As filed with the Securities and Exchange Commission on April 30, 1999
1933 Act File No. 2-98229
1940 Act File No. 811-4316
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 23
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Post-Effective Amendment No. 23
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)
THOMAS B. WINMILL
11 HANOVER SQUARE, NEW YORK, NEW YORK, 10005
(Name and Address of Agent for Service)
Copy to:
Deborah A. Sullivan, Esq. Stuart H. Coleman, Esq.
Bull & Bear Advisers, Inc. Stroock & Stroock & Lavan LLP
11 Hanover Square 180 Maiden Lane
New York, NY 10005 New York, NY 10038-4982
It is proposed that this filing will become effective on May 1, 1999
pursuant to paragraph (b) of Rule 485.
The Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The Registrant's most recent Rule 24f-2 Notice
was filed March 26, 1999.
<PAGE>
Midas Fund, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Table of Contents
Cross Reference Sheet - Midas Fund, Inc.
Midas Fund, Inc.
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
MIDAS FUND, INC.
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
Item No.
of Form N-lA Caption in Prospectus
1 Front and Back Cover Pages
2 "Investment Objective and Strategy", "Main Risks",
"Past Performance"
3 "Fees and Expenses of the Fund"
4 "Investment Objective and Strategy", "Main Risks"
5 not applicable
6 "Management"
7 "Purchasing Shares", "Redeeming Shares", "Account and Transaction
Policies", "Distributions and Taxes"
8 "Fees and Expenses of the Fund"
9 "Financial Highlights"
Caption in Statement of Additional Information
10 Cover Page
11 "Description of the Fund"
12 "Investment Objective and Strategy", "Investment Restrictions"
13 "Management of the Fund"
14 "Management of the Fund"
15 "Management of the Fund", "Investment Manager"
16 "Allocation of Brokerage"
17 Not Applicable
18 "Determination of Net Asset Value", "Purchase of Shares"
19 "Distributions and Taxes"
20 "Distribution of Shares"
21 "Calculation of Performance Data"
22 "Financial Statements"
3
<PAGE>
MIDAS FUND, INC.
Prospectus dated May 1, 1999
Midas Fund, Inc. seeks primarily capital appreciation and protection against
inflation and, secondarily, current income. The Fund pursues its objective by
investing primarily in companies involved with gold, silver, platinum or other
natural resources and gold, silver and platinum bullion. There can be no
assurance that the Fund will achieve its objective.
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 before you
invest. Please keep it for future reference.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
CONTENTS
INVESTMENT OBJECTIVE AND STRATEGY.............................................2
MAIN RISKS ..................................................................2
PAST PERFORMANCE..............................................................4
FEES AND EXPENSES OF THE FUND.................................................4
MANAGEMENT ..................................................................5
FINANCIAL HIGHLIGHTS..........................................................6
PURCHASING SHARES.............................................................6
REDEEMING SHARES..............................................................8
ACCOUNT AND TRANSACTION POLICIES..............................................9
DISTRIBUTIONS AND TAXES.......................................................9
FOR MORE INFORMATION.........................................................11
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGY
Midas Fund seeks primarily capital appreciation and protection against inflation
and, secondarily, current income. The Fund pursues its objective by investing
primarily in companies involved with gold, silver, platinum or other natural
resources and gold, silver and platinum bullion.
The Fund will invest 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.
In making investments for the Fund, management may consider, among other things,
the ore quality of metals mined by a company, a company's mining, processing and
fabricating costs and techniques, the quantity of a company's unmined reserves,
quality of management, and marketability of a company's equity or debt
securities. Management will emphasize the potential for growth of the proposed
investment, although it may also consider an investment's income generating
capacity as well. A stock is typically sold when, in the opinion of the
portfolio management team, its potential to meet the Fund's investment objective
is limited, or exceeded by another potential investment.
The Fund may, from time to time, under adverse market conditions take temporary
defensive positions that are inconsistent with the Fund's investment strategies,
such as investing some or all of its assets in money market securities. When the
Fund takes such temporary defensive positions, the Fund may not achieve its
investment objective.
The Fund may also invest in cash and cash equivalents, short-term bonds,
repurchase agreements, and convertible bonds. The Fund may engage in short
selling where risk of loss is potentially unlimited. The Fund may also lend
portfolio securities to other parties and borrow money to purchase securities.
Additionally, the Fund may invest in special situations such as liquidations and
reorganizations.
The Fund may utilize other investments and investment techniques that may impact
Fund performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their values from other
securities or commodities or that are based on indices).
MAIN RISKS
Precious Metals Price Risk. The primary risk affecting this Fund's performance
is that its investments are linked to the prices of gold, silver, platinum and
other resources. These prices can be influenced by a variety of global economic,
financial and political factors and may fluctuate substantially over short
periods of time and be more volatile than other types of investments. Economic,
political, or other conditions affecting one of the major sources of gold,
silver, platinum and other resources could have a substantial effect on supply
and demand in countries throughout the world.
Mining Risk. Resource mining by its nature involves significant risks and
hazards. Even when a resource mineralization is discovered, there is no
guarantee that the actual reserves of a mine will increase. Exploratory mining
can last over a number of years, incur substantial costs, and not lead to any
new commercial mining. Resource mining runs the risk of increased environmental,
labor or other costs in mining due to environmental hazards, industrial
accidents, labor disputes, discharge of toxic chemicals, fire, drought, flooding
and other natural acts. Changes in laws relating to mining or resource
production or sales could also substantially affect resource values.
Market Risk. The primary risks associated with investing in the Fund are those
related to fluctuations in the value of the Fund's portfolio. A potential risk
in investing in stocks is that stock value will go up and down according to
stock market movements and you could lose money. However, you also have the
<PAGE>
potential to make money. Also, investing in stocks involves a greater risk of
loss of income than bonds because stocks may not pay dividends.
Non-Diversification Risk. The Fund is non-diversified which means that more than
5% of the Fund's assets may be invested in the securities of one issuer. As a
result, the Fund may hold a smaller number of issuers than if it were
diversified. If this situation occurs, investing in the Fund could be more risky
than investing in a fund that holds a broader range of securities because
changes in the financial condition of a single issuer could cause greater
fluctuation in the Fund's total return.
Foreign Investment Risk. The Fund can be exposed to the unique risks of foreign
investing. Political turmoil and economic instability in the countries in which
the Fund invests could adversely affect the value of your investment. Also, if
the value of any foreign currency in which the Fund's investments are
denominated declines relative to the U.S. dollar, the value and total return of
your investment in the Fund may decline as well. Foreign investments,
particularly investments in emerging markets, carry added risks due to
inadequate or inaccurate financial information about companies, potential
political disturbances and fluctuations in currency exchange rates.
Portfolio Management Skill. The portfolio manager's skill in choosing
appropriate investments for the Fund will determine in large part the Fund's
ability to achieve its investment objectives.
Active Trading. The Fund expects to trade securities actively. This strategy
could increase transaction costs, reduce performance and may result in taxable
distributions. In addition, shareholders may incur taxes on any realized capital
gains.
Illiquid Securities. The Fund may invest up to 15% of its assets in illiquid
securities. Some potential risks from investing in illiquid securities is that
illiquid securities can 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.
Lending. The Fund may lend portfolio securities to borrowers for a fee.
Securities may only be lent if the Fund receives collateral equal to the market
value of the assets lent. Some risk is involved if the borrowers suffer
financial problems and are unable to return the assets lent.
Interest Rates. The Fund's bond investments are affected by interest rates. When
interest rates rise, the prices of bonds typically fall in proportion to their
duration. Duration, expressed in years, is based on the estimated payback
period, or "duration" of a bond and is the most widely used gauge of sensitivity
to interest rate change.
Year 2000. The Fund could be adversely effected if computer systems used by
Midas Management Corporation and the Fund's other service providers do not
properly process and calculate date-related information on and after January 1,
2000. Midas Management Corporation is working to avoid these problems and to
obtain assurances from other service providers that they are taking similar
steps. There could be a negative impact on the Fund. While the Fund cannot, at
this time, predict the degree of impact it is possible that foreign markets will
be less prepared than U.S. markets.
<PAGE>
PAST PERFORMANCE
The bar chart provides some indication of the risks of investing in the fund by
showing changes in the fund's performance from year to year. The table compares
the fund's average annual returns for the 1, 5 and 10 year periods with those of
the Standard & Poor's 500 Stock Index ("S&P 500") and Morningstar Precious
Metals Fund Average ("PMFA"). The S&P 500 is unmanaged and fully invested in
stocks. The PMFA is an equally weighted average of the 22 precious metals funds
tracked by Morningstar. Both the bar chart and the table assume reinvestment of
dividends and distributions. As with all mutual funds, past performance is not
necessarily an indication of future performance.
Year-by-year total percent return as of 12/31 each year
1989:21.88, 1990:(16.99), 1991:(0.20), 1992:(7.16), 1993:99.24, 1994:(17.27),
1995:36.73, 1996:21.22, 1997:(59.03), 1998:(28.44).
Best Quarter (4/93-6/93) = 36.64%
Worst Quarter (10/97-12/97) = (40.90)%
Average annual total return for the periods ended 12/31/98
1 Year 5 Years 10 Years
Midas Fund (28.44)% (16.62)% (2.82)%
S&P 500 28.58% 24.05% 19.20%
PMFA (11.35)% (12.91)% (3.27)%
FEES AND EXPENSES OF THE FUND
As an investor, you pay certain fees and expenses in connection with the fund,
which are described in the following tables. Shareholder fees are paid out of
your account. Annual fund operating expenses are paid out of fund assets, so
their effect is included in the share price.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price).................................... NONE
Maximum Deferred Sales Charge (Load)................................... NONE
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends.............................................................. NONE
Redemption Fee within 30 days of purchase.............................. 1.00%
4
<PAGE>
Annual fund operating expenses
(expenses that are deducted from fund assets)( as % of average daily net assets)
Management fees....................................................... 1.00%
Distribution and Service (12b-1) fees................................. 0.25%
Other expenses........................................................ 1.08%
Total Annual Fund Operating Expenses.................................. 2.33%
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
The example assumes that you invest
$10,000 in the fund for the time
periods indicated and then redeem
all of your shares at the end of
of those periods. The Example also
assumes that your investment has a
5% return each year and that the
fund's operating expenses remain
the same. Although your actual cost
may be higher or lower, based on
these assumptions your costs would be:....$ 236 $727 $1,245 $2,666
........... ............ ............ ...............
</TABLE>
MANAGEMENT
Midas Management Corporation is the investment manager. It regularly furnishes
advice with respect to portfolio transactions and provides all services
necessary for the proper conduct of the fund's business and administration. It
is located at 11 Hanover Square, New York, New York 10005. Generally, the fund
pays the investment manager a management 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. During the
fiscal year ended December 31, 1998, investment management fees paid by the fund
represented approximately 1.00% of average daily net assets.
Lion Resource Management Limited is the subadviser. 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. Its principal business address
is 7 - 8 Kendrick Mews, London, U.K. SW7 3HG. 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 net assets.
Investor Service Center, Inc. is the distributor of the fund and services
shareholder accounts. The fund has adopted a plan under Rule 12b-1 and pays the
distributor a distribution or 12b-1 fee in an amount of one-quarter of one
percent per annum of the fund's average daily net assets as compensation for
distribution and service activities. These fees are paid out of the Fund's
assets on an ongoing-basis. Overtime these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
5
<PAGE>
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the past five years. The fiscal
year end is December 31. Certain information reflects financial results for a
single fund share. Total return shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had reinvested
all dividends and distributions. The figures for the periods shown were audited
by Tait, Weller & Baker, the fund's independent accountants, whose report, along
with the fund's financial statements, are included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1998* 1997* 1996* 1995* 1994
----- ----- ----- ----- ----
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period..................... $2.11 $5.15 $4.25 $3.32 $4.16
----- ----- ----- ----- -----
Income from investment operations:
Net investment loss...................................... - (0.03) (0.05) (0.06) (0.05)
Net realized and unrealized gain (loss) on investments... (0.60) (3.01) 0.95 1.28 (0.67)
------ ------ ---- ---- ------
Total from investment operations....................... (0.60) (3.04) 0.90 1.22 (0.72)
Less distributions:
Distributions from net realized gains.................... - - - (0.29) (0.12)
Total distributions.................................... - - - (0.29) (0.12)
------ ------
Net asset value, end of period........................... $1.51 $2.11 $5.15 $4.25 $3.32
===== ===== ===== ===== =====
TOTAL RETURN............................................. (28.44)% (59.03)% 21.22% 36.73% (17.27)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)..................... $87,841 $100,793 $200,457 $15,753 $7,052
Ratio of expenses to average net assets(a) (b):.......... 2.33% 1.90% 1.63% 2.26% 2.15%
Ratio of net investment loss to average net assets(c):... (0.02)% (0.72)% (0.92)% (1.47)% (1.26)%
Portfolio turnover rate ................................. 27% 50% 23% 48% 53%
<FN>
*Per share net investment 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) Expense ratio
prior to reimbursement by the Investment Manager was 2.15%, 1.83%, and 2.52% for
the years ended December 31, 1997, 1996, and 1995. (b) Expense ratio after
transfer agent and custodian credits was 2.30%, 1.88%, 1.61% and 2.25% for the
years ended December 31, 1998, 1997, 1996 and 1995. Prior to 1995, such credits
were reflected in the expense ratio. (c) Ratio prior to reimbursement by the
Investment Manager was (0.97)%, (1.12)%, and (1.73)% for the years ended
December 31, 1997, 1996, and 1995.
</FN>
</TABLE>
PURCHASING SHARES
Your price for fund shares is the fund's next calculation, after the order is
placed, of net asset value (NAV) per share which is determined as of the close
of regular trading on the New York Stock Exchange (currently, 4 p.m. eastern
time) each day the exchange is open. The fund's shares will not be priced on the
days on which the exchange is closed for trading. The fund's investments are
valued based on market value, or where market quotations are not readily
available, based on fair value as determined in good faith by the fund's board.
Distribution and Service (12b-1) Fees. The Fund has adopted a plan under Rule
12b-1 that allows it to pay the Distributor a fee at the annual rate of 1% of
the value of the Fund's average daily net assets for the sale of Fund shares and
for services provided to holders of Fund shares. Because these fees are paid out
of the Fund's assets on an ongoing basis, over time, these fees will increase
the cost of a shareholder's investment and may cost shareholders more than
paying other types of sales charges.
OPENING YOUR ACCOUNT.
BY CHECK. Complete and sign the Account Application that accompanies this
prospectus and mail it, along with your check made payable to Midas Fund, to
Investor Service Center, Box 419789, Kansas City, MO 64141-6789 (see Minimum
Investments below).
6
<PAGE>
BY WIRE. Telephone Investor Service Center toll-free at 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 (see Minimum Investments below).
Minimum Investments
Initial Additional
Regular account ................................ $1,000 $100
Uniform Gifts/Transfers to Minors Act
custody accounts ............................ $1,000 $100
Traditional IRA ................................ $1,000 $100
Roth IRA ....................................... $1,000 $100
SEP-IRA ........................................ $1,000 $100
SIMPLE IRA ..................................... $1,000 $100
Rollover IRA ................................... $1,000 $100
403(b) plan .................................... $1,000 $100
Education IRA .................................. $500 N/A
Automatic Investment Program ................... $100 $100
- ------------------------------------------------ ------------- ---------------
Checks must be payable to Midas Fund in U.S. dollars. Third party checks cannot
be accepted. You may be charged a fee for any check that does not clear.
IRAs and retirement accounts. For more information about the IRAs and retirement
accounts listed above, please call Investor Service Center toll-free at
1-800-400-MIDAS.
Automatic Investment Program. With the 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 $100 or more into your fund account.
Bank Transfer Plan For making automatic investments from
a designated bank account.
................................................................................
Salary Investing Plan For making automatic investments
through a payroll deduction.
................................................................................
Government Direct Deposit Plan For making automatic investments from
your federal employment, Social
Security, or other regular federal
government check.
................................................................................
The fund reserves the right to redeem any account if participation in the
program ends and the account's value is less than $1000 due to redemptions.
7
<PAGE>
For more information, or to request the necessary authorization form, please
call Investor Service Center toll-free at 1-800-400-MIDAS. You may modify or
terminate the Bank Transfer Plan at any time by written notice received 10 days
prior to the scheduled investment date. To modify or terminate the Salary
Investing Plan or Government Direct Deposit Plan, you should contact your
employer or the appropriate U.S. Government agency, respectively.
ADDING TO YOUR ACCOUNT.
BY CHECK. Complete a Midas FastDeposit form and mail it, along with your check,
made payable to Midas Fund, to Investor Service Center, Box 419789, Kansas City,
MO 64141-6789 (see Minimum Investments above). If you do not use that form,
include a letter indicating the account number to which the subsequent
investment is to be credited, and the name of the registered owner.
BY ELECTRONIC FUNDS TRANSFER (EFT). Telephone Investor Service Center toll-free
at 1-800-400-MIDAS. The bank you designate on your Account Application or
Authorization Form will be contacted to arrange for the EFT, which is done
through the Automated Clearing House system, to your fund account. Requests
received by 4 p.m., eastern time, will ordinarily be credited to your fund
account on the next business day. 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 (see Minimum Investments
above).
BY WIRE. Subsequent investments by wire may be made at any time without having
to call Investor Service Center by simply following the same wiring procedures
above (see Minimum Investments above).
REDEEMING SHARES
Generally, you may redeem by any of the methods explained below. Requests for
redemption should include the following information:
o name of the registered owner(s) of the account
o account number
o fund name
o amount you want to sell
o recipient's name and address or wire information
In some instances, a signature guarantee may be required. Signature guarantees
help prevent against fraud. You can obtain one from most banks or securities
dealers, but not from a notary public. For joint accounts, each signature must
be guaranteed. Please call us to ensure that your signature quarantee will be
processed correctly.
BY MAIL. Write to Investor Service Center, Box 419789, Kansas City, MO
64141-6789, and request the specific amount to be redeemed. The request must be
signed by the registered owner(s).
BY TELEPHONE. Telephone Investor Service Center toll-free at 1-800-400-MIDAS, to
expedite redemption of fund shares.
BY EFT. Telephone Investor Service Center toll-free at 1-800-400-MIDAS and
request the specific amount to be redeemed through EFT. You may redeem as little
as $250 worth of shares by requesting EFT service. EFT proceeds are ordinarily
available in your bank account within two business days.
BY WIRE. Telephone Investor Service Center toll-free at 1-800-400-MIDAS and
request the specific amount to be redeemed by wire.
8
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. If your shares have a value of at least $20,000 you
may elect automatic withdrawals from your fund account, subject to a minimum
withdrawal of $100. All dividends and distributions are reinvested in the fund.
ACCOUNT AND TRANSACTION POLICIES
ORDER EXECUTION. Orders to buy and sell shares are executed at the next NAV
calculated after the order has been received in proper form. Orders received on
fund business days by 4 p.m., eastern time, will be redeemed from your account
that day. Orders received after 4 p.m., eastern time, will be redeemed from your
account on the next fund business day.
REDEMPTION FEE. The fund is designed as a long term investment, and short term
trading is discouraged. 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 NAV of shares redeemed or exchanged. Redemption fees are paid to
the Fund.
REDEMPTION PAYMENT. Payment for shares redeemed will ordinarily be made within
seven days after receipt of the redemption request in proper form.
ACCOUNTS WITH BELOW-MINIMUM BALANCES. If your account balance falls below $500
as a result of selling shares and not because of market action, the fund
reserves the right, upon 45 days' notice, to close your account or request that
you buy more shares.
TELEPHONE PRIVILEGES. The fund accepts telephone orders from all shareholders
and guards against fraud by following reasonable precautions such as requiring
personal identification before carrying out shareholder requests. You could be
responsible for any loss caused by an order which later proves to be fraudulent.
The Fund is not liable as long as the Fund follows reasonable procedures.
ASSIGNMENT. Fund shares may be transferred to another owner. Instructions are
available from Investor Service Center by calling toll-free at 1-800-400-MIDAS.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. The fund pays its shareholders dividends from its net investment
income, and distributes any net capital gains that it has realized. Each of
these distributions is paid out once a year. Your distributions will be
reinvested in the fund unless you instruct the fund otherwise by calling
Investor Service Center toll-free at 1-800-400-MIDAS.
TAXES. Generally, you will be taxed when you sell shares, exchange shares and
receive distributions (whether reinvested or taken in cash). Typically, your tax
treatment will be as follows:
Transaction Tax treatment
- ----------- -------------
Income dividends................................. Ordinary income
Short-term capital gains distributions........... Ordinary income
Long-term capital gains
distributions.................................. Capital gains
Sales or exchanges of shares
held for more than one year.................... Capital gains or losses
Sales or exchanges of shares held
for one year or less........................... Gains are treated as ordinary
income; losses are subject to
special rules
9
<PAGE>
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Each January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because everyone's tax situation is unique, please consult your tax professional
about your investment.
10
<PAGE>
(Back Cover)
FOR MORE INFORMATION about Midas Fund, Inc.
For investors who want more information on the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS. Contains performance data, lists portfolio holdings
and contains a letter from the fund's manager discussing recent market
conditions, economic trends and fund strategies that significantly affected the
fund's performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. A current SAI is on file with the Securities and Exchange Commission
(SEC) and is incorporated by reference (is legally considered part of this
prospectus).
To Obtain Information
By telephone
Call 1-800-400-MIDAS
By mail write to:
Midas Fund, Inc.
11 Hanover Square
New York, NY 10005
By e-mail write to:
[email protected]
On the Internet Fund documents
can be viewed online or downloaded from:
SEC http://www.sec.gov
Midas http://www.mutualfunds.net
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC (phone 1-800- SEC-0330) or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, DC
20549-6009. The fund's Investment Company Act file number is 811-4316.
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Statement of Additional Information May 1, 1999
MIDAS FUND, INC.(R)
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, 1999. The Prospectus is available to prospective
investors without charge upon request to Investor Service Center, Inc., the
Fund's Distributor, by calling 1-800-400-MIDAS.
TABLE OF CONTENTS
THE FUND'S INVESTMENT PROGRAM..................................................2
INVESTMENT RESTRICTIONS........................................................4
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES......................4
INVESTMENT COMPANY COMPLEX....................................................10
OFFICERS AND DIRECTORS........................................................11
INVESTMENT MANAGER............................................................11
SUBADVISER AND SUBADVISORY AGREEMENT..........................................12
CALCULATION OF PERFORMANCE DATA...............................................13
DISTRIBUTION OF SHARES........................................................15
DETERMINATION OF NET ASSET VALUE..............................................16
PURCHASE OF SHARES............................................................17
ALLOCATION OF BROKERAGE.......................................................17
DISTRIBUTIONS AND TAXES.......................................................18
REPORTS TO SHAREHOLDERS.......................................................19
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT.............................19
AUDITORS......................................................................19
FINANCIAL STATEMENTS..........................................................19
APPENDIX--DESCRIPTIONS OF BOND RATINGS........................................20
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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. 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.
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, 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. Certain of these instruments
are often restricted securities because the securities are either themselves
exempt from registration or sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. 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
resulting in liquidity problems..
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
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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
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, commonly
referred to as "junk bonds", 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 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 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
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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") (which currently limits borrowing to no more
than 33 1/3% of the value of the Fund's total assets);
2. Engage in the business of underwriting the securities of other issuers,
except to the extent that the Fund may be deemed to be an underwriter
under the Federal securities laws in connection with the disposition of
the Fund's authorized investments;
3. Purchase or sell real estate, provided that the Fund may invest in
securities (excluding limited partnership interests) secured by real
estate or interests therein or issued by companies which invest in real
estate or interests therein;
4. Purchase or sell physical commodities (other than precious metals),
although it may enter into (a) commodity and other futures contracts
and options thereon, (b) options on commodities, including foreign
currencies and precious metals, (c) forward contracts on commodities,
including foreign currencies and precious metals, and (d) other
financial contracts or derivative instruments;
5. Lend its assets, provided however, that the following are not
prohibited: (a) the making of time or demand deposits with banks, (b)
the purchase of debt securities such as bonds, debentures, commercial
paper, repurchase agreements and short term obligations in accordance
with the Fund's investment objectives and policies, and (c) engaging in
securities, precious metals, and other asset loan transactions to the
extent permitted by the 1940 Act; or
6. Issue senior securities as defined in the 1940 Act. The following will
not be deemed to be senior securities prohibited by this provision: (a)
evidences of indebtedness that the Fund is permitted to incur, (b) the
issuance of additional series or classes of securities that the Board
of Directors may establish, (c) the Fund's futures, options, and
forward transactions, and (d) to the extent consistent with the 1940
Act and applicable rules and policies adopted by the Securities and
Exchange Commission ("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:
The Fund may:
(i) Invest up to 15% of the value of its net assets in illiquid securities,
including repurchase agreements providing for settlement in more than
seven days after notice.
(ii) Purchase securities issued by other investment companies to the extent
permitted under the 1940 Act.
(iii) Pledge, mortgage, hypothecate or otherwise encumber its assets to the
extent permitted under the 1940 Act.
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES
Regulation of the Use of Options, Futures and Forward Currency Contract
Strategies. As discussed in the Prospectus, the Investment Manager may purchase
and sell options (including options on precious metals, foreign currencies,
equity and debt securities, and securities indices), futures contracts (or
"futures") (including futures contracts on precious metals, foreign currencies,
securities and securities indices), options on futures contracts and forward
currency contracts. Certain special characteristics of and risks associated with
using these instruments are discussed below. In addition to the non-fundamental
investment restrictions described above in sections 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, and the CFTC.
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
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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. There can be no
assurance that the techniques described herein will provide adequate hedging or
that such techniques are or will be actually or effectively available due to
liquidity, costliness, or other factors. Hedging maneuvers may fail and
investors should not assume the availability of any of the hedging opportunities
described herein. In any event, the Investment Manager will not attempt perfect
balancing, through hedging or otherwise and the Fund might not use any hedging
techniques, as described herein or otherwise. 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. The call option enables the Fund to buy
the underlying security at the predetermined exercise price. Call options also
may be used as a means of enhancing returns by, for example, participating in an
anticipated price increase of a security. In the event of a decline in the price
of the underlying security, use of this strategy would serve to limit the
potential loss to the Fund to the option premium paid; conversely, if the market
price of the underlying security increases above the exercise price and the Fund
either sells or exercises the option, any profit eventually realized would be
reduced by the premium paid.
The Fund may purchase put options on securities in order to hedge
against a decline in the market value of securities held in its portfolio or to
attempt to enhance return. The put option enables the Fund to sell the
underlying security at the predetermined exercise price; thus, the potential for
loss to the Fund below the exercise price is limited to the option premium paid.
If the market price of the underlying security is higher than the exercise price
of the put option, any profit the Fund realizes on the sale of the security
would be reduced by the premium paid for the put option less any amount for
which the put option may be sold.
The Fund may on certain occasions wish to hedge against a decline in
the market value of securities held in its portfolio at a time when put options
on those particular securities are not available for purchase. The Fund may
therefore purchase a put option on other 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
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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 discussed above. Index options may serve as a
hedge against overall fluctuations in the securities markets (or a market
sector) rather than anticipated increases or decreases in the value of a
particular security. A securities index assigns values to the securities
included in the index and fluctuates with changes in such values. Settlements of
securities index options are effected with cash payments and do not involve
delivery of securities. Thus, upon settlement of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the index. The
effectiveness of hedging techniques using securities index options will depend
on the extent to which price movements in the securities index selected
correlate with price movements of the securities in which the Fund invests.
The Fund may purchase and write straddles on securities and securities
indexes. A long straddle is a combination of a call and a put purchased on the
same security or index where the exercise price of the put is less than or equal
to the exercise price on the call. The Fund would enter into a long straddle
when the Investment Manager believes that it is likely that securities prices
will be more volatile during the term of the options than is implied by the
option pricing. A short straddle is a combination of a call and a put written on
the same security where the exercise price on the put is less than or equal to
the exercise price of the call; the same issue of the security can be considered
"cover" for both the put and the call. The Fund would enter into a short
straddle when the Investment Manager believes that it is unlikely that
securities prices will be as volatile during the term of the options as is
implied by the option pricing. In such case, the Fund will set aside cash and/or
liquid, high-grade debt securities in a segregated account with its custodian
equivalent in value to the amount, if any, by which the put is "in-the-money,"
that is, that amount by which the exercise price of the put exceeds the current
market value of the underlying security.
Foreign Currency Options and Related Risks. The Fund may purchase and
sell options on foreign currencies to hedge against the risk of foreign exchange
rate fluctuations on foreign securities that the Fund holds in its portfolio or
that it intends to purchase or to enhance return. For example, if the Fund
enters into a contract to purchase securities denominated in a foreign currency,
it could effectively fix the maximum U.S. dollar cost of the securities by
purchasing call options on that foreign currency. Similarly, if the Fund held
securities denominated in a foreign currency and anticipated a decline in the
value of that currency against the U.S. dollar, the Fund could hedge against
such a decline by purchasing a put option on the currency involved. The Fund can
also purchase and sell options on foreign currencies in order to attempt to
increase the Fund's yield.
The Fund's ability to establish and close out positions in such options
is subject to the maintenance of a liquid secondary market. Although many
options on foreign currencies are exchange-traded, the majority are traded on
the OTC market. Options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers and other market resources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the inter-bank market and thus may not reflect relatively
smaller transactions (that is, less than $1 million) where rates may be less
favorable. The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are closed
while the markets for the underlying currencies remain open, significant price
and rate movements may take place in the underlying markets that cannot be
reflected in the options markets until they reopen.
Special Characteristics and Risks of Options Trading. The Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If the Fund wishes to terminate its obligation to purchase
or sell under a put or a call option it has written, the Fund may purchase a put
or a call option of the same series (that is, an option identical in its terms
to the option previously written); this is known as a closing purchase
transaction. Conversely, in order to terminate its right to purchase or sell
under a call or put option it has purchased, the Fund may sell an option of the
same series as the option held; this is known as a closing sale transaction.
Closing transactions essentially permit the Fund to realize profits or limit
losses on its options positions prior to the exercise or expiration of the
option.
In considering the use of options to enhance return or to hedge the
Fund's portfolio, particular note should be taken of the following:
(1) The value of an option position will reflect, among other things,
the current market price of the underlying security, securities index, precious
metal or currency, the time remaining until expiration, the relationship of the
exercise price to the market price, the historical price volatility of the
underlying security, securities index, precious metal or currency and general
market conditions. For this reason, the successful use of options depends upon
the Investment Manager's ability to forecast the direction of price fluctuations
in the underlying securities, precious metals or currency markets or, in the
case of securities index options, fluctuations in the market sector represented
by the selected index.
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(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 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 purchase and write covered straddles on securities
indexes. A long straddle is a combination of a call and a put purchased on the
same future 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 futures 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 future
where the exercise price on the put is less than or equal to the exercise price
of the call where the same issue of the future is 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 futures 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 permissible liquid assets in a segregated
account 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 future.
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 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:
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(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 contracts may not correlate perfectly with
movements in the prices of the hedged securities, precious metals or currencies
due to price distortions in the futures and options market. There may be several
reasons unrelated to the value of the underlying securities, precious metals or
currencies that cause this situation to occur. First, as noted above, all
participants in the futures and options market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts or options through offsetting transactions,
distortions in the normal price relationship between the securities, precious
metals, currencies and the futures and options markets may occur. Second,
because the margin deposit requirements in the futures and options market are
less onerous than margin requirements in the securities market, there may be
increased participation by speculators in the futures market; such speculative
activity in the futures market also may cause temporary price distortions. As a
result, a correct forecast of general market trends may not result in successful
hedging through the use of futures contracts or options over the short term. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage and other investment strategies may result in temporary
price distortions.
(3) Positions in futures contracts and options on futures may be closed
out only on an exchange or board of trade that provides a secondary market for
such contracts. Although the Fund intends to purchase and sell such contracts
only on exchanges or boards of trade where there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange or board of trade will exist for any particular contract at any
particular time. In such event, it may not be possible to close a position, and
in the event of adverse price movements, the Fund would continue to be required
to make variation margin payments.
(4) Like options on securities and currencies, options on futures
contracts have limited life. The ability to establish and close out options on
futures will be subject to the maintenance of liquid secondary markets on the
relevant exchanges or boards of trade.
(5) Purchasers of options on futures contracts pay a premium at the
time of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on futures contracts, however, must post initial margin and
are subject to additional margin calls that could be substantial in the event of
adverse price movements. In addition, although the maximum amount at risk when
the Fund purchases an option is the premium paid for the option and the
transaction costs, there may be circumstances when the purchase of an option on
a futures contract would result in a loss to the Fund when the use of a futures
contract would not, such as when there is no movement in the level of the
underlying securities index value or the underlying securities, precious metals
or currencies.
(6) As is the case with options, the Fund's activities in the futures
and options on futures markets may result in a higher portfolio turnover rate
and additional transaction costs in the form of added brokerage commissions and
taxes; however, the Fund also may save on commissions by using futures contracts
or options thereon rather than buying or selling individual securities or
currencies in anticipation or as a result of market movements.
Special Risks Related to Foreign Currency Futures Contracts and Related
Options. Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described above.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. Compared to
the purchase or sale of foreign currency futures contracts, the purchase of call
or put options thereon involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the option (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a foreign currency futures contract would result in a loss, such as
when there is no movement in the price of the underlying currency or futures
contract, when the purchase of the underlying futures contract would not result
in such a loss.
Forward Currency Contracts. The Fund may use forward currency contracts
to protect against uncertainty in the level of future foreign currency exchange
rates. The Fund may also use forward currency contracts in one currency or
basket of currencies to attempt to hedge against fluctuations in the value of
securities denominated in a different currency if the Investment Manager
anticipates that there will be a correlation between the two currencies.
The Fund may enter into forward currency contracts with respect to
specific transactions. For example, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or the Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds or anticipates purchasing, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar
9
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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.
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.
INVESTMENT COMPANY COMPLEX
The investment companies advised by affiliates of Winmill & Co.
Incorporated (formerly Bull & Bear Group, Inc.) ("Investment Company Complex")
are:
Bull & Bear Dollar Reserves
Bull & Bear Gold Investors Ltd.
Bull & Bear Special Equities Fund, Inc.
Bull & Bear U.S. and Overseas Fund
Bull & Bear U.S. Government Securities Fund, Inc.
Global Income Fund, Inc.
Midas Fund, Inc.
Rockwood Fund, Inc.
Tuxis Corporation
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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.
BRUCE B. HUBER, CLU, ChFC, MSFS -- Director. 3443 Highway 66, Neptune, NJ 07753.
He is a Financial Representative with New England Financial, specializing in
financial, estate and insurance matters. From March 1995 to December 1995, he
was President of Huber Hogan Knotts Consulting, Inc., financial consultants and
insurance planners. From 1988 to 1990, he was Chairman of Bruce Huber
Associates. He is also a Director of five other investment companies in the
Investment Company Complex. He was born February 7, 1930.
JAMES E. HUNT -- Director. One Dag Hammarskjold Plaza, New York, NY 10017. He is
a principal of Hunt & Howe Inc., executive recruiting consultants. He is also a
Director of five other investment companies in the Investment Company Complex.
He was born December 14, 1930.
JOHN B. RUSSELL -- Director. 334 Carolina Meadows Villa, Chapel Hill, NC 27514.
He was born February 9, 1923. 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 five other investment
companies in the Investment Company Complex.
THOMAS B. WINMILL -- Chairman, Chief Executive Officer, President, and General
Counsel. He is President of the Investment Manager and the Distributor, and of
their affiliates. He was born June 25, 1959. 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 son
of Bassett S. Winmill. He is also a Director of eight other investment companies
in the Investment Company Complex.
The Fund's executive officers, each of whom serves at the pleasure
of the Board of Directors, are as follows:
THOMAS B. WINMILL -- Chairman, Chief Executive Officer, President, and General
Counsel. (see biographical information above)
ROBERT D. ANDERSON -- Vice Chairman. He is Vice Chairman of the Investment
Manager and its affiliates. He was born December 7, 1929. He was a member of the
Board of Governors of the Mutual Fund Education Alliance, and of its
predecessor, the No-Load Mutual Fund Association. He has also been a member of
the District #12, District Business Conduct and Investment Companies Committees
of the NASD.
STEVEN A. LANDIS -- Senior Vice President. He is Senior Vice President of the
Investment Manager and certain of its affiliates. He was born March 1, 1955.
From 1993 to 1995, he was Associate Director -- Proprietary Trading at Barclays
De Zoete Wedd Securities Inc., and from 1992 to 1993, he was Director, Bond
Arbitrage at WG Trading Company.
JOSEPH LEUNG, CPA -- Chief Accounting Officer, Chief Financial Officer and
Treasurer. 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. He is a member of the
American Institute of Certified Public Accountants. He was born September 15,
1965.
DEBORAH ANN SULLIVAN, ESQ. -- Chief Compliance Officer, Secretary and Vice
President. She is Chief Compliance Officer, Secretary and Vice President of the
investment companies in the Investment Company Complex, and the Investment
Manager and its affiliates. From 1993 through 1994 she was the Blue Sky
Paralegal for SunAmerica Asset Management Corporation and from 1992 through 1993
she was Compliance Administrator and Blue Sky Administrator with Prudential
Securities, Inc. and Prudential Mutual Fund Management, Inc. She earned her
Juris Doctor at Hofstra University, School of Law. She was born June 13, 1969.
* 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, 1998.
Compensation Table
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefit Estimated Annual From Fund and Investment
NAME OF PERSON, Compensation Accrued as Part Benefits Upon Company Complex Paid To
POSITION From Fund of Fund Expenses Retirement Directors
- --------------- -------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Bruce B. Huber, $5,000 None None $12,500 from 6 Investment
Director Companies
James E. Hunt, $5,000 None None $12,500 from 6 Investment
Director Companies
John B. Russell, $5,000 None None $12,500 from 6 Investment
Director 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 27, 1999, officers and Directors of the Fund
owned less than 1% of the outstanding shares of the Fund. As of April 27, 1999,
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104 owned
of record 25.92% of the Fund's outstanding shares and National Investor Services
Corporation, 55 Water Street, New York, NY 10041-0001 owned of record 6.07% of
the Fund's outstanding shares.
11
<PAGE>
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 the functions of billing,
accounting, certain shareholder communications and services, administering state
and Federal registrations, filings and controls and other administrative
services. Any services so requested and performed will be for the account of the
Fund and the costs of the Investment Manager in rendering such services shall be
reimbursed by the Fund, subject to examination by those directors of the Fund
who are not interested persons of the Investment Manager or any affiliate
thereof.
The Fund's Investment Management Agreement continues from year to
year only if a majority of the Fund's directors (including a majority of
disinterested directors) approve. The Fund's Investment Management Agreement may
be terminated by either the Fund or the Investment Manager on 60 days' written
notice to the other, and terminates automatically in the event of its
assignment.
The Investment Management Agreement provides that the Investment
Manager shall waive all or part of its fee or reimburse the Fund monthly if and
to the extent the aggregate operating expenses of the Fund exceed the most
restrictive limit imposed by any state in which shares of the Fund are qualified
for sale or such lesser amount as may be agreed to by the Fund's Board of
Directors and the Investment Manager. Currently, the 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 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 was 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) were
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.
As of December 31, 1996, 1997 and 1998, the Fund paid the Investment
Manager $1,549,358, $1,577,627 and $1,018,983, respectively. Reimbursements for
the years ended December 31, 1996, 1997 and 1998 were $308,230, $402,551, and $0
respectively. The Fund reimbursed the Investment Manager $56,751, $64,081 and
$50,160 for the years 1996, 1997, and 1998, respectively, for providing certain
administrative and accounting services at cost.
The Investment Manager, a registered investment adviser, is a
wholly-owned subsidiary of Winmill & Co. Incorporated ( formerly Bull & Bear
Group, Inc.) ("Winmill"). The other principal subsidiaries of Winmill include
Investor Service Center, Inc., a registered broker-dealer, CEF Advisers, Inc.
(formerly Bull & Bear Advisers, Inc.) and Rockwood Advisers, Inc., registered
investment advisers.
Winmill 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 Winmill on the basis of his
ownership of 100% of Winmill's voting stock and, therefore, of the Investment
Manager. The Fund and its investment company affiliates had net assets in excess
of $254,000,000 as of April 26, 1999.
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.
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 percentage is determined by the grid and
accompanying definitions set forth in Table 1 below.
12
<PAGE>
SUBADVISER'S FEE AS A PERCENTAGE OF INVESTMENT MANAGER'S NET FEES
Table 1
RELATIVE PERFORMANCE a
TOTAL NET ASSETS b More than 50 basis Within 50 basis More than
points better than points of BTR 50 basis
BTR points below
BTR
less than or equal
to $150,000,000 ............... 35% 25% 20%
greater than$150,000,000
and less than or equal
to $300,000,000 ............... 40% 30% 25%
greater than$300,000,000 ........ 50% 37.5% 30%
- --------------------------------------------------------------------------------
a. "Relative Performance" is determined from comparing the total return
performance of the Fund and the total return performance of the "Benchmark
Performance" of the objective category of "precious metals" funds ("BTR")
as determined by Morningstar, Inc., or, if unavailable, other similar
service acceptable to the parties and the Fund. The Relative Performance is
determined as of the last calendar day of each month ("Performance
Determination Date") and measures the Relative Performance for the most
recent 12 month period ("Measurement Period"), except that for the first 12
months of the Subadvisory Agreement, Relative Performance is based upon
annualized returns, the first three Performance Determination Dates are the
next three calendar quarter ends after the effective date of the
Subadvisory Agreement, and the Measurement Periods are the most recent
three months and the fourth Performance Determination Date is the next
calendar quarter end and the Measurement Period is the most recent twelve
months.
b. "Total Net Assets" are the total net assets of the Fund as of the
Performance Determination Date.
For the year ended December 31, 1998, the Investment Manager (and
not the Fund) paid the Subadviser $230,954.
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.
Average Annual Total Return
Average annual total return is computed by finding the average
annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period.
This calculation assumes all dividends and other distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectus, and includes all recurring fees, such as investment advisory and
Rule 12b-1 fees, charged to all shareholder accounts.
13
<PAGE>
Average Annual Total Returns For Periods Ended December 31, 1998
One Year (28.44)%
Five Years (16.62)%
Ten Years (2.82)%
Cumulative Total Return
Cumulative total return is calculated by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR=( ERV-P )100
P
CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a hypothetical $1,000
payment made at the beginning of such period
P = initial payment of $1,000
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and other distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectus, and includes all recurring fees, such as investment advisory and
management fees, charged to all shareholder accounts.
The cumulative return for the Fund for the one year, five year and
ten year periods ending December 31, 1998 is (28.44)%, (59.70)%, and (24.97)%,
respectively.
Source Material
From time to time, in marketing pieces and other Fund literature, the Fund's
performance may be compared to the performance of broad groups of comparable
mutual funds or unmanaged indexes of comparable securities. Evaluations of Fund
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for Fund performance information may include, but
are not limited to, the following:
Bank Rate Monitor, a weekly publication which reports yields on various bank
money market accounts and certificates of deposit.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance and other data.
Bloomberg, a computerized market data source and portfolio analysis system.
Bond Buyer Municipal Bond Index (20 year), an index of municipal bonds provided
by a national periodical reporting on municipal securities.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CDA/Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient features,
management results, income and dividend records, and price ranges.
Consumer's Digest, a bimonthly magazine that periodically features the
performance of a variety of investments, including mutual funds.
Financial Times, Europe's business newspaper, which from time to time reports
the performance of specific investment companies in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Goldman Sachs Convertible Bond Index -- currently includes 67 bonds and 33
preferred shares. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds.
Growth Fund Guide, a newsletter providing a mutual fund rating service published
for over 25 years.
IBC's Money Fund Report, a weekly publication of money market fund total net
assets, yield, and portfolio composition.
Individual Investor, a newspaper that periodically reviews mutual fund
performance and other data.
Investment Advisor, a monthly publication reviewing performance of mutual funds.
Investor's Business Daily, a nationally distributed newspaper which regularly
covers financial news.
Kiplinger's Personal Finance Magazine, a monthly publication periodically
reviewing mutual fund performance.
Lehman Brothers, Inc. "The Bond Market Report" reports on various Lehman
Brothers bond indices.
Lehman Government/Corporate Bond Index -- is a widely used index composed of
government, corporate, and mortgage backed securities.
Lehman Long Term Treasury Bond -- is composed of all bonds covered by the Lehman
Treasury Bond Index with maturities of 10 years or greater.
Lipper Analytical Services, Inc., a publication periodically reviewing mutual
funds industry-wide by means of various methods of analysis.
Merrill Lynch Pierce Fenner & Smith Taxable Bond Indices reports on a variety of
bond indices.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
14
<PAGE>
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, Inc., publications which review 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, indices, and
portfolio holdings.
Russell 3000 Index -- consists of the 3,000 largest stocks of U.S. domiciled
companies commonly traded on the New York and American Stock Exchanges or the
Nasdaq over-the-counter market, accounting for over 90% of the market value of
publicly traded stocks in the U.S.
Russell 2000 Small Company Stock Index -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely used benchmark for small capitalization common
stocks.
Salomon Smith Barney GNMA Index -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
Salomon Smith Barney High-Grade Corporate Bond Index -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
Salomon Smith Barney Broad Investment-Grade Bond Index -- is a market-weighted
index that contains approximately 4,700 individually priced investment-grade
corporate bonds rated BBB or better, U.S. Treasury/agency issues and mortgage
pass-through securities.
Salomon Smith Barney Market Performance tracks the Salomon Brothers bond index.
Standard & Poor's 500 Composite Stock Price Index -- is an index of 500
companies representing the U.S. stock market.
Standard & Poor's 100 Composite Stock Price Index -- is an index of 100
companies representing the U.S. stock market.
Standard & Poor's Preferred Index is an index of preferred securities.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
businesses, often featuring mutual fund performance data.
USA Today, a national newspaper that periodically reports mutual fund
performance data.
U.S. News and World Report, a national weekly that periodically reports mutual
fund performance data.
The Wall Street Journal, a nationally distributed newspaper which regularly
covers financial news.
The Wall Street Transcript, a periodical reporting on financial markets and
securities.
Wilshire 5000 Equity Indexes -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
Indices prepared by the research departments of such financial
organizations as Salomon Smith Barney Holdings, Inc., Merrill Lynch, Pierce,
Fenner & Smith, Inc., Bear Stearns & Co., Inc., and Ibbotson Associates may be
used, as well as information provided by the Federal Reserve Board.
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement, Investor Service Center, Inc.
("Distributor") acts as principal distributor of the Fund's shares. Under the
Distribution Agreement, the Distributor uses its best efforts, consistent with
its other businesses, to sell shares of the Fund. Fund shares are sold
continuously. Pursuant to a Plan of Distribution ("Plan") adopted pursuant to
Rule 12b-1 under the 1940 Act, the Fund pays the Distributor monthly a fee in
the amount of one-quarter of one percent per annum of the Fund's average daily
net assets as compensation for its distribution and service activities.
In performing distribution and service activities pursuant to the
Plan, the Distributor may spend such amounts as it deems appropriate on any
activities or expenses primarily intended to result in the sale of the Fund's
shares or the servicing and maintenance of shareholder accounts, including, but
not limited to: advertising, direct mail, and promotional expenses; compensation
to the Distributor and its employees; compensation to and expenses, including
overhead and telephone and other communication expenses, of the Distributor, the
Investment Manager, the Fund, and selected dealers and their affiliates who
engage in or support the distribution of shares or who service shareholder
accounts; fulfillment expenses, including the costs of printing and distributing
prospectuses, statements of additional information, and reports for other than
existing shareholders; the costs of preparing, printing and distributing sales
literature and advertising materials; and internal costs incurred by the
Distributor and allocated by the Distributor to its efforts to distribute shares
of the Fund or service shareholder accounts such as office rent and equipment,
employee salaries, employee bonuses and other overhead expenses.
Among other things, the Plan provides that (1) the Distributor will
submit to the Fund's Board of Directors at least quarterly, and the Directors
will review, reports regarding all amounts expended under the Plan and the
purposes for which such expenditures were made, (2) the Plan will continue in
effect only so long as it is approved at least annually, and any material
amendment or agreement related thereto is approved, by the Fund's Board of
Directors, including those Directors who are not "interested persons" of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan or any agreement related to the Plan ("Plan Directors"), acting in
person at a meeting called for that purpose, unless terminated by vote of a
majority of the Plan Directors, or by vote of a majority of the outstanding
voting securities of the Fund, (3) payments by the Fund under the Plan shall not
be materially increased without the affirmative vote of the holders
15
<PAGE>
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 Winmill, in an attempt to obtain cost
savings on the marketing of the Fund's shares. Hanover Direct will provide
services to the Distributor on behalf of the Fund at standard industry rates,
which includes fees. The amount of Hanover Direct's fees over its cost of
providing Fund marketing will be credited to the Fund's distribution expenses
and represent a saving on marketing, to the benefit of the Fund. To the extent
Hanover Direct's costs exceed such fees, Hanover Direct will absorb any of such
costs.
It is the opinion of the Board of Directors that the Plan is
necessary to maintain a flow of subscriptions to offset redemptions. Redemptions
of mutual fund shares are inevitable. If redemptions are not offset by
subscriptions, a fund shrinks in size and its ability to maintain quality
shareholder services declines. Eventually, redemptions could cause a fund to
become uneconomic. Furthermore, an extended period of significant net
redemptions may be detrimental to orderly management of the portfolio. The
offsetting of redemptions through sales efforts benefits shareholders by
maintaining the viability of a fund. In periods where net sales are achieved,
additional benefits may accrue relative to portfolio management and increased
shareholder servicing capability. Increased assets enable the Fund to further
diversify its portfolio, which spreads and reduces investment risk while
increasing opportunity. In addition, increased assets enable the establishment
and maintenance of a better shareholder servicing staff which can respond more
effectively and promptly to shareholder inquiries and needs. While net increases
in total assets are desirable, the primary goal of the Plan is to prevent a
decline in assets serious enough to cause disruption of portfolio management and
to impair the Fund's ability to maintain a high level of quality shareholder
services.
The Plan increases the overall expense ratio of the Fund; however, a
substantial 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, 1998, approximately $17,217 represented paid expenses
incurred for advertising, $75,288 for printing and mailing prospectuses and
other information to other than current shareholders, $104,185 for salaries of
marketing and sales personnel, $33,110 for payments to third parties who sold
shares of the Fund and provided certain services in connection therewith, and
$24,946 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 $170,317 for
shareholder administration services which it provided to the Fund at cost during
the year ended December 31, 1998.
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, Martin Luther King Jr. Day,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. Because a substantial portion of the Fund's
net assets may be invested in gold, platinum and silver bullion, foreign
securities and/or foreign currencies, trading in each of which is also conducted
in foreign markets which are not necessarily closed on days when the NYSE is
closed, the net asset value per share may be significantly affected on days when
shareholders have no access to the Fund or its transfer agent.
Securities owned by the Fund are valued by various methods depending
on the market or exchange on which they trade. Securities traded on the NYSE,
the American Stock Exchange and the Nasdaq 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.
16
<PAGE>
PURCHASE OF SHARES
The Fund will only issue shares upon payment of the purchase price
by check made drawn to the Fund's order in U.S. dollars on a U.S. bank, or by
Federal Reserve wire transfer. Third party checks, credit cards, and cash will
not be accepted. The Fund reserves the right to reject any order, to cancel any
order due to nonpayment, to accept initial orders by telephone or telegram, and
to waive the limit on subsequent orders by telephone, with respect to any person
or class of persons. Orders to purchase shares are not binding on the Fund until
they are confirmed by the Fund's transfer agent. If an order is canceled because
of non-payment or because the purchaser's check does not clear, the purchaser
will be responsible for any loss the Fund incurs. If the purchaser is already a
shareholder, the Fund can redeem shares from the purchaser's account to
reimburse the Fund for any loss. In addition, the purchaser may be prohibited or
restricted from placing future purchase orders in the Fund or any of the other
Funds in the Investment Company Complex. In order to permit the Fund's
shareholder base to expand, to avoid certain shareholder hardships, to correct
transactional errors, and to address similar exceptional situations, the Fund
may waive or lower the investment minimums with respect to any person or class
of persons.
ALLOCATION OF BROKERAGE
The Fund seeks to obtain prompt execution of orders at the most
favorable net prices. 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 shares, of the Fund or other Funds advised by the Investment
Manager or its affiliates. With respect to brokerage and research services,
consideration may be given in the selection of broker/dealers to brokerage or
research provided and payment may be made for a fee higher than that charged by
another broker/dealer which does not furnish brokerage or research services or
which furnishes brokerage or research services deemed to be of lesser value, so
long as the criteria of Section 28(e) of the Securities Exchange Act of 1934, as
amended ("1934 Act"), or other applicable law are met. Section 28(e) of the 1934
Act specifies that a person with investment discretion shall not be "deemed to
have acted unlawfully or to have breached a fiduciary duty" solely because such
person has caused the account to pay a higher commission than the lowest
available under certain circumstances. To obtain the benefit of Section 28(e),
the person so exercising investment discretion must make a good faith
determination that the commissions paid are "reasonable in relation to the value
of the brokerage and research services provided ... viewed in terms of either
that particular transaction or his overall responsibilities with respect to the
accounts as to which he exercises investment discretion." Thus, although the
Investment Manager may direct portfolio transactions without necessarily
obtaining the lowest price at which such broker/dealer, or another, may be
willing to do business, the Investment Manager seeks the best value to the Fund
on each trade that circumstances in the market place permit, including the value
inherent in 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 transactions and performing functions
incidental thereto (such as clearance, settlement, and custody). Pursuant to
arrangements with certain broker/dealers, such broker/dealers provide and pay
for various computer hardware, software and services, market pricing
information, investment subscriptions and memberships, and other third party and
internal research of assistance to the Investment Manager in the performance of
its investment decision-making responsibilities for transactions effected by
such broker/dealers for the Fund. Commission "soft dollars" may be used only for
"brokerage and research services" provided directly or indirectly by the
broker/dealer and under no circumstances will cash payments be made by such
broker/dealers to the Investment Manager. To the extent that commission "soft
dollars" do not result in the provision of any "brokerage and research services"
by a broker/dealer to whom such commissions are paid, the commissions,
nevertheless, are the property of such broker/dealer. To the extent any such
services are utilized by the Investment Manager for other than the performance
of its investment decision-making responsibilities, the Investment Manager makes
an appropriate allocation of the cost of such services according to their use.
Until March 31, 1999, Bull & Bear Securities, Inc. ("BBSI") was a
wholly owned subsidiary of Winmill and the Investment Manager's affiliate. BBSI
provides discount brokerage services to the public as an introducing broker
clearing through unaffiliated firms on a fully disclosed basis. The Investment
Manager was, until March 31, 1999, authorized to place Fund brokerage through
BBSI at its posted discount rates and indirectly through a BBSI clearing firm.
The Fund did not deal with BBSI in any transaction in which BBSI acts as
principal. The clearing firm executed trades in accordance with the fully
disclosed clearing agreement between BBSI and the clearing firm. BBSI was
financially responsible to the clearing firm for all trades of the Fund until
complete payment was received by the Fund or the clearing firm. BBSI provided
order entry services or order entry facilities to the Investment Manager,
arranged for execution and clearing of portfolio transactions through executing
and clearing brokers, monitored trades and settlements and performed limited
back-office functions including the maintenance of all records required of it by
the National Association of Securities Dealers, Inc.
In order for BBSI to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by BBSI must have been
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. The Fund's Board of Directors adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid
to BBSI were reasonable and fair. Although BBSI's posted discount rates may be
lower than those charged by full cost brokers, such rates may be higher than
some other discount brokers and certain brokers may be willing to do business at
a lower commission rate on certain trades. The Board determined that portfolio
transactions may have been executed through BBSI if, in the judgment of the
Investment Manager, the use of BBSI was likely to result in price and execution
at least as favorable as those of other qualified broker/dealers and if, in
particular transactions, BBSI charged the Fund a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. Brokerage
transactions with BBSI were also subject to such fiduciary standards as may be
imposed by applicable law. The Investment Manager's fees under its agreement
with the Fund were not reduced by reason of any brokerage commissions paid to
BBSI.
17
<PAGE>
During the fiscal years ended December 31, 1996, 1997, and 1998, the
Fund paid total brokerage commissions of approximately $847,875, $466,420, and
$324,583 respectively. For the fiscal year ended December 31, 1998,
approximately $245,964 in brokerage commissions (representing approximately
$84,655,435 in portfolio transactions) was allocated to broker/dealers that
provided research services. For the fiscal year ended December 31, 1998,
approximately $49,500 in brokerage commissions was allocated to broker/dealers
for selling shares of the Fund and other Funds advised by the Investment Manager
or its affiliates. During the Fund's fiscal years ended December 31, 1996, 1997,
and 1998, the Fund paid $120,957, $83,700, and $29,119, respectively, in
brokerage commissions to BBSI, which represented approximately 14%, 17.95%, and
8.97% respectively, of the total brokerage commissions paid by the Fund and 18%,
5.15% and 16.63%, 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 (a "bunched trade") if it appears that a combined order would reduce
brokerage commissions and/or result in a more favorable transaction price. All
accounts participating in a bunched trade shall receive the same execution price
with all transaction costs (e.g. commissions) shared on a pro rata basis. In the
event that there are insufficient securities to satisfy all orders, the partial
amount executed shall be allocated among participating accounts pro rata on the
basis of order size. In the event of a partial fill and the portfolio manager
does not deem the pro rata allocation of a specified number of shares to a
particular account to be sufficient, the portfolio manager may waive in writing
such allocation. In such event, the account's pro rata allocation shall be
reallocated to the other accounts that participated in the bunched trade.
Following trade execution, portfolio managers may determine in certain instances
that it would be fair and equitable to allocate securities purchased or sold in
such trade in a manner other than that which would follow from a mechanical
application of the procedures outlined above. Such instances may include (i)
partial fills and special accounts (In the event that there are insufficient
securities to satisfy all orders, it may be fair and equitable to give
designated accounts with special investment objectives and policies some degree
of priority over other types of accounts.); (ii) unsuitable or inappropriate
investment (It may be appropriate to deviate from the allocation determined by
application of these procedures if it is determined before the final allocation
that the security in question would be unsuitable or inappropriate for one or
more of the accounts originally designated). While in some cases this practice
could have a detrimental effect upon the price or quantity available of the
security with respect to the Fund, the Investment Manager believes that the
larger volume of combined orders can generally result in better execution and
prices. The Fund is not obligated to deal with any particular broker, dealer or
group thereof. Certain broker/dealers that the Fund or other affiliated
investment companies do business with may, from time to time, own more than 5%
of the publicly traded Class A non-voting Common Stock of Winmill, the parent of
the Investment Manager, and may provide clearing services to BBSI.
The Fund is not obligated to deal with any particular broker, dealer
or group thereof. Certain broker/dealers that the Fund or other affiliated
investment companies do business with may, from time to time, own more than 5%
of the publicly traded Class A non-voting Common Stock of Winmill, the parent of
the Investment Manager, and may provide clearing services to BBSI.
The Fund'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, 1998 and
1997, the Fund's portfolio turnover rate was 27% and 50%, respectively. A higher
portfolio turnover rate involves correspondingly greater transaction costs and
increases the potential for short-term capital gains and taxes.
From time to time, certain brokers may be paid a fee for record
keeping, shareholder communications and other services provided by them to
investors purchasing shares of the Fund through the "no transaction fee"
programs offered by such brokers. This fee is based on the value of the
investments in the Fund made by such brokers on behalf of investors
participating in their "no transaction fee" programs. The Fund's Directors have
further authorized the Investment Manager to place a portion of the Fund's
brokerage transactions with any such brokers, if the Investment Manager
reasonably believes that, in effecting the Fund's transactions in portfolio
securities, such broker or brokers are able to provide the best execution of
orders at the most favorable prices. Commissions earned by such brokers from
executing portfolio transactions on behalf of the Fund may be credited by them
against the fee they charge the Fund, on a basis which has resulted from
negotiations between the Investment Manager and such brokers.
DISTRIBUTIONS AND TAXES
If the U.S. Postal Service cannot deliver a shareholder's check, or
if a shareholder's check remains uncashed for six months, the Fund reserves the
right to redeposit a shareholder check, thereby crediting the shareholder's
account with additional Fund shares at the then current net asset value in lieu
of the cash payment and to thereafter issue such shareholder's distributions in
additional Fund shares.
The Fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"). To qualify for that treatment, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
Among these requirements are the following: (1) at least 90% of the Fund's gross
income each taxable year must be derived from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement");and (2) the Fund's
investments must satisfy certain diversification requirements. In any year
during which the applicable provisions of the Code are satisfied, the Fund will
not be liable for Federal income tax on net income and gains that are
distributed to its shareholders. If for any taxable year the Fund does not
qualify for treatment as a RIC, all of its taxable income would be taxed at
corporate rates.
A portion of the dividends from the Fund's investment company
taxable income (whether paid in cash or in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by the Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
A loss on the sale of Fund shares that were held for six months or
less will be treated as a long term (rather than a short term) capital loss to
the extent the seller received any capital gain distributions attributable to
those shares.
Any dividend or other distribution will have the effect of reducing
the net asset value of the Fund's shares on the payment date by the amount
thereof. Furthermore, any such dividend or other distribution, although similar
in effect to a return of capital, will be subject to taxes. Dividends and other
distributions may also be subject to state and local taxes.
18
<PAGE>
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.
For the tax years beginning after December 31, 1997, open-end RICs,
such as the Fund, are entitled to elect to "mark-to-market" their stock in
certain PFICs. "Marking-to-market," in this context, means recognizing as gain
for each taxable year the excess, as of the end of that year, of the fair market
value of each such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
The Taxpayer Relief Act of 1997 included constructive sale
provisions that generally will apply if a Fund either (1) holds an appreciated
financial position with respect to stock, certain debt obligations, or
partnership interests ("appreciated financial position") and then enters into a
short sale, futures or forward contract or offsetting notional principal
contract (collectively, a "Contract") with respect to the same or substantially
identical party or (2) holds an appreciated financial position that is a
Contract and then acquires property that is the same as, or substantially
identical to, the underlying property. In each instance, with certain
exceptions, the Fund generally will be taxed as if the appreciated financial
position were sold at its fair market value on the date the Fund enters into the
financial position or acquires the property, respectively. Transactions that are
identified as hedging or straddle transactions under other provisions of the
Code can be subject to the constructive sale provisions.
The foregoing discussion of Federal tax consequences is based on the
tax law in effect on the date of this Statement of Additional Information, which
is subject to change by legislative, judicial, or administrative action. The
Fund may be subject to state or local tax in jurisdictions in which it may be
deemed to be doing business.
REPORTS TO SHAREHOLDERS
The Fund issues, at least semi-annually, reports to its shareholders
including a list of investments held and statements of assets and liabilities,
income and expense, and changes in net assets of the Fund. The Fund's fiscal
year ends on December 31.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, MO
64105, ("Custodian") has been retained by the Fund to act as Custodian of the
Fund's investments and may appoint one or more subcustodians. The Custodian also
performs certain accounting services for the Fund. As part of its agreement with
the Fund, the Custodian may apply credits or charges for its services to the
Fund for, respectively, positive or deficit cash balances maintained by the Fund
with the Custodian. DST Systems, Inc., Box 419789, Kansas City, Missouri
64141-6789, is the Fund's Transfer and Dividend Disbursing Agent.
AUDITORS
Tait, Weller & Baker, 8 Penn Center Plaza, Suite 800, Philadelphia,
PA 19103-2108, 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, 1998, together with the Report of the Fund's independent accountants
thereon, appear in the Fund's Annual Report to Shareholders and are incorporated
herein by reference.
19
<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.
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.
C 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.
20
<PAGE>
MIDAS FUND, INC.
Part C. Other Information
Item 23. Exhibits
(a) Articles of Incorporation: Filed with the Securities and Exchange
Commission on March 31, 1998, Accession Number 0000770200-98-000006
(b) By-Laws as now in effect: Filed with the Securities and Exchange
Commission March 2, 1998, Accession Number 0000770200-98-000001
(c) Articles of Incorporation: Filed with the Securities and Exchange
Commission on March 31, 1998, Accession Number 0000770200-98-000006
By-Laws as now in effect: Filed with the Securities and Exchange
Commission March 2, 1998, Accession Number 0000770200-98-000001
(d) Form of Investment Management Agreement, filed with the
Securities and Exchange Commission on March 31, 1998,
accession number 0000770200-98-000006
(e) (1) Form of Distribution Agreement, filed with the
Securities and Exchange Commission on March 31,
1998, accession number 0000770200-98-000006.
(2) Form of Related Agreement to Plan of Distribution
between Investor Service Center, Inc. and Hanover
Direct Advertising Company, Inc., filed with the
Securities and Exchange Commission on March 31,
1998, Accession number 0000770200-98-000006.
(f) not applicable.
(g) (1) Form of Custody and Investment Accounting
Agreement, filed with the Securities and Exchange
Commission on April 28, 1997, accession number
0000770200-97-000010
(2) Form of Retirement Plan Custodial Services
Agreement, filed with the Securities and Exchange
Commission on April 30, 1998, Accession Number
0000788422-98-000005.
(h) (a) Form of Transfer Agency Agreement, filed with
the Securities and Exchange Commission on March
31, 1998, accession number 0000770200-98-000006
(b) Form of Agency Agreement, filed with the
Securities and Exchange Commission on March 31,
1998, accession number 0000770200-98-000006
(c) Form of credit facilities agreement, filed with
the Securities and Exchange Commission on
March 31, 1998, accession number
0000770200-98-000006.
(d) Form of Securities Lending Authorization
Agreement, filed with the Securities and Exchange
Commission on March 31, 1998, accession number
0000770200-98-000006.
(e) Form of Segregated Account Procedural and
Safekeeping Agreement, filed with the Securities
and Exchange Commission on March 31, 1998,
accession number 0000770200-98-000006.
(i) Opinion of Counsel as to Legality of Securities filed
herewith.
(j) (1) Accountants consent filed herewith.
(2) Opinion of Councel with respect to eligibility for
effectiveness under paragraph (b) of Rule 485. Filed
herewith.
Item 24. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 25. 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 amended and restated Articles of Incorporation: (1)
provide that, to the maximum extent permitted by applicable law, a director or
officer will not be liable to the Registrant or its stockholders for monetary
damages; (2) require the Registrant to indemnify and advance expense as provided
in the By-laws to its present and past directors, officers, employees and
agents, and persons who are serving or have served at the request of the
Registrant in similar capacities for other entities in advance of final
disposition of any action against that person to the extent permitted by
Maryland law and the 1940 Act; (3) allow the corporation to purchase insurance
for any present or past director, officer, employee, or agent; and (4) require
that any repeal or modification of the amended and restated Articles of
Incorporation by the shareholders, or adoption or modification of any provision
of the Articles of Incorporation inconsistent with the indemnification
provisions, be prospective only to the extent such repeal or modification would,
if applied retrospectively, adversely affect any limitation on the liability of
or indemnification available to any person covered by the indemnification
provisions of the amended and restated Articles of Incorporation.
Section 11.01 of Article XI of the By-Laws sets forth the
procedures by which the Registrant will indemnify its directors, officers,
employees and agents. Section 11.02 of Article XI of the By-Laws further
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 amended Investment Management Agreement between the
Registrant and Investment Management Corporation ("Investment Manager") provides
that the Investment Manager shall not be liable to the Registrant or its series
or any shareholder of the Registrant or its series for any error of judgment or
mistake of law or for
<PAGE>
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 or to the series 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
Investment Management Agreement 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 26. Business and other Connections of Investment Adviser
The directors and officers of the Investment Manager, a
wholly-owned subsidiary of Winmill & Co. Incorporated (formerly Bull & Bear
Group, Inc.), are also directors and officers of other Funds managed by the
Investment Manager ("Funds"). In addition, such officers are officers and
directors of Winmill & Co. Incorporated and its other subsidiaries Investor
Service Center, Inc., the Funds' distributor and a registered broker/dealer, CEF
Advisers, Inc. (formerly Bull & Bear Advisers, Inc.) and Rockwood Advisers,
Inc., registered investment
<PAGE>
advisers. The principalbusiness of the Investment Manager, CEF Advisers, Inc.
and Rockwood Advisers, Inc. since their founding has been to serve as investment
managers to registered investment companies. CEF Advisers, Inc. serves as
investment manager of Bull & Bear Dollar Reserves, a series of Bull & Bear Funds
II, Inc.; Bull & Bear U.S. and Overseae Fund, a series of Funds I, Inc.; Bull &
Bear U.S. Government Securities Fund, Inc.; Inc.; Bull & Bear Gold Investors
Ltd. and Bull & Bear Special Equities Fund,Inc., Global Income Fund, Inc. and
Tuxis Corporation. Midas Management Corporation serves as investment adviser to
Midas Fund, Inc. and Rockwood Advisers, Inc. serves as investment adviser to
Rockwood Fund, Inc.
Item 27. Principal Underwriters
a) In addition to the Registrant, Investor Service Center, Inc. serves a
principal underwriter of Bull & Bear Gold Investors Ltd., Bull & Bear Funds II,
Inc., Bull & Bear Funds I, Inc., Global Income Fund, Tuxis Corporation, Midas
Fund, Inc., and Rockwood Fund, Inc.
b) Service Center will serve as the Registrant's principal underwriter with
respect to Bull & Bear Special Equities Fund, Inc. 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.
Name and Principal Position and Offices Position and Offices
Business Address with Service Center with Registrant
- -------------------------------------------------------------------------------
Thomas B. Winmill President, Director, President, Director, Chief
11 Hanover Square and General Counsel Executive Officer and General
New York, NY 10005 Counsel
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
Joseph Leung Treasurer, Chief Accounting Treasurer, Chief
11 Hanover Square Officer, Chief Financial Officer Accounting Officer,
New York, NY 10005 Chief Financial Officer
Deborah Ann Sullivan Vice President, Secretary Vice President,Secretary,
11 Hanover Square and Chief Compliance Officer Chief Compliance Officer
New York, NY 10005
Irene K. Kawczynski Vice President None
11 Hanover Square
New York, NY 10005
Item 28. 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 Fiduciary
Trust Company, 801 Pennsylvania, Kansas City, MO 64105 (the offices of
Registrant's custodian) and at DST Systems, Inc., P.O. Box 419789, Kansas City,
MO 64141-6789 (the offices of the Registrant's transfer and dividend disbursing
agent). Copies of certain of the records located at Investors Fiduciary Trust
Company and DST Systems, Inc. are kept at 11 Hanover Square, New York, NY 10005.
Item 29. Management Services -- none
Item 30. 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meet all of the
requirements for effectivenes of this Registration Statement pursuant to Rule
485 (b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto authorized,
in the City, County and State of New York on this 30th day of April, 1999.
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:
Thomas B. Winmill Chairman, President, Chief April 30, 1999
- ----------------- Executive Officer
Thomas B. Winmill
Joseph Leung Treasurer, Chief Accounting April 30, 1999
- ------------ Officer, Chief Financial Officer
Joseph Leung
Bruce B. Huber Director April 30, 1999
- --------------
Bruce B. Huber
James E. Hunt Director April 30, 1999
- -------------
James E. Hunt
John B. Russell Director April 30, 1999
- ---------------
John B. Russell
<PAGE>
EXHIBIT INDEX
PAGE
EXHIBIT NUMBER
(23)(i) Opinion of Counsel as to Legality of Securities
(23)(j) (a) Accountants' consent.
(b) Opinion of counsel with respect to eligibility for
effectiveness under paragraph (b) of Rule 485.
(23)(n) Financial Data Schedule for the Fiscal Year ended December 31, 1998.
CONSENT 0F INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report dated January 15, 1999 on the financial
statements and financial highlights of Midas Fund. Such financial statements and
financial highlights appear in the 1998 Annual Report to Shareholders which is
incorporated by reference in the Statement of Additional Information filed in
Post-Effective Amendment No. 23 under the Securities Act of 1933 and Amendment
No. 23 under the Investment Company Act of 1940 to the Registration Statement on
Form N-1A of Midas Fund. We also consent to the references to our Firm in the
Registration Statement and Prospectus.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 28, 1999
Dorsey & Whitney
2200 First Bank Place East
Minneapolis, Minnesota 55204
(612) 340-2600
Midas Gold Shares & Bullion, Inc.
One Appletree Square
Minneapolis, Minnesota 55402
Gentlemen:
Reference is made to the Registration Statement on Form N-1A (File No. 2-98229)
which you have filed with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 for the purpose of registering for sale by Midas Gold
Shares & Bullion, Inc. (the "Fund") of an indefinite number of shares of the
Fund's Common Stock, $.01 par value per share.
We are of the opinion that:
(a) The Fund is a legally organized corporation under Minnesota Law.
(b) The Shares of Common Stock to be sold by the Fund will be legally
issued, fully payed, and non assessable when issued and sold upon the
terms and in the manner set forth in said Registration Statement of
the Fund.
We consent to the reference to this Firm under the caption "Other
Information--Counsel and Accountants" in Part B of the Registration Statement
and to the use of this opinion as an exhibit to said Registration Statement.
Dated: October 1, 1985
Very truly yours,
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NY 10038-4982
PHONE 212-806-5400
FAX 212-806-6006
April 29, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are counsel to Midas Fund, Inc. (the "Fund"), and in so acting have reviewed
Post-Effective Amendment No. 23 (the "Post-Effective Amendment") to the Fund's
Registration Statement on Form N- 1A, Registration File No. 2-98229.
Representatives of the Fund have advised us that the Fund will file the
Post-Effective Amendment pursuant to paragraph (b) of Rule 485 ("Rule 485")
promulgated under the Securities Act of 1933. In connection therewith, the Fund
has requested that we provide this letter.
In our examination of the Post-Effective Amendment, we have assumed the
conformity to the originals of all documents submitted to us as copies.
Based upon the foregoing, we hereby advise you that the prospectus included as
part of the Post-Effective Amendment does not include disclosure which we
believe would render it ineligible to become effective pursuant to paragraph (b)
of Rule 485.
Very truly yours,
STROOCK & STROOCK & LAVAN LLP
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Midas
Fund, Inc. 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. Dollar
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-31-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 216,113,491
<INVESTMENTS-AT-VALUE> 89,782,956
<RECEIVABLES> 239,154
<ASSETS-OTHER> 2,706,235
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 92,728,345
<PAYABLE-FOR-SECURITIES> 829,630
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,057,317
<TOTAL-LIABILITIES> 4,886,947
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 270,942,869
<SHARES-COMMON-STOCK> 58,174,800
<SHARES-COMMON-PRIOR> 47,762,811
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (56,759,649)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (126,341,822)
<NET-ASSETS> 87,841,398
<DIVIDEND-INCOME> 2,211,164
<INTEREST-INCOME> 415,502
<OTHER-INCOME> 0
<EXPENSES-NET> 2,344,721
<NET-INVESTMENT-INCOME> 281,945
<REALIZED-GAINS-CURRENT> (28,704,152)
<APPREC-INCREASE-CURRENT> (6,280,375)
<NET-CHANGE-FROM-OPS> (34,702,582)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 53,935,734
<NUMBER-OF-SHARES-REDEEMED> (43,523,746)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (12,979,943)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (27,854,418)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,018,983
<INTEREST-EXPENSE> 17,653
<GROSS-EXPENSE> 2,371,065
<AVERAGE-NET-ASSETS> 101,862,377
<PER-SHARE-NAV-BEGIN> 2.11
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (.60)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.51
<EXPENSE-RATIO> 2.33
<AVG-DEBT-OUTSTANDING> 350,353
<AVG-DEBT-PER-SHARE> .01
</TABLE>
