Bond Index -- currently includes 67 bonds and 33
preferred shares. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds..
Growth Fund Guide, a newsletter providing a mutual fund rating service published
for over 25 years.
IBC's Money Fund Report, a weekly publication of money market fund total net
assets, yield, and portfolio composition.
Individual Investor, a newspaper that periodically reviews mutual fund
performance and other data.
22
<PAGE>
Investment Advisor, a monthly publication reviewing performance of mutual funds.
Investor's Business Daily, a nationally distributed newspaper which regularly
covers financial news.
Kiplinger's Personal Finance Magazine, a monthly publication periodically
reviewing mutual fund performance.
Lehman Brothers, Inc. "The Bond Market Report" reports on various Lehman
Brothers bond indices.
Lehman Government/Corporate Bond Index -- is a widely used index composed of
government, corporate, and mortgage backed securities.
Lehman Long Term Treasury Bond -- is composed of all bonds covered by the Lehman
Treasury Bond Index with maturities of 10 years or greater.
Lipper Analytical Services, Inc., a publication periodically reviewing mutual
funds industry-wide by means of various methods of analysis.
Merrill Lynch Pierce Fenner & Smith Taxable Bond Indices reports on a variety of
bond indices.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley Capital International EAFE Index, is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Morningstar, Mutual Fund Values, publications of Morningstar, Inc., periodically
reviewing mutual funds industry-wide by means of various methods of analysis and
textual commentary.
Mutual Fund Forecaster, a newsletter providing a mutual fund rating service.
Nasdaq Industrial Index -- is composed of more than 3,000 industrial issues. It
is a value- weighted index calculated on price change only and does not include
income.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter that reports on mutual fund
performance, rates funds, and discusses investment strategies for mutual fund
investors.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
special section reporting on mutual fund performance, yields, indexes, and
portfolio holdings.
Russell 3000 Index -- consists of the 3,000 largest stocks of U.S. domiciled
companies commonly traded on the New York and American Stock Exchanges or the
Nasdaq over-the-counter market, accounting for over 90% of the market value of
publicly traded stocks in the U.S.
Russell 2000 Small Company Stock Index -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely used benchmark for small capitalization common
stocks.
Salomon Brothers GNMA Index -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
Salomon Brothers High-Grade Corporate Bond Index -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
Salomon Brothers Broad Investment-Grade Bond Index -- is a market-weighted index
that contains approximately 4,700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
Salomon Brothers Market Performance tracks the Salomon Brothers bond index.
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Standard & Poor's 500 Composite Stock Price Index -- is an index of 500
companies representing the U.S. stock market.
Standard & Poor's 100 Composite Stock Price Index -- is an index of 100
companies representing the U.S. stock market.
Standard & Poor's Preferred Index is an index of preferred securities.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
businesses, often featuring mutual fund performance data.
USA Today, a national newspaper that periodically reports mutual fund
performance data.
U.S. News and World Report, a national weekly that periodically reports mutual
fund performance data.
The Wall Street Journal, a nationally distributed newspaper which regularly
covers financial news.
The Wall Street Transcript, a periodical reporting on financial markets and
securities.
Wilshire 5000 Equity Indexes -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
Indices prepared by the research departments of such financial
organizations as Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith,
Inc., Bear Stearns & Co., Inc., and Ibbotson Associates may be used, as well as
information provided by the Federal Reserve Board.
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement, Investor Service Center, Inc.
("Distributor") acts as principal distributor of the Fund's shares. Under the
Distribution Agreement, the Distributor shall use its best efforts, consistent
with its other businesses, to sell shares of the Fund. Fund shares are sold
continuously. Pursuant to a Plan of Distribution ("Plan") adopted pursuant to
Rule 12b-1 under the 1940 Act, the Fund pays the Distributor monthly a fee in
the amount of one-quarter of one percent per annum of the Fund's average daily
net assets as compensation for its distribution and service activities.
In performing distribution and service activities pursuant to the Plan,
the Distributor may spend such amounts as it deems appropriate on any activities
or expenses primarily intended to result in the sale of the Fund's shares or the
servicing and maintenance of shareholder accounts, including, but not limited
to: advertising, direct mail, and promotional expenses; compensation to the
Distributor and its employees; compensation to and expenses, including overhead
and telephone and other communication expenses, of the Distributor, the
Investment Manager, the Fund, and selected dealers and their affiliates who
engage in or support the distribution of shares or who service shareholder
accounts; fulfillment expenses, including the costs of printing and distributing
prospectuses, statements of additional information, and reports for other than
existing shareholders; the costs of preparing, printing and distributing sales
literature and advertising materials; and internal costs incurred by the
Distributor and allocated by the Distributor to its efforts to distribute shares
of the Fund or service shareholder accounts such as office rent and equipment,
employee salaries, employee bonuses and other overhead expenses.
Among other things, the Plan provides that (1) the Distributor will
submit to the Fund's Board of Directors at least quarterly, and the Directors
will review, reports regarding all amounts expended under the Plan and the
purposes for which such expenditures were made, (2) the Plan will continue in
effect only so long as it is approved at least annually, and any material
amendment or agreement related thereto is approved, by the Fund's Board of
Directors, including those Directors who are not "interested persons" of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan or any agreement related to the Plan ("Plan Directors"), acting in
person at a meeting called for that purpose, unless terminated by vote of a
majority of the Plan Directors, or by vote of a
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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, 1996, approximately $48,991 represented paid expenses
incurred for advertising, $106,978 for printing and mailing prospectuses and
other information to other than current shareholders, $106,863 for salaries of
marketing and sales personnel, $53,223 for payments to third parties who sold
shares of the Fund and provided certain services in connection therewith, and
$71,324 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 $77,717 for
shareholder administration services which it provided to the Fund at cost during
the year ended December 31, 1996.
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The Glass-Steagall Act prohibits certain banks from engaging in the
business of underwriting, selling, or distributing securities such as shares of
a mutual fund. Although the scope of this prohibition under the Glass-Steagall
Act has not been fully defined, in the Distributor's opinion it should not
prohibit banks from being paid for administrative and accounting services under
the Plan. If, because of changes in law or regulation, or because of new
interpretations of existing law, a bank or the Fund were prevented from
continuing these arrangements, it is expected that other arrangements for these
services will be made. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
regular trading in equity securities on the New York Stock Exchange ("NYSE")
(currently 4:00 p.m. eastern time) each business day of the Fund. The following
are not business days of the Fund: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanks giving 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 Stock Market 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 only issue shares upon payment of the purchase price by
check made drawn to the Fund's order in U.S. dollars on a U.S. bank, or by
Federal Reserve wire transfer. Third party checks, credit cards, and cash will
not be accepted. The Fund reserves the right to reject any order, to cancel any
order due to nonpayment, to accept initial orders by telephone or telegram, and
to waive the limit on subsequent orders by telephone, with respect to any person
or class of persons. Orders to purchase shares are not binding on the Fund until
they are confirmed by the Fund's transfer agent. If an order is canceled because
of non-payment or because the purchaser's check does not clear, the purchaser
will be responsible for any loss the Fund incurs. If the purchaser is already a
shareholder, the Fund can redeem shares from the purchaser's account to
reimburse the Fund for any loss. In addition, the purchaser may be prohibited or
restricted from placing future purchase orders
26
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in the Fund or any of the other Funds in the Investment Company Complex. In
order to permit the Fund's shareholder base to expand, to avoid certain
shareholder hardships, to correct transactional errors, and to address similar
exceptional situations, the Fund may waive or lower the investment minimums with
respect to any person or class of persons.
ALLOCATION OF BROKERAGE
The Fund seeks to obtain prompt execution of orders at the most favorable
net prices. The Fund is not currently obligated to deal with any particular
broker, dealer or group thereof. Fund transactions in debt and OTC securities
generally are with dealers acting as principals at net prices with little or no
brokerage costs. In certain circumstances, however, the Fund may engage a broker
as agent for a commission to effect transactions for such securities. Purchases
of securities from underwriters include a commission or concession paid to the
underwriter, and purchases from dealers include a spread between the bid and
asked price. While the Investment Manager generally seeks reasonably competitive
spreads or commissions, payment of the lowest spread or commission is not
necessarily consistent with obtaining the best net results. Accordingly, the
Fund will not necessarily be paying the lowest spread or commission available.
The Investment Manager directs portfolio transactions to broker/dealers
for execution on terms and at rates which it believes, in good faith, to be
reasonable in view of the overall nature and quality of services provided by a
particular broker/dealer, including brokerage and research services, sales of
Fund shares, and allocation of commissions to the Fund's Custodian. With respect
to brokerage and research services, consideration may be given in the selection
of broker/dealers to brokerage or research provided and payment may be made for
a fee higher than that charged by another broker/dealer which does not furnish
brokerage or research services or which furnishes brokerage or research services
deemed to be of lesser value, so long as the criteria of Section 28(e) of the
Securities Exchange Act of 1934, as amended ("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
"brokerage and research services" as defined in Section 28(e)(3) of the 1934
Act, which presently include (1) furnishing advice as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities or purchasers or sellers of securities, (2)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts, and (3) effecting securities trans actions and performing functions
incidental thereto (such as clearance, settlement, and custody). Pursuant to
arrangements with certain broker/dealers, such broker/dealers provide and pay
for various computer hardware, software and services, market pricing
information, investment subscriptions and memberships, and other third party and
internal research of assistance to the Investment Manager in the performance of
its investment decision-making responsibilities for transactions effected by
such broker/dealers for the Fund. Commission "soft dollars" may be used only for
"brokerage and research services" provided directly or indirectly by the
broker/dealer and under no circumstances will cash payments be made by such
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<PAGE>
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.
In order for BBSI to effect any portfolio transactions for the Fund, the
commissions, fees or other remuneration received by BBSI must be reasonable and
fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. The Fund's Board of Directors has adopted procedures in conformity with
Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to
BBSI are reasonable and fair. Although BBSI's posted discount rates may be lower
than those charged by full cost brokers, such rates may be higher than some
other discount brokers and certain brokers may be willing to do business at a
lower commission rate on certain trades. The Board has determined that portfolio
transactions may be executed through BBSI if, in the judgment of the Investment
Manager, the use of BBSI is likely to result in price and execution at least as
favorable as those of other qualified broker/dealers and if, in particular
transactions, BBSI charges the Fund a rate consistent with that charged to
comparable unaffiliated customers in similar transactions. Brokerage
transactions with BBSI are also subject to such fiduciary standards as may be
imposed by applicable law. The Investment Manager's fees under its agreement
with the Fund are not reduced by reason of any brokerage commissions paid to
BBSI.
During the fiscal years ended December 31, 1994, 1995, and 1996, the Fund
paid total brokerage commissions of approximately $75,000, $64,400, and
$847,875, respectively. For the fiscal year ended December 31, 1996,
approximately $726,917 in brokerage commissions (representing approximately
$158,239,228 in portfolio transactions) was allocated to bro ker/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 year ended December 31, 1994, the Fund paid no
brokerage commissions to BBSI. During the Fund's fiscal years ended December 31,
1995 and 1996, the Fund paid $2,224 and $120,957, respectively, which
represented approximately 3% and 14%, respectively, of the total brokerage
commissions paid by the Fund and 9% and 18%, respectively, 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.
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The Fund is not obligated to deal with any particular broker, dealer or
group thereof. Certain broker/dealers that the Fund or other affiliated
investment companies do business with may, from time to time, own more than 5%
of the publicly traded Class A non-voting Common Stock of Group, the parent of
the Investment Manager, and may provide clearing services to BBSI.
The Fund'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, 1996 and
1995, the Fund's portfolio turnover rate was 23% and 48%, respectively. A higher
portfolio turnover rate involves correspondingly greater transaction costs and
increases the potential for short-term capital gains and taxes.
From time to time, certain brokers may be paid a fee for record keeping,
shareholder communications and other services provided by them to investors
purchasing shares of the Fund through the "no transaction fee" programs offered
by such brokers. This fee is based on the value of the investments in the Fund
made by such brokers on behalf of investors participating in their "no
transaction fee" programs. The Fund's Directors have further authorized the
Investment Manager to place a portion of the Fund's brokerage transactions with
any such brokers, if the Investment Manager reasonably believes that, in
effecting the Fund's transactions in portfolio securities, such broker or
brokers are able to provide the best execution of orders at the most favorable
prices. Commissions earned by such brokers from executing portfolio transactions
on behalf of the Fund may be credited by them against the fee they charge the
Fund, on a basis which has resulted from negotiations between the Investment
Manager and such brokers.
DISTRIBUTIONS AND TAXES
If the U.S. Postal Service cannot deliver a shareholder's check, or if a
shareholder's check remains uncashed for six months, the Fund reserves the right
to credit the shareholder's account with additional Fund shares at the then
current net asset value in lieu of the cash payment and to thereafter issue such
shareholder's distributions in additional Fund shares.
The Fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"). To qualify for that treatment, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
Among these requirements are the following: (1) at least 90% of the Fund's gross
income each taxable year must be derived from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months - options, futures, or forward contracts (other than
those on foreign currencies), or foreign currencies (or options, futures, or
forward contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); and (3) the Fund's investments must satisfy
certain diversification requirements. In any year during which the applicable
provisions of the Code are satisfied, the Fund will not be liable for Federal
income tax on net income and gains that are distributed to its shareholders. If
for any taxable year the Fund does not qualify for treatment as a RIC, all of
its taxable income would be taxed at corporate rates.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or in additional Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by the Fund from U.S.
corporations. However, dividends received by a
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<PAGE>
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 ("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 the Excise Tax by making
adequate distributions.
Dividends and interest received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible to, and may, file an election
with the Internal Revenue Service that would enable its shareholders, in effect,
to receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions' income taxes paid by it. Pursuant to the election, the Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by the shareholder, the shareholder's proportionate share of those taxes, (2)
treat the shareholder's share of those taxes and of any dividend paid by the
Fund that represents income from foreign or U.S. possessions sources as the
shareholder's own income from those sources, and (3) either deduct the taxes
deemed paid by the shareholder in computing the shareholder's taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the shareholder's Federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of the
Fund's income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to Federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain from disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If the Fund invests in a PFIC and elects to treat the PFIC
as a "qualified electing fund", then in lieu of the foregoing tax and interest
obligation, the Fund would 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 likely
would have to be distributed to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax. In most instances it will be very difficult, if
not impossible, to make this election because of certain requirements thereof.
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
30
<PAGE>
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. Gains from the
disposition of foreign currencies (except certain gains that may be excluded by
future regulations), and gains from 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 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, forward contracts
and foreign currency positions 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 Plaza, Suite 700, Philadelphia, PA
19102-1707, are the Fund's independent accountants. The Fund's financial
statements are audited annually.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended December 31,
1996, together with the Report of the Fund's independent accountants thereon,
appear in the Fund's Annual Report to Shareholders and are incorporated herein
by reference.
31
<PAGE>
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 edged". Interest payments are
protected by a large or 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. Together with the Aaa group they 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 risk appear somewhat larger than the 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 some time 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 the
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 Group Corporate Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitments on the obligation is
still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet
its financial commitment on the obligation.
32
<PAGE>
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions
which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than an
obligation rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
CCC The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but
payments on the obligation are being continued.
33
<PAGE>
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a)Financial Statements to be included in Part A of this Registration Statement:
Financial Highlights
Financial Statements to be included in Part B of this
Registration Statement:
The financial statements contained in the Fund's Annual Report
to Shareholders for the fiscal year ended December 31, 1996
are incorporated into Part B by reference, except that the
letter to shareholders and other information contained on
pages one and two of said Annual Report is not so incorporated
by reference and is not 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.
2 Bylaws of Midas Fund, Inc., filed with the Securities
and Exchange Commission on August 24, 1995.
3 Not applicable.
4 Specimen copy of share certificate of Midas Fund,
Inc., filed with the Securities and Exchange
Commission on August 24, 1995.
5(a) Form of Investment Management Agreement of Midas Fund, Inc.,
filed with the Securities and Exchange Commission on August
24, 1995.
5(b) Form of Subadvisory Agreement of Midas Fund, Inc.,
filed with the Securities and Exchange Commission on
August 24, 1995.
6 Form of Distribution Agreement of Midas Fund, Inc.,
filed with the Securities and Exchange Commission on
August 24, 1995.
7 Not applicable.
8(a) 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.
Part C-1
<PAGE>
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.
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 21, 1997:
(1) (2)
Title of Class Number of Record Holders
Common stock, par value 16,767
$.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
Part C-2
<PAGE>
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 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 "Investment Manager" filed as part of this Registration
Part C-3
<PAGE>
Statement.
The directors and officers of the Investment Manager are also directors
and officers of other Funds managed by Bull & Bear Advisers, Inc. and Rockwood
Advisers, Inc., both wholly-owned subsidiaries of Bull & Bear Group, Inc.
("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, Rockwood
Advisers, Inc., a registered investment adviser, 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 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, a series of
shares issued by Bull & Bear Funds II, Inc.; Bull & Bear Global Income Fund,
Inc.; Bull & Bear U.S. Government Securities Fund, Inc.; Bull & Bear Municipal
Income Fund, Inc.; Bull & Bear Gold Investors Ltd.; Bull & Bear U.S. and
Overseas Fund, a series of Bull & Bear Funds I, Inc.; and Bull & Bear Special
Equities Fund, Inc. Rockwood Advisers, Inc. serves as investment adviser to
Rockwood 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 Rockwood
Fund, 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>
Name and Principal Position and Offices
Business Address Position and Offices with Service with Registrant
Center
- - ----------------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C>
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
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
Part C-4
<PAGE>
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
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
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's annual report to
shareholders upon request and without charge.
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 27th day of
February, 1997.
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 February 27, 1997
Mark C. Winmill Executive Officer
Thomas B. Winmill Director, Co-President and Co-Chief February 27, 1997
Thomas B. Winmill Executive Officer
Joseph Leung Treasurer, Principal February 27, 1997
Joseph Leung Accounting Officer
Bruce B. Huber Director February 27, 1997
Bruce B. Huber
James E. Hunt Director February 27, 1997
James E. Hunt
Frederick A. Parker, Jr. Director February 27, 1997
Frederick A. Parker, Jr.
John B. Russell Director February 27, 1997
John B. Russell
Russell E. Burke III Director February 27, 1997
Russell E. Burke III
Part C-6
<PAGE>
Exhibit Index
EXHIBIT
(17) Financial Data Schedule
Part C-7
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial infomation extracted from Midas
Fund Semi-Annual Report and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000770200
<NAME> Midas Fund, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<EXCHANGE-RATE> 1.00
<INVESTMENTS-AT-COST> 219,004,506
<INVESTMENTS-AT-VALUE> 205,932,976
<RECEIVABLES> 2,799,570
<ASSETS-OTHER> 15,854
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 208,748,400
<PAYABLE-FOR-SECURITIES> 1,424,351
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,867,522
<TOTAL-LIABILITIES> 8,291,873
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 216,117,388
<SHARES-COMMON-STOCK> 38,928,321
<SHARES-COMMON-PRIOR> 3,707,726
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,587,097)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (13,073,764)
<NET-ASSETS> 200,456,527
<DIVIDEND-INCOME> 741,778
<INTEREST-INCOME> 332,209
<OTHER-INCOME> 0
<EXPENSES-NET> 2,494,708
<NET-INVESTMENT-INCOME> (1,420,721)
<REALIZED-GAINS-CURRENT> (2,683,675)
<APPREC-INCREASE-CURRENT> (14,771,827)
<NET-CHANGE-FROM-OPS> (18,876,223)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 60,650,936
<NUMBER-OF-SHARES-REDEEMED> (25,443,864)
<SHARES-REINVESTED> 13,523
<NET-CHANGE-IN-ASSETS> 184,703,484
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 83,138
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,549,358
<INTEREST-EXPENSE> 44,520
<GROSS-EXPENSE> 2,830,594
<AVERAGE-NET-ASSETS> 154,951,764
<PER-SHARE-NAV-BEGIN> 4.25
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> .95
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.15
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 629,838
<AVG-DEBT-PER-SHARE> .02
</TABLE>
