As filed with the Securities and Exchange Commission on May 25, 1999
1933 Act File No. 33-2847
1940 Act File No. 811-4625
- ---------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 22
and
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22
MIDAS SPECIAL EQUITIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
11 Hanover Square
New York, New York 10005
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 1-212-785-0900
Copies to:
Deborah A. Sullivan, Esq. Stuart H. Coleman, Esq.
CEF Advisers, Inc. Stroock & Stroock & Lavan LLP
11 Hanover Square 180 Maiden Lane
New York, NY 10005 New York, NY 10038-4982
(Name and Address of Agent for Service)
It is proposed that this filing will become effective on June 30, 1999 pursuant
to paragraph (a) of Rule 485.
Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The Registrant's most recent Rule 24f-2 Notice was filed March 25
1999.
<PAGE>
MIDAS SPECIAL EQUITIES FUND, INC.
Contents of Registration Statement
This registration statement consists of the following papers and
documents.
Cover Sheet
Table of Contents
Cross Reference Sheets
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
MIDAS SPECIAL EQUITIES 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>
[Insert Midas Design]
Midas Funds
Prospectus dated June 30, 1999
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.
TABLE OF CONTENTS
MIDAS FUND, INC................................................................2
MIDAS INVESTORS, LTD...........................................................5
MIDAS MAGIC, INC...............................................................7
MIDAS SPECIAL EQUITIES FUND, INC..............................................10
MIDAS U.S. AND OVERSEAS FUND LTD..............................................12
DOLLAR RESERVES, INC..........................................................15
RISKS OF INVESTING............................................................17
PORTFOLIO MANAGEMENT..........................................................18
MANAGEMENT FEES...............................................................19
DISTRIBUTION AND SHAREHOLDER SERVICES.........................................19
PURCHASING SHARES.............................................................20
REDEEMING SHARES..............................................................21
ACCOUNT AND TRANSACTION POLICIES..............................................21
DISTRIBUTIONS AND TAXES.......................................................22
FINANCIAL HIGHLIGHTS..........................................................23
1
<PAGE>
MIDAS FUND, INC.
INVESTMENT OBJECTIVE
Midas Fund seeks primarily capital appreciation and protection against inflation
and, secondarily, current income.
INVESTMENT STRATEGY
The Fund pursues its objective by investing primarily in domestic or foreign
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 borrow money to purchase and hold securities and may engage in
short selling where risk of loss is potentially unlimited. 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). The Fund may also lend portfolio securities to other
parties. Additionally, the Fund may invest in special situations such as
liquidations and reorganizations.
The Fund may, from time to time, under adverse market conditions take temporary
defensive positions such as investing some or all of its assets in cash and cash
equivalents, money market securities, short-term bonds, repurchase agreements,
and convertible bonds. When the Fund takes such temporary defensive positions,
the Fund may not achieve its investment objective.
PRINCIPAL RISKS
Precious Metals Price. 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.
Non-Diversification. 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 involve more
risk 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.
BAR CHART AND PERFORMANCE TABLE
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 an index that
is unmanaged and fully invested in common stocks. The PMFA is an equally
weighted average of the 22 managed 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.
2
<PAGE>
Year-by-year total percent return as of 12/31 each year
[GRAPHIC OMITTED]
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%
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%
3
<PAGE>
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>
<S>
One Three Five Ten
Year Years Years Years
The example assumes that you invest $10,000 in the Fund for <C> <C> <C> <C>
the time periods indicated and then redeem all of your
shares at the end 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 costs may be higher or lower, based on these
assumptions your costs would be:................................. $236 $727 $1,245 $2,666
</TABLE>
4
<PAGE>
MIDAS INVESTORS, LTD.
INVESTMENT OBJECTIVE
Midas Investors seeks long term capital appreciation in investments with the
potential to provide a hedge against inflation and preserve the purchasing power
of the dollar. The Fund invests primarily in gold, platinum and silver bullion
and a global portfolio of securities of companies involved directly or
indirectly in mining, processing or dealing in gold or other precious metals
("gold mining shares"). Income is a secondary objective.
INVESTMENT STRATEGY
In seeking to achieve its primary investment objective of long term capital
appreciation, the Fund will concentrate its investments in gold mining shares
and gold, platinum, and silver bullion. This means at least 25% will, and up to
100% of its assets may, be so invested. Generally, at least 65% of the Fund's
total assets will be invested in equity securities (including common stocks,
convertible securities and warrants) of companies involved directly or
indirectly in mining, processing or dealing in gold or other precious metals,
gold, platinum and silver bullion and gold coins. Currently, the Fund limits
bullion investments to less than 25% of its total assets.
The Fund may invest up to 35% of its total assets in securities of companies
that own or develop natural resources and other basic commodities, in securities
of selected growth companies, and securities issued by the U.S. Government, its
agencies or instrumentalities. Natural resources include ferrous and non-ferrous
metals (such as iron, aluminum and copper), strategic metals (such as uranium
and titanium), hydrocarbons (such as coal, oil and natural gases), chemicals,
forest products, real estate, food products and other basic commodities, which
historically have been produced and marketed profitably during periods of rising
inflation. Selected growth companies in which the Fund may invest typically have
earnings or tangible assets which are expected to grow faster than the rate of
inflation over time. The Investment Manager believes that such investments can
also offer excellent opportunities to provide hedges against inflation. Pending
investment or for temporary defensive purposes, the Fund may commit all or a
portion of its assets to cash (U.S. dollars and/or foreign currencies) or invest
in money market instruments of U.S. and foreign issuers, including repurchase
agreements.
Options, Futures, and Forward Currency Contracts. The Fund may purchase call
options on securities that the Investment Manager intends to include in the
Fund's portfolio in order to fix the cost of a future purchase or to attempt to
enhance return by, for example, participating in an anticipated price increase
of a security. The Fund may purchase put options to hedge against a decline in
the market value of securities held in the Fund's portfolio or to attempt to
enhance return. The Fund may write (sell) covered put and call options on
securities in which it is authorized to invest. The Fund may purchase and write
covered straddles, purchase and write put and call options on stock and bond
indexes, and take positions in options on foreign currencies to hedge against
the risk of foreign exchange rate fluctuations on foreign securities the Fund
holds in its portfolio or that it intends to purchase. The Fund may purchase and
sell interest rate futures contracts, stock and bond index futures contracts and
foreign currency futures contracts, and may purchase put and call options and
write covered put and call options on such futures contracts.
The Fund may enter into forward currency contracts to set the rate at which
currency exchanges will be made for contemplated or completed transactions. The
Fund might also enter into forward currency contracts in amounts approximating
the value of one or more portfolio positions to fix the U.S. dollar value of
those positions. For example, when the Investment Manager believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract to sell, for
a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. The Fund has no specific limitation on the percentage of
assets it may commit to foreign currency exchange contracts, except that it will
not attempt to enter into a forward contract if the amount of assets set aside
to cover the contract would impede portfolio management or the Fund's ability to
meet redemption requests.
Short Sales. The Fund may from time to time use short sales, which means that
the Fund may sell a security that it does not own in the hope of replacing it by
a later purchase at a lower price. In order to make delivery to the buyer, the
Fund must borrow the security. When it does, the Fund incurs an obligation to
replace that security, whatever its price may be, at the time the Fund purchases
it for delivery to the lender. The Fund must also pay to the lender of the
security the dividends or interest payable during such period and may have to
pay a premium to borrow the security. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet the margin requirements,
until the short position is closed out. The obligation to restore the borrowed
security will at all times also be secured by collateral consisting of cash or
liquid securities whose value is marked to the market daily. In addition to the
amount required to be maintained by the broker, a similarly collateralized
deposit will be made to a segregated account at the Fund's custodian bank in an
amount such that the value of these two deposits will, at all times, be at least
equal to the
5
<PAGE>
current market value of the securities sold short. Ordinarily, no interest will
be received by the Fund on the proceeds of the short sale held by the broker,
although income from the collateral securities will belong to the Fund. The Fund
will incur a loss, which could be substantial, if the price of the security
increases between the date of the short sale and the date on which it purchases
securities to replace those borrowed. The Fund will realize a gain if the
security declines in price between those dates. Any such gain will be a short
term gain.
The frequency of short sales by the Fund may vary substantially, and no
specified portion of the Fund's assets will be invested in short sales. However,
not more than 25% of the Fund's net assets will be used to collateralize short
sales. To adhere to the 25% limitation, the Fund may be required to cover short
sales at a disadvantageous time.
The Fund may also make short sales "against the box." A short sale is "against
the box" to the extent that the Fund contemporaneously owns or has the right to
obtain without additional cost securities identical to those sold short. Such
sales will not be subject to the limitations referred to above.
Fixed Income Securities. When seeking to achieve its secondary objective of
income, the Fund will normally invest in investment grade fixed income
securities. Investment grade securities are those rated in the top four
categories by a nationally recognized statistical rating organization such as
Standard & Poor's Ratings Group or Moody's Investors Service, Inc., ("Moody's")
or, if unrated, are determined by the Investment Manager to be of comparable
quality. Moody's considers securities in the fourth highest category to have
speculative characteristics. Such securities may include long, intermediate and
short maturities, depending on the Investment Manager's evaluation of market
patterns and trends. The Fund may invest up to 35% of its assets in fixed income
securities rated below investment grade, although it has no current intention of
investing more than 5% of its assets in such securities during the coming year.
The Fund may also invest without limit in unrated securities if such securities
offer, in the Investment Manager's opinion, the opportunity for a high overall
return by reason of their yield, discount at purchase, or potential for capital
appreciation without undue risk. Securities rated below investment grade and
many unrated securities may be considered predominantly speculative and subject
to greater market fluctuations and risks of loss of income and principal than
higher rated fixed income securities. The market value of fixed income
securities usually is affected by changes in the level of interest rates. An
increase in interest rates tends to reduce the market value of such investments,
and a decline in interest rates tends to increase their value. In addition,
fixed income securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater fluctuations in price than
obligations with shorter maturities. Fluctuations in the market value of fixed
income securities subsequent to their acquisition do not affect cash income from
such securities but are reflected in the Fund's net asset value.
Lending. Pursuant to an agency arrangement with an affiliate of its Custodian,
the Fund may lend portfolio securities or other assets through such affiliate
for a fee to other parties. The Fund's agreement requires 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. Loans of portfolio securities may not exceed one-third of
the Fund's total assets. 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 to
be creditworthy. Any loan made by the Fund will provide that it may be
terminated by either party upon reasonable notice to the other party.
PRINCIPAL RISKS
Precious Metals Price. 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.
Non-Diversification. 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 involve more
risk 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.
BAR CHART AND PERFORMANCE TABLE
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
6
<PAGE>
of the Standard & Poor's 500 Stock Index ("S&P 500") and Morningstar Specialty
Fund-Precious Metals Average ("PMFA"). The S&P 500 is an index that is unmanaged
and fully invested in common stocks. The PMFA is an equally weighted average of
the 22 managed 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
[GRAPHIC OMITTED]
1989: x%, 1990: x%, 1991: x%, 1992: x%, 1993: x%, 1994: x%, 1995: x%,
1996: x%, 1997: x%, 1998: x%.
Best Quarter (x/xx - x/xx) = x.x%
Worst Quarter (x/xx - x/xx) =(x.x)%
Average annual total return for the periods ended 12/31/98
1 Year 5 Years 10 Years
------ ------- --------
Midas Investors Ltd. (32.21)% (23.90)% (9.61)%
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%
Annual Fund operating expenses
(expenses that are deducted from Fund assets)( as % of average daily net assets)
Management fees....................................................... x.x%
Distribution and service (12b-1) fees................................. x.x%
Other expenses........................................................ x.x%
----
Total annual fund operating expenses.................................. x.x%
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>
<S>
One Three Five Ten
Year Years Years Years
The example assumes that you invest $10,000 in the Fund for <C> <C> <C> <C>
the time periods indicated and then redeem all of your
shares at the end 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 costs may be higher or lower, based on these
assumptions your costs would be:.................................. $x $x $x $x
</TABLE>
7
<PAGE>
MIDAS MAGIC, INC.
INVESTMENT OBJECTIVE
The Fund seeks long term capital appreciation.
INVESTMENT STRATEGY
The Fund seeks to achieve this objective by investing primarily in equity
securities. Any income which the Fund earns is incidental to its objective of
capital appreciation. The Fund will purchase primarily common stocks, which will
be selected generally for their potential for long term capital appreciation and
not dividend yield. Generally, the Fund will invest in companies expected to
achieve above-average growth, which have small, medium or large capitalizations.
In attempting to achieve capital appreciation, the Fund employs aggressive and
speculative investment strategies. The Fund may borrow money to purchase
securities and engage in short selling, where risk of loss is potentially
unlimited. Additionally, the Fund may invest in special situations such as
liquidations and reorganizations. The Fund may also lend portfolio securities to
other parties. The Fund may invest in options, warrants, financial futures, and
forward contracts, for which there is no assurance of success.
The Fund may from time to time take defensive positions, such as investing some
or all of its assets in cash, cash equivalents, money market securities,
short-term bonds, repurchase agreements, and convertible bonds. When the Fund
takes a defensive position, the Fund may not achieve its investment objective
over the short term.
PRINCIPAL RISKS
Market. The primary market risks associated with investing in the Fund are those
related to fluctuations in the value of the Fund's portfolio. A risk of
investing in stocks is that their value will go up and down reflecting stock
market movements and you could lose money. However, you also have the potential
to make money. Also, investing in stocks involves a greater risk of loss of
income than bonds because stocks need not pay dividends.
Small Capitalization. The Fund may invest in companies that are small or thinly
capitalized, and may have a limited operating history. A potential risk in
investing in small-cap stocks is that small-cap stocks are likely more
vulnerable than larger companies to adverse business or economic developments.
During broad market downturns, Fund value may fall further than that of funds
investing in larger companies. Full development of small-cap companies takes
time, and for this reason the Fund should be considered a long term investment
and not a vehicle for seeking short term profit.
BAR CHART AND PERFORMANCE TABLE
Past Performance. The bar chart provides some indiction 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 Russell 2000 Index, an index that is unmanaged
and fully invested in common stocks of small companies. 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.
8
<PAGE>
Year-by-year total percent return as of 12/31 each year
[GRAPHIC OMITTED]
1989: 19.14, 1990: (31.75), 1991: 6.39, 1992: 28.00, 1993: 14.30,
1994: 1.58, 1995: 32.84, 1996: 18.67, 1997: 3.54, 1998: (13.82)
Best Quarter:
1/96 - 3/96
24.77%
Worst Quarter:
7/90 - 9/90
(19.47)%
Average annual total return for the periods ended 12/31/98
1 Year 5 Years 10 Years
------ ------- --------
Midas Magic (13.82)% 7.40% 6.10%
Russell 2000 Index (2.57)% 11.87% 12.92%
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%
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 ...........................................................8.02%
Total annual fund operating expenses .....................................9.27%
Fee waiver and Expense reimbursement......................................7.29%
Net expenses..............................................................1.98%*
*Reflects a contractual obligation by Rockwood Advisers, Inc. to waive and/or
reimburse the Fund to the extent Total annual fund operating expenses exceed
1.90% of average daily net assets, excluding certain expenses.
9
<PAGE>
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>
<S>
One Three Five Ten
Year Years Years Years
The example assumes that you invest $10,000 in the Fund for <C> <C> <C> <C>
the time periods indicated and then redeem all of your
shares at the end 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, except for the
first year in each of the time periods indicated. Although
your actual costs may be higher or lower, based on these
assumptions your costs would be**............................... $201 $2,030 $3,707 $7,310
<FN>
** The first year expenses in each of the time periods indicated are based on a
contractual agreement.
</FN>
</TABLE>
10
<PAGE>
MIDAS SPECIAL EQUITIES FUND, INC.
INVESTMENT OBJECTIVE
Midas Special Equities Fund seeks capital appreciation.
INVESTMENT STRATEGY
The Fund invests primarily in equity securities, often involving special
situations and emerging growth companies. The Fund seeks to invest in equity
securities of companies with optimal combinations of growth in earnings and
other fundamental factors, while also offering reasonable valuations in terms of
price/earnings, price/cash flow, price/sales and similar ratios. The Fund may
invest in domestic or foreign companies which have small, medium or large
capitalizations.
In attempting to achieve capital appreciation, the Fund employs aggressive and
speculative investment strategies. The Fund may borrow money to purchase and
hold securities and engage in short selling, where risk of loss is potentially
unlimited. Additionally, the Fund may invest in special situations such as
liquidations and reorganizations. The Fund may also lend portfolio securities to
other parties. The Fund may invest in options, warrants, financial futures, and
forward contracts, for which there is no assurance of success.
The Fund may from time to time take defensive positions, such as investing some
or all of its assets in cash, cash equivalents, money market securities,
short-term bonds, repurchase agreements, and convertible bonds. When the Fund
takes a defensive position, the Fund may not achieve its investment objective
over the short term.
PRINCIPAL RISKS
Market. The primary market risks associated with investing in the Fund are those
related to fluctuations in the value of the Fund's portfolio. A risk of
investing in stocks is that their value will go up and down reflecting stock
market movements and you could lose money. However, you also have the potential
to make money. Also, investing in stocks involves a greater risk of loss of
income than bonds because stocks need not pay dividends.
BAR CHART AND PERFORMANCE TABLE
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 Russell 2000 Index, an index that is unmanaged
and fully invested in common stocks of small companies. 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 return as of 12/31 each year
[GRAPHIC OMITTED]
1989: 42.29, 1990: (36.39), 1991: 40.54, 1992: 28.38, 1993: 16.35,
1994: (16.54), 1995: 40.47, 1996: 1.06, 1997: 5.23, 1998: (5.00)
Best Quarter:
10/92 - 12/92
24.29%
Worst Quarter:
7/90 - 9/90
(43.75)%
11
<PAGE>
Average annual total return for the periods ended 12/31/98
1 Year 5 Years 10 Years
------ ------- --------
Midas Special Equities Fund (5.00)% 3.44% 8.42%
Russell 2000 Index (2.57)% 11.87% 12.92%
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%
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)( as % of average daily net assets)
Management fees ...........................................................0.87%
Distribution and service (12b-1) fees .....................................1.00%
Other expenses ............................................................1.55%
Total annual fund operating expenses ......................................3.42%
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>
<S>
One Three Five Ten
Year Years Years Years
The example assumes that you invest $10,000 in the Fund for <C> <C> <C> <C>
the time periods indicated and then redeem all of your
shares at the end 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 costs may be higher or lower, based on these
assumptions your costs would be:............................ $345 $1,051 $1,779 $3,703
</TABLE>
12
<PAGE>
MIDAS U.S. AND OVERSEAS FUND LTD.
INVESTMENT OBJECTIVE
Midas U.S. and Overseas Fund seeks to obtain the highest possible total return
on its assets from long term growth of capital and from income principally
through a portfolio of securities of U.S. and overseas issuers.
INVESTMENT STRATEGY
The Fund may invest substantially all of its assets in equity securities of
issuers located in foreign countries with developed and/or emerging markets. The
Fund may invest a portion of its assets in debt securities and in a combination
of countries which include the U.S. and foreign markets. Generally, the Fund
pays dividends annually to its shareholders.
The Fund seeks to invest in equity securities of companies with optimal
combinations of growth in earnings and other fundamental factors, while also
offering reasonable valuations in terms of price/ earnings, price/cash flow,
price/sales and similar ratios. The Fund may sell an investment when the value
or growth potential of the investment appears limited or exceeded by other
investment opportunities, when the issuer's investment no longer appears to meet
the Fund's investment objective, or when the Fund must meet redemptions.
The Fund may invest in companies which have small, medium or large
capitalizations. The Fund may borrow money to purchase and hold securities and
engage in short selling, where risk of loss is potentially unlimited.
Additionally, the Fund may invest in special situations such as liquidations and
reorganizations. The Fund may also lend portfolio securities to other parties.
The Fund may invest in options, warrants, financial futures, and forward
contracts, for which there is no assurance of success.
The Fund may from time to time take defensive positions such as investing some
or all of its assets in cash, cash equivalents, money market securities,
short-term bonds, repurchase agreements, and convertible bonds. When the Fund
takes a defensive position, the Fund may not achieve its investment objective
over the short term.
PRINCIPAL RISKS
Market. The primary market risks associated with investing in the Fund are those
related to fluctuations in the value of the Fund's portfolio. A risk of
investing in stocks is that their value will go up and down reflecting stock
market movements and you could lose money. However, you also have the potential
to make money. Also, investing in stocks involves a greater risk of loss of
income than bonds because stocks need not pay dividends.
Foreign Investment. 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.
BAR CHART AND PERFORMANCE TABLE
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 Morgan Stanley Capital International ("MSCI")
World Index, an index that is unmanaged and fully invested in common stocks.
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.
13
<PAGE>
Year-by-year total return as of 12/31 each year
[GRAPHIC OMITTED]
1989: 11.10, 1990: (8.61), 1991: 22.55, 1992: 2.57, 1993: 26.71,
1994: (13.12), 1995: 25.11, 1996: 5.34, 1997: 5.64, 1998: 1.18.
Best Quarter:
10/98-12/98
18.99%
Worst Quarter:
7/98-9/98
(24.43)%
Average annual total return for the periods ended 12/31/98
1 Year 5 Years 10 Years
------ ------- --------
Midas U.S. and Overseas Fund Ltd. 1.18% 4.12% 6.94%
MSCI World Index 24.34% 15.68% 10.66%
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%
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 ...........................................................1.33%
Total annual fund operating expenses .....................................2.58%
*Reflects a contractual distribution fee waiver that will continue through May
1, 2000. Without such waiver, distribution and service fee and total annual fund
operating expenses would have been 1.00% and 3.33%, respectively.
14
<PAGE>
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>
<S>
One Three Five Ten
Year Years Years Years
The example assumes that you invest $10,000 in the Fund for <C> <C> <C> <C>
the time periods indicated and then redeem all of your
shares at the end 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, except for the
first year periods. Although your actual costs may be higher
or lower, based on these assumptions your costs would
be**................................................................ $261 $955 $1,672 $3,571
<FN>
**Year one fees are based on contractual Distribution fee.
</FN>
</TABLE>
15
<PAGE>
DOLLAR RESERVES, INC.
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide its shareholders maximum current
income consistent with preservation of capital and maintenance of liquidity.
INVESTMENT STRATEGY
The Fund invests exclusively in obligations of the U.S. Government, its agencies
and instrumentalities ("U.S. Government Securities"). The monthly dividends the
Fund pays are generally exempt from state and local income taxes. In addition,
the value of Fund shares is generally exempt from state intangible personal
property taxes.
The U.S. Government Securities in which the Fund may invest include U.S.
Treasury notes and bills and certain agency securities that are backed by the
full faith and credit of the U.S. Government. The Fund may also invest without
limit in securities issued by U.S. Government agencies and instrumentalities
that may have different degrees of government backing as to principal or
interest but which are not backed by the full faith and credit of the U.S.
Government.
The Fund is managed so the dollar-weighted average maturity of its portfolio
does not exceed 90 days, and all investments have, or are deemed to have, a
remaining maturity of less than 397 days.
The Fund may purchase securities on a "when-issued" basis. In such transactions
the price is fixed at the time the commitment to make the purchase is made, but
delivery and payment occur at a later date. The Fund will only make commitments
to purchase U.S.
Government Securities maturing in less than 397 days from the date of the
commitment.
When the Fund purchases securities on a when-issued basis, its custodian will
set aside in a segregated account cash or liquid securities whose value is
marked to the market daily with a market value at least equal to the amount of
the commitment. If necessary, assets will be added to the account daily so that
the value of the account will not be less than the amount of the Fund's purchase
commitment.
Pursuant to an agency arrangement with an affiliate of its Custodian, the Fund
may lend portfolio securities or other assets through such affiliate for a fee
to other parties. The Fund's agreement requires 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. Loans of portfolio securities may not exceed one-third of the Fund's total
assets.
Loans will be made only to borrowers deemed to be creditworthy. Any loan made by
the Fund will provide that it may be terminated by either party upon reasonable
notice to the other party.
The Fund operates in accordance with a nonfundamental policy that complies with
Rule 2a-7 under the Investment Company Act of 1940 ("1940 Act") that limits the
amount the Fund may invest in the securities of any one issuer to 5% of the
Fund's total assets, except that this limitation does not apply to U.S.
Government Securities. The Fund is also subject to a fundamental limitation that
provides it with the ability to invest, with respect to 25% of the Fund's
assets, more than 5% of its total assets in any one issuer. The Fund will
operate in accordance with this fundamental limitation only in the event that
Rule 2a-7 is amended and the Fund's Board amends the nonfundamental policy
discussed above. The Fund may borrow money from banks for temporary or emergency
purposes (not for leveraging or investment), but not in excess of an amount
equal to one third of the Fund's total assets. The Fund may also invest up to
10% of its net assets in illiquid assets and up to 10% of its total assets in
restricted securities.
Variable and Floating Rate Securities. The Fund may purchase variable and
floating rate U.S. Government Securities. The yield on these securities is
adjusted in relation to changes in specific rates, such as the prime rate, and
different securities may have different adjustment rates. The Fund's investments
in these securities must comply with conditions established by the SEC under
which they may be considered to have remaining maturities of 397 days or less.
16
<PAGE>
PRINCIPAL RISKS
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
BAR CHART AND PERFORMANCE TABLE
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. As with all mutual funds, past performance is not necessarily an
indication of future performance.
Year-by-year total return as of 12/31 each year
[GRAPHIC OMITTED]
1989: x%, 1990: x%, 1991: X%, 1992: x%, 1993: x%, 1994: x%, 1995: x%,
1996: x%, 1997: x%, 1998: x%.
Best Quarter (x/xx - x/xx) = x.x%
Worst Quarter (x/xx - x/xx) =(x.x)%
For information on the Fund's 7-day yield, call toll-free 1-888-503-FUND.
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%
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)( as % of average daily net assets)
Management fees ............................................................x.%
Distribution and service (12b-1) fees .......................................x%
Other expenses ..............................................................x%
Total annual fund operating expenses ........................................x%
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>
<S>
One Three Five Ten
Year Years Years Years
The example assumes that you invest $10,000 in the Fund for <C> <C> <C> <C>
the time periods indicated and then redeem all of your
shares at the end 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 costs may be higher or lower, based on these
assumptions your costs would be:.................................. $x $x $x $x
</TABLE>
17
<PAGE>
RISKS OF INVESTING:
RISKS OF INVESTING IN THE MIDAS FAMILY OF FUNDS
The following risks apply to each of the Funds:
Market. The primary market risks associated with investing in the Fund are those
related to fluctuations in the value of the Fund's portfolio. A risk of
investing in stocks is that their value will go up and down reflecting stock
market movements and you could lose money. However, you also have the potential
to make money. Also, investing in stocks involves a greater risk of loss of
income than bonds because stocks need not pay dividends.
Illiquid Securities. The Fund may invest up to 15% of its assets in illiquid
securities. Potential risks from investing in illiquid securities are 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.
Portfolio Management. The portfolio manager's skill in choosing appropriate
investments for the Fund will determine in large part whether the Fund achieves
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.
Temporary Defensive Positions. The Fund may from time to time take defensive
positions such as investing some or all of its assets in cash, cash equivalents,
money market securities, short-term bonds, repurchase agreements, and
convertible bonds. When the Fund takes a defensive position, the Fund may not
achieve its investment objective over the short term.
Year 2000. The Fund could be adversely affected if computer systems used by CEF
Advisers, Inc. (formerly Bull & Bear Advisers, Inc.) and the Fund's other
service providers do not properly process and calculate date-related information
on and after January 1, 2000. CEF Advisers, Inc. 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.
RISKS OF INVESTING IN SECURITIES OF SMALL COMPANIES
Small Capitalization. Some of the Funds may invest in companies that are small
or thinly capitalized, and may have a limited operating history. A potential
risk in investing in small-cap stocks is that small-cap stocks are likely more
vulnerable than larger companies to adverse business or economic developments.
During broad market downturns, Fund values may fall further than that of funds
investing in larger companies. Full development of small-cap companies takes
time, and for this reason the affected Funds should be considered a long term
investment and not a vehicle for seeking short term profit.
RISKS OF INVESTING IN FOREIGN SECURITIES
Foreign Investment. Some of the Funds can be exposed to the unique risks of
foreign investing. Political turmoil and economic instability in the countries
in which some of the Funds invest could adversely affect the value of your
investment. Also, if the value of any foreign currency in which the Funds
investments are denominated declines relative to the U.S. dollar, the value and
total return of your investment in the Funds 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.
RISKS OF MINING AND INVESTING IN PRECIOUS METALS
Precious Metals Price. Some of the Funds 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,
18
<PAGE>
platinum and other resources could have a substantial effect on supply and
demand in countries throughout the world.
Mining. Resource mining by its nature involves significant risks and hazards to
which some of the Funds are exposed. 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.
NON-DIVERSIFICATION RISK
Non-Diversification. Some of the Funds are 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 Funds may hold a smaller number of issuers than if it were
diversified. If this situation occurs, investing in these Funds could involve
more risk 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.
INTEREST RATE RISK
Interest Rates. Bond investments are affected by interest rates to which some of
the Funds are exposed. 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.
PORTFOLIO MANAGEMENT
Midas Fund, Inc.
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.
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.
Midas Investors, Ltd., Midas Special Equities Fund, Inc., and Midas U.S. and
Overseas Fund Ltd.
CEF Advisers, Inc. is the investment manager of the Fund, providing day-to-day
advice regarding portfolio transactions and is located at 11 Hanover Square, New
York, New York 10005. Thomas B. Winmill, President and Chief Executive Officer
of the investment manager and the Fund, is the Fund's portfolio manager. Mr.
Winmill has served as a member of the Investment Manager's Investment Policy
Committee since 1990. As a member of the Investment Policy Committee, he helps
establish general investment guidelines. He has served as portfolio manager of
the Fund since May 1, 1998.
Midas Magic, Inc.
Rockwood Advisers, Inc. is the investment manager of the Fund, providing
day-to-day advice regarding portfolio transactions and is located at 11 Hanover
Square, New York, New York 10005. Bassett S. Winmill, Chief Investment Officer
of the investment manager, is the Fund's portfolio manager. Mr. Winmill has
served as a portfolio manager of the Fund since February 2, 1999. He is a member
of the New York Society of Security Analysts, the Association for Investment
Management and Research and the International Society of Financial Analysts.
19
<PAGE>
Dollar Reserves, Inc.
CEF Advisers, Inc. is the investment manager of the Fund, providing day-to-day
advice regarding portfolio transactions and is located at 11 Hanover Square, New
York, New York 10005. Steven A. Landis, Senior Vice President of the investment
manager and the Fund, is the Fund's portfolio manager. Mr. Landis has served as
a member of the investment manager's Investment Policy Committee since 1995. As
a member of the Investment Policy Committee, he assembles and disseminates
information with respect to the fund's performance. He has served as portfolio
manager of the Fund since April, 1995. From 1993 to 1995, he was an Associate
Director of Proprietary Trading at Barclays de Zoete Wedd Securities Inc.
MANAGEMENT FEES
Each Fund pays a management fee at an annual rate based on its average daily net
assets, to the investment manager of the Fund, as follows: Midas Fund pays 1% on
the first $200 million of average daily net assets, declining thereafter. Midas
Investors, Ltd. pays 1% on the first $10 million of average daily net assets,
declining thereafter. Midas Magic pays 1% on the first $200 million of average
daily net assets, declining thereafter. Midas Special Equities Fund, Inc. 1% on
the first $10 million of average daily net assets, declining thereafter. Midas
U.S. and Overseas pays 1% on the first $10 million of average daily net assets,
declining thereafter. Dollar Reserves 0.50% on the first $250 million of average
daily net assets, declining thereafter.
DISTRIBUTION AND SHAREHOLDER SERVICES
Investor Service Center, Inc. is the distributor of the Fund and services
shareholder accounts. Each of the Funds has adopted a plan under Rule 12b-1 and
pays the distributor a distribution or 12b-1 fee as compensation for
distribution and service activities as follows: Midas Fund pays one-quarter of
one percent per annum of the Fund's average daily net assets. Midas Investors,
Ltd. pays one-quarter of one percent per annum of the Fund's average daily net
assets. Midas Magic pays one quarter of one percent per annum of the Fund's
average daily net assets. Midas Special Equities Fund, Inc. pays one percent per
annum of the Fund's average daily net assets. Midas U.S. and Overseas pays one
percent per annum of the Fund's average daily net assets. Dollar Reserves one
quarter of one percent per annum of the Fund's average daily net assets. 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.
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.
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 Dollar Reserves,
to Investor Service Center, Box 419789, Kansas City, MO 64141-6789 (see Minimum
Investments below).
By wire. Call toll-free 1-888-503-FUND, 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 Dollar Reserves 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; Dollar Reserves. 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).
20
<PAGE>
Minimum Investments
Account Type Initial Subsequent
- ---------------------------- ------------------------ ------------------------
Regular $1,000 $100
Unif Gifts/Trans to $1,000 $100
Minors
403(b) plan $1,000 $100
Automatic Investment $100 $100
Program
............................ ........................ ........................
IRA Accounts Initial Subsequent
- ---------------------------- ------------------------ ------------------------
Traditional, Roth IRA $1,000 $100
Spousal, Rollover IRA $1,000 $100
SEP-IRA, SIMPLE IRA $1,000 $100
Education IRA $500 No min.
............................ ........................ ........................
Checks must be payable to Dollar Reserves in U.S. dollars. Third party checks
cannot be accepted. You will 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 toll-free 1-888- 503-FUND.
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. Minimum investments above are waived for
each plan since they are 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 $1,000 due to redemptions.
For more information, or to request the necessary authorization form, please
call toll-free 1-888-503-FUND. 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 Dollar Reserves, 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). Call toll-free 1-888-503-FUND. 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 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 name and address or wire information of person to receive proceeds
21
<PAGE>
In some instances, a signature guarantee may be required. Signature guarantees
protect against unauthorized account transfers by assuring that a signature is
genuine. 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 guarantee 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) and additional documentation may be required.
By telephone. Call toll-free 1-888-503-FUND, to expedite redemption of Fund
shares.
By EFT. Call toll-free 1-888-503-FUND 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. Call toll-free 1-888-503-FUND and request the specific amount to be
redeemed by wire.
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.
Check Writing Privilege for Easy Access. You may establish free, unlimited check
writing privileges with only $250 minimum per check upon request, by calling
toll-free 1-888-503-FUND. You will be subject to a $20 charge for refused
checks, which may change without notice.
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 executed from your account
that day. Orders received after 4 p.m., eastern time, will be executed 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 by calling toll-free 1-888-503-FUND.
DISTRIBUTIONS AND TAXES
Distributions. The Fund pays its shareholders dividends from any net investment
income and distributes net capital gains that it has realized, if any. Each of
these distributions, if any, is paid out once a year. Your distributions will be
reinvested in the Fund unless you instruct the Fund otherwise by calling
toll-free 1-888-503-FUND.
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:
22
<PAGE>
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
Because income and capital gains distributions are taxable, you may want to
avoid making a substantial investment in a taxable account when the Fund is
about to declare a 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.
23
<PAGE>
FINANCIAL HIGHLIGHTS: MIDAS FUND, INC.
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, with the
exception of 1994, 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>
24
<PAGE>
FINANCIAL HIGHLIGHTS: MIDAS INVESTORS, LTD.
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>
Six Months Ended Years Ended June 30,
December 31,* --------------------------------------------------------------
PER SHARE DATA* 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period............. $3.67 $7.14 $14.02 $13.13 $15.71 $16.98
----- ----- ------ ------ ------ ------
Income from investment operations:
Net investment loss............................. (.04) (.12) (.25) (.22) -- (.11)
Net realized and unrealized gain (loss) on
investments.................................. (.81) (2.94) (4.36) 2.72 (1.13) (1.05)
----- ------ ------ ---- ------ ------
Total from investment operations.......... (.85) (3.06) (4.61) 2.50 (1.13) (1.16)
----- ------ ------ ---- ------ ------
Less distributions:
Distributions from net realized gains on
investments.................................. -- (.41) (2.27) (1.61) (1.45) (.11)
Total distributions............................. -- (.41) (2.27) (1.61) (1.45) (.11)
----- ------ ------ ------ -----
Net asset value at end of period................... $2.82 $3.67 $7.14 $14.02 $13.13 $15.71
===== ===== ===== ====== ====== ======
TOTAL RETURN....................................... (23.16)% (43.45)% (37.81)% 21.01% (8.01)% (6.92)%
======= ======= ======= ===== ====== ======
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's omitted)........ $6,293 $8,324 $15,217 $27,489 $29,007 $36,603
====== ====== ======= ======= ======= =======
Ratio of expenses to average net assets(a)(b)...... 4.32%** 3.57% 2.77% 2.93% 2.82% 2.54%
==== ==== ==== ==== ==== ====
Ratio of net investment income (loss) to
average net assets................................. (2.50)%** (2.09)% (1.89)% (1.49)% 0.12% (.65)%
====== ====== ====== ====== ==== =====
Portfolio turnover rate............................ 36% 136% 37% 61% 158% 129%
== === == == === ===
<FN>
* Per share net investment loss and unrealized gain (loss) on investment have
been computed using the average number of shares outstanding. these computations
had no effect on net asset value per share.
** Annualized.
(a) Ratios excluding interest expense were 3.96%**, 3.57%, 2.77%, 2.93%, 2.82%,
and 2.54%, for the six months ending December 31, 1998 and the years ending June
30, 1998, 1997, 1996, 1995, and 1994, respectively. (b) Ratio after custodian
credits was 4.30%** and 3.82% for the six months ending December 31, 1998 and
the year ended June 30, 1998, respectively.
</FN>
</TABLE>
25
<PAGE>
FINANCIAL HIGHLIGHTS: MIDAS MAGIC, INC.
This table describes the Fund's performance for the past five years. In 1998,
the fiscal year end changed to December 31. Previously, the fiscal year end was
October 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 ended 1996 through 1998
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. The Fund's financial statements for
periods prior to 1996 were audited by other auditors whose reports thereon
expressed unqualified opinions on those statements.
<TABLE>
<CAPTION>
Two Months Ended Years Ended October 31,
December 31, -----------------------------------------------------------------
1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
PER SHARE DATA*
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period........... $15.67 $24.92 $24.24 $18.73 $16.61 $16.32
------ ------ ------ ------ ------ ------
Net investment loss.............................. (.04) (.25) (.59) (.56) (.31) (.22)
Net realized and unrealized gain (loss) on
investments................................... .98 (7.20) 6.17 6.07 2.43 .51
--- ------ ---- ---- ---- ---
Total from investment operations........... .94 (7.45) 5.58 5.51 2.12 .29
--- ------ ---- ---- ---- ----
Distributions from net realized gain
on investments................................ (2.04) (1.80) (4.90) .00 .00 .00
------ ------ ------ --- --- ---
Total Distributions........................ (2.04) (1.80) (4.90) .00 .00 .00
Net asset value at end of period................. $14.57 $15.67 $24.92 $24.24 $18.73 $16.61
====== ====== ====== ====== ====== ======
TOTAL RETURN..................................... 6.48% (31.29)% 27.55% 29.42% 12.76% 1.78%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's omitted)...... $548 $613 $1,771 $1,200 $774 $714
Ratio of expenses to average net assets(a)(b).... 2.85%** 2.09% 2.81% 2.55% 2.30% 2.00%
Ratio of net investment loss to average net
assets(c)..................................... (1.54)%** (1.38) (2.65)% (2.23)% (1.77)% (1.38)%
Portfolio turnover rate.......................... 0% 207% 44% 42% 30% 18%
<FN>
*Per share net investment loss and net realized and unrealized gain on
investments have been computed using the average number of shares outstanding.
These computations had no effect on net asset value per share.
**Annualized.
(a)Ratio prior to reimbursement by the investment manager was 18.84%**, 9.27%,
10.47%, 4.44%, 3.00%, and 2.82%, for the two months ended December 31, 1998 and
the years ended October 31, 1998, 1997, 1996, 1995, and 1994, respectively.
(b)Ratio after custodian fee credits was 1.97% for the year ended October 31,
1998. There were no custodian fee credits for prior years. (c)Ratio prior to
reimbursement by the manager was (17.53)%**, (8.56)%, (10.31)%, (4.12)%,
(2.47)%, and (2.20)% for the two months ended December 31, 1998 and the years
ended October 31, 1998, 1997, 1996, 1995, and 1994, respectively.
</FN>
</TABLE>
26
<PAGE>
FINANCIAL HIGHLIGHTS: MIDAS SPECIAL EQUITIES FUND, INC.
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 at beginning of period................. $23.38 $22.96 $25.42 $19.11 $23.13
------ ------ ------ ------ ------
Net investment loss................................. (.61) (.38) (.73) (.81) (.55)
Net realized and unrealized gain (loss) on
investments...................................... (.65) 1.55 0.99 8.51 (3.28)
----- ---- ---- ---- ------
Total from investment operations.................... (1.26) 1.17 0.26 7.70 (3.83)
------ ---- ---- ---- ------
Distributions from net realized gains on
investments...................................... (1.78) (.75) (2.72) (1.39) (.19)
------ ----- ------ ------ -----
Net increase (decrease) in net asset value.......... (3.04) .42 (2.46) 6.31 (4.02)
Net asset value at end of period....................... $20.34 $23.38 $22.96 $25.42 $19.11
====== ====== ====== ====== ======
TOTAL RETURN........................................... (5.0)% 5.3% 1.0% 40.5% (16.5)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's omitted)............ $36,807 $44,773 $49,840 $56,340 $45,614
Ratio of expenses to average net assets(a)(b).......... 3.42% 2.81% 2.92% 3.67% 2.92%
Ratio of net investment loss to average net assets..... (2.57)% (1.48)% (2.81)% (2.70)% (2.43)%
Portfolio turnover rate................................ 97% 260% 311% 319% 309%
<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
excluding interest expense was 2.63%, 2.53%, 2.45% and 2.88% for the years ended
December 31, 1998, 1997, 1996 and 1995. (b) Expense ratio after custodian fee
credits was 3.41% and 2.79% for the years ended December 31, 1998 and 1997.
Prior to 1995, such credits were reflected in the expense ratio. There were no
custodian fee credits for 1996 and 1995.
</FN>
</TABLE>
27
<PAGE>
FINANCIAL HIGHLIGHTS: MIDAS U.S. AND OVERSEAS FUND LTD.
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(1)
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period............................. $7.35 $7.91 $8.36 $7.08 $8.71
----- ----- ----- ----- -----
Net investment income (loss).................................... (.10) (0.05) (0.24) (0.23) (0.13)
Net realized and unrealized gain (loss) on investments.......... .18 0.46 0.68 2.00 (1.01)
--- ---- ---- ---- ------
Total from investment operations................................ .08 0.41 0.44 1.77 (1.14)
--- ---- ---- ---- ------
Distributions from net realized gains........................... (.26) (0.97) (0.89) (0.49) (0.49)
Net asset value at end of period................................... $7.17 $7.35 $7.91 $8.36 $7.08
===== ===== ===== ===== =====
TOTAL RETURN....................................................... 1.18% 5.64% 5.34% 25.11% (13.12)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's omitted)........................ $7,340 $8,446 $9,836 $9,808 $8,454
Ratio of expenses to average net assets(a)(b)...................... 3.33% 3.28% 3.20% 3.55% 3.53%
Ratio of net investment income (loss) to average net assets(c)..... (1.38)% (0.63)% (2.74)% (2.85)% (1.65)%
Portfolio turnover rate............................................ 69% 205% 255% 214% 212%
<FN>
1 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 3.84% and 3.59% for the
years ended December 31, 1995 and 1994. (b) Expense ratio after the custodian
fee credits was 3.22% and 3.49% for 1997 and 1995. Prior to 1995, such
reductions were reflected in the expense ratios. There were no custodian fee
credits for 1998 and 1996. (c) Ratio prior to reimbursement by the investment
manager was (3.14)% and (1.71)% for the years ended December 31, 1995 and 1994.
</FN>
</TABLE>
28
<PAGE>
FINANCIAL HIGHLIGHTS: DOLLAR RESERVES, INC.
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>
Six Months Ended Years Ended June 30,
December 31, -----------------------------------------------------------------
1998 1998 1997 1996 1995 1994
PER SHARE DATA ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Income from investment operations:
Net investment income........................... .022 .048 .047 .047 .044 .026
Less distributions:
Distributions from net investment income........ (.022) (.047) (.047) .047 (.044) (.026)
------ ------ ------ ---- ------ ------
Distributions from paid-in capital ............. -- ($.001) -- -- -- --
-------
Net asset value at end of period................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ======
TOTAL RETURN....................................... 4.46%** 4.88% 4.83% 4.81% 4.53% 2.59%
==== ==== ==== ==== ==== ====
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's omitted)........ $65,535 $61,602 $62,908 $62,467 $65,278 $76,351
======= ======= ======= ======= ======= =======
Ratio of expenses to average net assets (a)........ .93%** .86% .71% .90% .89% .89%
=== === === === === ===
Ratio of net investment income to average net 4.43%** 4.71% 4.73% 4.70% 4.41% 2.56%
assets (b)......................................... ==== ==== ==== ==== ==== ====
<FN>
** Annualized
(a) Ratio prior to waiver by the Investment Manager and Distributor was
1.30%**, 1.20%, 1.21%, 1.40%, 1.39%, and 1.39% for the six months
ended December 31, 1998 and the years ended June 30, 1998, 1997,
1996, 1995, 1994, respectively.
(b) Ratio prior to waiver by the Investment Manager and Distributor was
4.06%**, 4.37%, 4.23%, 4.20%, 3.91%, and 2.06%for the six months
ended December 31, 1998, 1997, 1996, 1995, and 1994, respectively.
</FN>
</TABLE>
29
<PAGE>
FOR MORE INFORMATION
For investors who want more information on the Funds, the following documents
are available free upon request:
Annual/Semi-annual reports. Contains performance data, lists portfolio holdings
and contains a letter from the Funds managers discussing recent market
conditions, economic trends and Fund strategies that significantly affected the
Funds performance during the last fiscal year.
Statement of Additional Information (SAI). Provides a fuller technical and legal
description of the Funds 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 (for Midas Fund) or 1-888-503-FUND (for all other Funds)
By mail, write to:
Midas Funds
Box 419789
Kansas City, MO 64141-6789
By e-mail, write to:
[email protected]
On the Internet, Fund documents
can be viewed online or downloaded from:
SEC at http://www.sec.gov, or
Midas Family of Funds at 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 Funds Investment Company Act file numbers are as follows:
811-04316 (Midas Fund); 811-00835 (Midas Investors); 811-04534 (Midas Magic);
811-04625 (Midas Special Equities); 811-04741 (Midas U.S. and Overseas) and
811-02474 (Dollar Reserves) .
30
<PAGE>
Statement of Additional Information June 30, 1999
MIDAS SPECIAL EQUITIES FUND, INC.
11 Hanover Square
New York, NY 10005
1-888-503-FUND
This Statement of Additional Information regarding Midas Special Equities
Fund, Inc. ("Fund") is not a prospectus and should be read in conjunction with
the Fund's Prospectus dated June 30, 1999. The Prospectus is available to
prospective investors without charge upon request by calling 1-888-503-FUND
(1-888-503-3863).
TABLE OF CONTENTS
THE FUND'S INVESTMENT PROGRAM..................................................2
INVESTMENT RESTRICTIONS........................................................3
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES......................4
THE INVESTMENT COMPANY COMPLEX.................................................9
OFFICERS AND DIRECTORS........................................................10
INVESTMENT MANAGER............................................................10
INVESTMENT MANAGEMENT AGREEMENT...............................................11
DETERMINATION OF NET ASSET VALUE..............................................11
PURCHASE OF SHARES............................................................12
PERFORMANCE INFORMATION.......................................................12
DISTRIBUTION OF SHARES........................................................14
ALLOCATION OF BROKERAGE.......................................................15
DISTRIBUTIONS AND TAXES.......................................................17
REPORTS TO SHAREHOLDERS.......................................................18
CUSTODIAN AND TRANSFER AGENT..................................................18
AUDITORS......................................................................18
FINANCIAL STATEMENTS..........................................................18
APPENDIX -- DESCRIPTIONS OF BOND RATINGS......................................19
1
<PAGE>
THE FUND'S INVESTMENT PROGRAM
The following information supplements the information concerning the
investment objective, policies and limitations of the Fund found in the
Prospectus. The Fund is a non-diversified, open-end management investment
company organized as a Maryland corporation in 1986.
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.
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 ("QIBs"). Institutional restricted securities
markets may provide both readily ascertainable values for restricted securities
and the ability to liquidate an investment in order to satisfy share redemption
orders on a timely basis. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. ("NASD") An insufficient number of QIBs interested
in purchasing certain restricted securities held by the Fund, however, could
affect adversely the marketability of such portfolio securities, and the Fund
might be unable to dispose of such securities promptly or at favorable prices
resulting in liquidity problems.
The Fund's Board of Directors has delegated the function of making day-to-day
determinations of liquidity to CEF Advisers, Inc. (formerly Bull & Bear
Advisers, Inc.) ("Investment Manager") pursuant to guidelines approved by the
Board. The Investment Manager takes into account a number of factors in reaching
liquidity determinations, including (1) the frequency of trades and quotes for
the security, (2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers, and (3) dealer undertakings to
make a market in the security, and the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The Investment
Manager monitors the liquidity of restricted securities in the Fund's portfolio
and reports periodically on liquidity determinations to the Board of Directors.
Lower Rated Debt Securities. The Fund may invest in investment grade and
non-investment grade debt securities. Ratings of "investment grade" or better
include the four highest ratings of Standard & Poor's Ratings Group ("S&P")
('AAA', 'AA', 'A', or 'BBB') and Moody's Investors Service, Inc. ("Moody's")
('Aaa', 'Aa', 'A', or 'Baa'). There is no minimum quality rating for the debt
securities in which the Fund may invest and the Fund may invest up to 35% of its
assets in unrated debt securities or 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 total assets in such securities during the
coming year. 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 agencies to be
predominantly speculative with respect to the issuer's 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 Manger 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 risk 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 a further description of S&P's and
Moody's ratings.
Lower rated debt securities generally offer a higher current yield than that
available for higher grade issues. However, lower rated securities involve
greater risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
adverse changes in the financial condition of the issuers and to price
fluctuations in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely
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affect their ability to make payments of interest and principal and increase the
possibility of default. In addition, the market for lower rated debt 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 issues may be thinner and less active than that for higher
quality securities, which may limit the Fund's ability to sell such securities
at fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the price and liquidity of lower rated securities,
especially in a thinly traded market.
Repurchase Agreements. The Fund may enter into repurchase agreements with
U.S. banks or dealers involving securities in which the Fund is authorized to
invest. A repurchase agreement is an instrument under which the Fund purchases
securities from a bank or dealer and simultaneously commits to resell the
securities to the bank or dealer at an agreed upon date and price reflecting a
market rate of interest. The Fund's custodian maintains custody of the
underlying securities until their repurchase; thus the obligation of the bank or
dealer to pay the repurchase price is, in effect, secured by such securities.
The Fund's risk is limited to the ability of the seller to pay the agreed upon
amount on the repurchase date; if the seller defaults, the securities constitute
collateral for the seller's obligation to pay. If, however, the seller defaults
and the value of the collateral declines, the Fund may incur loss and expenses
in selling the collateral. To attempt to limit the risk in engaging in
repurchase agreements, the Fund enters into repurchase agreements only with
banks and dealers believed by the Investment Manager to present minimum credit
risks in accordance with guidelines established by the Board of Directors. The
Fund will not enter into a repurchase agreement with a maturity of more than
seven days if, as a result, more than 15% of its net assets would then be
invested in such agreements and other illiquid assets.
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.
Municipal Securities. Under certain circumstances municipal securities may
offer the potential for capital appreciation relative to other fixed income
alternatives even without taking into consideration the tax-advantaged nature of
interest earned on such securities. At such times, the Fund may invest in
municipal securities of varying maturities. The municipal securities in which
the Fund may invest include general obligation and revenue or special obligation
securities. General obligation securities are secured by an issuer's pledge of
its full faith, credit and unlimited taxing power for the payment of principal
and interest. Revenue or special obligation securities are payable only from the
revenues derived from a particular facility or class of facility or project or,
in a few cases, from the proceeds of a special excise or other tax. Municipal
securities also include "private activity bonds," the interest income from which
generally is subject to the Federal alternative minimum tax. Even though the
interest from municipal securities may be exempt from Federal income tax,
dividends paid by the Fund attributable to that interest will be fully taxable
to Fund shareholders.
Equity Securities. The Fund may invest in equity securities of U.S. and
foreign issuers that, in the Investment Manager's judgment, offer potential for
capital appreciation. 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
conditions of the issuers of such securities.
Year 2000 Risks. Like other investment companies, financial and business
organizations around the world, the Fund will be adversely affected if the
computer systems used by the Investment Manager and the Fund's other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund is taking steps that it believes are reasonably designed to
address the Year 2000 Problem with respect to the computer systems it uses and
to obtain satisfactory assurances that comparable steps are being taken by each
of the Fund's major service providers. The Fund does not expect to incur any
significant costs in order to address the Year 2000 Problem. However, at this
time there can be no assurances that these steps will be sufficient to avoid any
adverse impact on the Fund. Additionally, while the Fund cannot, at this time,
predict the degree of impact, it is possible that foreign markets will be less
prepared than U.S. markets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions that
may not be changed without the approval of the lesser of (a) 67% or more of the
voting securities of the Fund present at a meeting if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding voting securities of the Fund.
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. Issue senior securities as defined in the Investment Company Act
of 1940, as amended ("1940 Act"). The following will not be
deemed to be senior securities for this purpose: (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 currency 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;
2. 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
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in accordance with the Fund's investment objective and policies
and (c) engaging in securities and other asset loan transactions
limited to one-third of the Fund's total assets;
3. Underwrite 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;
4. Borrow money, except to the extent permitted by the 1940 Act
(which currently limits borrowing to no more than 33 1/3% of the
value of the Fund's total assets);
5. Purchase or sell commodities or commodity futures contracts,
although it may enter into (i) financial and foreign currency
futures contracts and options thereon, (ii) options on foreign
currencies, and (iii) forward contracts on foreign currencies; or
6. 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.
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 engage in
certain options strategies to attempt to enhance return or for hedging purposes.
The Investment Manager also may use securities index futures contracts, interest
rate futures contracts, foreign currency futures contracts (collectively,
"futures contracts" or "futures"), options on futures contracts and forward
currency contracts for hedging purposes or in other circumstances permitted by
the CFTC. There is no guarantee, however, that the Investment Manager will
engage in any of these transactions in the coming year. 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, 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.
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.
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 permitted by the 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. The Fund
will not use leverage in its options, futures and forward currency contract
strategies. Accordingly, the Fund will comply with guidelines established by the
SEC with respect to coverage of these strategies by either (1) setting aside
cash or liquid securities whose value is marked to the market daily in a
segregated account in the prescribed amount, or (2) holding securities,
currencies or other options or futures contracts whose values are expected to
offset ("cover") its obligations thereunder. Securities, currencies or other
options or futures contracts used for cover and securities held in a segregated
account cannot be sold or closed out while the strategy is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of the Fund's
assets 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. Currently, options on debt securities are primarily traded on the OTC
market. Although many options on currencies are exchange-traded, the majority of
such options currently are traded on the 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 contra-party 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
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 portfo lio 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.
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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 covered call options on securities in which it is
authorized to invest 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 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 asset in illiquid securities, unless the OTC options are
sold to qualified dealers who agree that the Fund may repurchase any OTC options
it writes for a maximum price to be calculated by a formula set forth in the
option agreement. The cover for an OTC option written subject to this procedure
would be considered illiquid provided, however that subject to evaluation by or
under the direction of the Board of Directors, such cover will be deemed
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 covered put options on securities in which it is
authorized to invest. 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. The operation of
put options in other respects, including their related risks and rewards, is
substantially identical to that of call options. 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 put and call options and write covered put and call
options on securities indexes in much the same manner as the more traditional
securities options discussed above, except that 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 covered straddles on securities indexes. A
long straddle is a combination of a call and a put purchased on the same
security 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 where the same issue of the security 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
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 permissible
liquid assets whose value is marked to the market daily 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 security.
Foreign Currency Options and Related Risks. The Fund may take positions in
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. 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'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. The Fund will not purchase or write such
options unless, in the Investment Manager's opinion, the market for them is
sufficiently liquid to ensure that the risks in connection with such options are
not greater than the risks in connection with the underlying currency. In
addition, options on foreign currencies are affected by all of those factors
that influence foreign exchange rates and investments generally.
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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 interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank 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 securities or currencies 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 specified se curities or currencies 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 returns 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 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 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 or
currency markets or, in the case of securities index options, fluctuations in
the market sector represented by the selected index.
(2) Options normally have expiration dates of up to three years. The exercise
price of the options may be below, equal to or above the current market value of
the underlying security, securities index or currency. 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 stocks. 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 contra-party, 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 must maintain a covered position with respect to any
call option it writes on a security, currency or securities index, the Fund may
not sell the underlying securities 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 will not know in advance the
difference, if any, between the closing value of the index on the exercise date
and the exercise price of the call option itself and thus will not know the
amount of cash payable upon settlement. 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. This 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, the
Fund may sell a 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, the Fund may buy a 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 and in
other circumstances permitted by the CFTC. 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.
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<PAGE>
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 covered put options on interest rate
futures contracts as a partial anticipatory hedge and may write covered 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 that could adversely affect the market
value of the Fund's portfolio. 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 would 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 covered put options on se curities index futures
as a partial anticipatory hedge and may write covered 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 covered 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 is 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.
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 secur ity 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 covered put
option on a foreign currency futures contract as a partial anticipatory hedge
and may write a covered 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 write put options on interest rate, securities index or
foreign currency futures contracts while, at the same time, purchasing call
options on the same interest rate, securities index or foreign currency futures
contract in order to synthetically create an interest rate, securities index 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, margin also must be deposited in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not involve borrowing to finance the futures
transactions. Rather, initial margin on futures contracts is in the nature of a
perfor mance 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
7
<PAGE>
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 futures 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 related 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 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 futures 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 related options,
particular note should be taken of the following:
(1) Successful use by the Fund of futures contracts and related options will
depend upon the Investment Manager's ability to predict movements in the
direction of the overall securities, currencies and interest rate markets, which
requires different skills and techniques than predicting changes in the prices
of individual securities. Moreover, futures 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 futures contract will not correlate
with the movements in the prices of the securities 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
futures contract moves more than the price of the underlying securities, the
Fund will experience either a loss or a gain on the futures 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
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures 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 through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures 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 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 may be closed out only on an exchange or
board of trade that provides a secondary market for such futures contracts.
Although the Fund intends to purchase and sell futures 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 futures positions, 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 development and maintenance of liquid secondary markets
on the relevant exchanges or boards of trade. There can be no certainty that
such markets for all options on futures contracts will develop.
(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 under
lying securities index value or the securities or currencies being hedged.
(6) As is the case with options, the Fund's activities in the 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 as a hedge
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,
8
<PAGE>
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 enter into forward currency contracts with respect to specific
transactions. For example, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or the Fund anticipates
the receipt in a foreign currency of dividend or interest payments on a security
that it holds or anticipates purchasing the Fund may desire to "lock in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such payment,
as the case may be, by entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars or foreign currency, of the amount of
foreign currency involved in the underlying transaction. The Fund will thereby
be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the currency exchange rates during the period
between the date on which the security is purchased or sold, or on which the
payment is declared, and the date on which such pay ments are made or received.
The Fund also may hedge by using forward currency contracts in connection
with portfolio positions to lock in the U.S. dollar value of those positions, to
increase the Fund's exposure to foreign currencies that the Investment Manager
believes may rise in value relative to the U.S. dollar or to shift the Fund's
exposure to foreign currency fluctuations from one country to another. For
example, when the Investment Manager believes that the currency of a particular
foreign country may suffer a substantial decline relative to the U.S. dollar or
another currency, it may enter into a forward contract to sell the amount of the
former foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This investment
practice generally is referred to as "cross-hedging" when another foreign
currency is used.
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 secur ity
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 such 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 forward currency
contracts limit the risk of loss due to a decline in the value of the hedged
currencies, at the same time they limit 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.
THE INVESTMENT COMPANY COMPLEX
The investment companies advised by affiliates of Winmill & Co. Incorporated
(formerly Bull & Bear Group, Inc.) ("Winmill") ("Investment Company Complex")
are:
Bexil U.S. Government Securities Fund, Inc.
Dollar Reserves, Inc.
Global Income Fund, Inc.
Midas Fund, Inc.
Midas Investors Ltd.
Midas Magic, Inc.
Midas Special Equities Fund, Inc.
Midas U.S. and Overseas Fund Ltd.
Tuxis Corporation
9
<PAGE>
OFFICERS AND DIRECTORS
The officers and Directors of the Fund, their respective offices and
principal occupations during the last five years are set forth below. Unless
otherwise noted, the address of each is 11 Hanover Square, New York, NY 10005.
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 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. He was born June 25, 1959.
ROBERT D. ANDERSON* -- Vice Chairman and Director. He is Vice Chairman and a
Director of two other investment companies in the Investment Company Complex and
of the Investment Manager and its affiliates. He is a former member of the
District #12, District Business Conduct and Investment Companies Committees of
the NASD. He was born December 7, 1929.
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 is a Director of Wheelock, Inc., a manufacturer of signal products, and a
consultant for the National Executive Service Corps. He is also a Director of
five other investment companies in the Investment Company Complex. He was born
February 9, 1923.
The executive officers of the Fund, 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. (See biographical information above.)
STEVEN A. LANDIS -- Senior Vice President. He is Senior Vice President of the
Investment Manager and certain of its affiliates. From 1993 to 1995, he was
Associate Director -- Proprietary Trading at Barclays de Zoete Wedd Securities
Inc., and from 1992 to 1993 he was Director, Bond Arbitrage at WG Trading
Company. He was born March 1, 1955.
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 and Robert D. Anderson are "interested persons" of the Fund
as defined by the 1940 Act, because of their positions with the Investment
Manager.
<TABLE>
<CAPTION>
Compensation Table
Name of Person, Position Aggregate Pension or Retirement Estimated Annual Bene Total Compensation From Fund and
Compensation Benefits Accrued as fits Upon Retirement Investment Company Complex Paid
From Fund Part of Fund Expenses to Directors
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bruce B. Huber, $3,000 None None $12,500 from 6
Director Investment Companies
James E. Hunt, $3,000 None None $12,500 from 6
Director Investment Companies
John B. Russell, $3,000 None None $12,500 from 6
Director Investment Companies
<FN>
Information in the above table is based on fees paid during the year ended
December 31, 1998.
</FN>
</TABLE>
No officer, Director or employee of the Fund's Investment Manager receives
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, no
shareowner of record owned more than 5% of the Fund's outstanding shares.
INVESTMENT MANAGER
The Fund's Investment Manager is CEF Advisers, Inc., 11 Hanover Square, New
York, NY 10005. The Investment Manager, a registered investment adviser, is a
wholly owned subsidiary of the parent of the Investment Manager, Winmill & Co.
Incorporated ("Winmill"). The other principal subsidiaries of Winmill include
Investor Service Center, Inc., the Fund's Distributor and a registered
broker-dealer, Midas Management Corporation and Rockwood Advisers, Inc.,
registered investment advisers.
10
<PAGE>
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 27, 1999.
INVESTMENT MANAGEMENT AGREEMENT
Under the Investment Management Agreement, the Fund assumes and pays all
expenses required for the conduct of its business including, but not limited to,
custodian and transfer agency fees, accounting and legal fees, investment
management fees, fees of disinterested Directors, association fees, printing,
salaries of certain administrative and clerical personnel, necessary office
space, all expenses relating to the registration or qualification of the shares
of the Fund under Blue Sky laws and reasonable fees and expenses of counsel in
connection with such registration and qualification, miscellaneous expenses and
such non-recurring expenses as may arise, including 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.
The Investment Manager has agreed in the Investment Management Agreement that
it will waive all or part of its fee or reimburse the Fund monthly if, and to
the extent that, the Fund's aggregate operating expenses exceed the most
restrictive limit imposed by any state in which shares of the Fund are qualified
for sale. 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. For the
fiscal years ended December 31, 1996, 1997 and 1998, the Fund paid to the
Investment Manager aggregate investment management fees of $461,244, $403,809,
and $367,537 respectively. No reimbursement was made to the Fund by the
Investment Manager for the fiscal years ended December 31, 1996, 1997 and 1998,
pursuant to the expense guaranty described above.
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 cost
of such services billed to the Fund by the Investment Manager for the fiscal
years ended December 31, 1996, 1997, and 1998 was $22,062, $19,659, and $20,306
respectively.
The Investment Management Agreement provides that the Investment Manager will
not be liable to the Fund or any shareholder of the Fund for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the agreement relates. Nothing contained in the
Investment Management Agreement, however, shall be construed to protect the
Investment Manager against any liability to the Fund by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
by reason of its reckless disregard of obligations and duties under the
Investment Management Agreement.
The Investment Management Agreement will continue automatically for
successive periods of twelve months, provided such continuance is specifically
approved at least annually by (a) the Fund's Board of Directors or by the
holders of a majority of the outstanding voting securities of the Fund as
defined in the 1940 Act and (b) a vote of a majority of the Directors of the
Fund who are not parties to the Investment Management Agreement, or interested
persons of any such party. The Investment Management Agreement may be terminated
without penalty at any time either by a vote of the Fund's Board of Directors or
the holders of a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act, on 60 days' written notice to the Investment Manager,
or by the Investment Manager on 60 days' written notice to the Fund, and shall
immediately terminate in the event of its assignment.
Winmill has granted the Fund a non-exclusive license to use various service
marks including "Performance Driven" under certain terms and conditions on a
royalty free basis. Such license will be withdrawn in the event the Fund's
investment manager shall not be the Investment Manager or another subsidiary of
Winmill. If the license is terminated, the Fund will eliminate all reference to
those marks in its corporate name and cease to use any of such service marks or
any similar service marks in its business.
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, unless weather, equipment failure, or other factors
contribute to an earlier closing) each day the NYSE is open for trading
("Business Day"). The NYSE is closed on the following holidays: 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
portion of the Fund's net assets may be invested in foreign securities that are
traded in foreign markets that are not necessarily closed on days when the NYSE
is closed, the net asset value per share may be 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 sale
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 over-the-counter are valued at the mean
between the last available bid and asked quotations, if available, or at their
fair value as determined in good faith by or under general direction of the
Board of Directors. Short term securities are valued either at amortized cost or
at original cost plus accrued interest, both of which approximate current value.
Foreign securities are valued at the last sale 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 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 a Fund's net asset value on that day. If events materially
affecting the value of such securities or currency exchange rates occur during
such time period, the securities will be valued at their fair value as
determined in good faith by or under the direction of the Board of Directors.
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Price quotations generally are furnished by pricing services, which may also
use a matrix system to determine valuations. This system considers such factors
as security prices, yields, maturities, call features, ratings, and developments
relating to specific securities in arriving at valuations.
PURCHASE OF SHARES
The Fund will only issue shares upon payment of the purchase price by check
made to the Fund's order in U.S. dollars and drawn 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. The Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. A shareholder's order will be priced at the Fund's net asset value next
computed after such order is accepted by an authorized broker or the broker's
authorized designee.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Fund may refer to the
Fund's "average annual total return" and "cumulative total return." All such
quotations are based upon historical earnings and are not intended to indicate
future performance. The investment return on and principal value of an
investment in the Fund will fluctuate, so that the investor's shares when
redeemed may be worth more or less than their original cost.
Average Annual Total Return
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation assumes all dividends and other distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectus, and includes all recurring fees, such as investment advisory and
Rule 12b-1 fees, charged to all shareholder accounts.
Average Annual Total Returns For Periods Ended December 31, 1998
One Year (5.00)%
Five Years 3.44%
Ten Years 8.42%
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
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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 (5.00)%, 18.44%, and 125.02%, 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, including but not
limited to small company growth, capital appreciation, and growth funds indexes.
Indexes are fully invested in the securities they index, whereas the Fund is
managed and may hold cash, non-comparable securities, or be leveraged.
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 com panies, 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.
Morgan Stanley Capital International World Index measures the performance of
stock markets in 16 nations, including Australia, Hong Kong, Germany, the United
Kingdom, Canada, and the United States.
Morningstar, Mutual Fund Values, publications of Morningstar, Inc., periodically
reviewing mutual funds industry-wide by means of various methods of analysis and
textual commentary.
Mutual Fund Forecaster, a newsletter providing a mutual fund rating service.
Nasdaq Industrial Index -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
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<PAGE>
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 Smith Barney 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. acts as
the 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 offered continuously.
Pursuant to a Plan of Distribution ("Plan") adopted under Rule 12b-1 of 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
service activities and a fee in the amount of three-quarters of one percent per
annum of the Fund's average daily net assets as compensation for distribution
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 such as office rent and equipment, employee salaries, employee
bonuses and other overhead expenses.
Among other things, the Plan provides that (1) the Distributor will submit to
the Fund's Board of Directors at least quarterly, and the Directors will review,
reports regarding all amounts expended under the Plan and the purposes for which
such expenditures were made, (2) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendment or agreement
related thereto is approved, by the Fund's Board of Directors, including those
Directors who are not "interested persons" of the Fund and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to the Plan ("Plan Directors"), acting in person at a meeting called for
that purpose, unless terminated by vote of a majority of the Plan Directors, or
by vote of a majority of the outstanding voting securities of the Fund, (3)
payments by the Fund under the Plan shall not be materially increased without
the affirmative vote of the holders of a majority of the outstanding voting
securities of the Fund and (4) while the Plan remains in effect, the selection
and nomination of Directors who are not "interested persons" of the Fund shall
be committed to the discretion of the Directors who are not interested persons
of the Fund.
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<PAGE>
With the approval of the vote of a majority of the entire Board of Directors
and of the Plan Directors of the Fund, the Distributor has entered into a
related agreement with Hanover Direct Advertising Company, Inc. ("Hanover
Direct"), a wholly owned subsidiary of Group, in an attempt to obtain cost
savings on the marketing of the Fund's shares. Hanover Direct will provide
services to the Distributor on behalf of the Fund and other affiliated
investment companies at standard industry rates, which includes commissions. The
amount of Hanover Direct's commissions over its cost of providing Fund marketing
will be credited to the Fund's distribution expenses and represent a savings on
marketing to the benefit of the Fund. To the extent Hanover Direct's costs
exceed such commissions, Hanover Direct will absorb any 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. Offsetting 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.
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 had any direct or indirect financial
interest in the operation of the Plan or any related agreement.
Of the amounts paid to the Distributor during the Fund's fiscal year ended
December 31, 1998, approximately $365 represented paid expenses incurred for
advertising, $74,233 for printing and mailing prospectuses and other information
to other than current shareholders, $267,824 for salaries of marketing and sales
personnel, $18,211 for payments to third parties who sold shares of the Fund and
provided certain services in connection therewith, and $62,797 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 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 shareholder 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 interpretation of
Federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
ALLOCATION OF BROKERAGE
The Fund seeks to obtain prompt execution of orders at the most favorable net
prices. Transactions are directed to brokers and dealers qualified to execute
orders or provide research, statistical or other services, and who may sell
shares of the Fund or other affiliated investment companies. The Investment
Manager may also allocate portfolio transactions to broker/dealers that remit a
portion of their commissions as a credit against the Custodian's charges. No
formula exists and no arrangement is made with or promised to any broker/dealer
which commits either a stated volume or percentage of brokerage business based
on research, statistical or other services furnished to the Investment Manager
or upon sale of Fund shares. Fund transactions in debt and over-the-counter
securities generally are with dealers acting as principals at net prices with
little or no brokerage costs. In certain circumstances, however, the Fund may
engage a broker as agent for a commission to effect transactions for such
securities. Purchases of securities from underwriters include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
include a spread between the bid and asked price. While the Investment Manager
generally seeks competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission 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 services
provided and payment may be made of 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 was adopted in 1975 and 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 for
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,
15
<PAGE>
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, and it may be that other affiliated
investment companies will derive benefit therefrom. 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 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 an unaffiliated firm on a fully disclosed basis. The Investment
Manager was, until March 31, 1999, authorized by the Board of Directors of the
Fund to place Fund brokerage through BBSI at its posted discount rates and
indirectly through BBSI's clearing firm. The Fund did not deal with BBSI in any
transaction in which BBSI acted 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 NASD.
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 has adopted procedures in
conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage
commissions paid to BBSI are reasonable and fair. Although BBSI's posted
discount rates may be lower than those charged by full cost brokers, such rates
may be higher than some other discount brokers and certain brokers may be
willing to do business at a lower commission rate on certain trades. The Fund's
Board of Directors has determined that portfolio transactions may be executed
through BBSI if, in the judgement of the Investment Manager, the use of BBSI is
likely to result in price and execution at least as favorable as those of other
qualified broker/dealers and if, in particular transactions, BBSI charges the
Fund a rate consistent with that charged to comparable unaffiliated customers in
similar transactions. Brokerage transactions with BBSI are also subject to such
fiduciary standards as may be imposed by applicable law. The Investment
Manager's fees under its agreement with the Fund are not reduced by reason of
any brokerage commissions paid to BBSI.
During the fiscal years ended December 31, 1996, 1997 and 1998, the Fund paid
total brokerage commissions of $446,414, $305,591, and $158,031 respectively.
For the fiscal year ended December 31, 1998, $108,846 in brokerage commissions
was allocated to broker/dealers that provided research, analytical, statistical,
and other services to the Fund, including third party research, market and
comparative industry information, portfolio analysis services, computerized
market data and other services. For the fiscal year ended December 31, 1998, $0
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 $39,674, $122,109 and $49,185 respectively, in brokerage commissions to
BBSI, which represented 8.89%, 39.96%, and 31.12% respectively, of the total
brokerage commissions paid by the Fund and 19.27%, 33.77%, and 46.00%
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 Group, the parent of
the Investment Manager, and may provide clearing services to BBSI.
16
<PAGE>
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.
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 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
property 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.
17
<PAGE>
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,
operations, and changes in net assets of the Fund. The Fund's fiscal year ends
on December 31.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, MO 64105
("Custodian") has been retained to act as Custodian of the Fund's investments
and may appoint one or more subcustodians. The Custodian also performs
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, MO 64141-6789, acts as
the Fund's Transfer and Dividend Disbursing Agent. The Distributor provides
certain shareholder administration services to the Fund pursuant to a
Shareholder Services Agreement and is reimbursed by the Fund the actual costs
incurred with respect thereto. For services performed pursuant to the
Shareholder Services Agreement, the Fund reimbursed the Distributor for the
fiscal years ended December 31, 1996, 1997, and 1998 approximately $61,675,
$59,403, and $62,140 respectively.
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.
18
<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 protec
tion 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.
19
<PAGE>
MIDAS SPECIAL EQUITIES, INC.
Part C. Other Information
Item 23. Exhibits
(a) Articles of Incorporation: Filed with the Securities and Exchange
Commission on April 30, 1998, Accession Number 0000788422-98-000005
(b) By-Laws as now in effect: Filed with the Securities and Exchange
Commission April 30, 1998, Accession Number 0000788422-98-000005
(c) Articles of Incorporation: Filed with the Securities and Exchange
Commission on April 30, 1998, Accession Number 0000788422-98-000005
By-Laws as now in effect: Filed with the Securities and Exchange
Commission April 30, 1998, Accession Number 0000788422-98-000005
(d) Form of Investment Management Agreement, filed with the
Securities and Exchange Commission on April 30, 1998,
accession number 0000788422-98-000005
(e) (1) Form of Distribution Agreement, filed with the
Securities and Exchange Commission on April 30,
1998, accession number 0000788422-98-000005.
(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 April 30,
1998, Accession number 0000788422-98-000005.
(f) not applicable.
(g) (1) Form of Custody and Investment Accounting
Agreement, filed with the Securities and Exchange
Commission on April 29, 1997, accession number
0000788422-97-000003
(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 April
30, 1998, accession number 0000788422-98-000005
(b) Form of Agency Agreement, filed with the
Securities and Exchange Commission on April 30,
1998, accession number 0000788422-98-000005
(c) Form of credit facilities agreement, filed with
the Securities and Exchange Commission on
April 30, 1998, accession number
0000788422-98-000005.
(d) Form of Securities Lending Authorization
Agreement, filed with the Securities and Exchange
Commission on April 30, 1998, accession number
0000788422-98-000005.
(e) Form of Segregated Account Procedural and
Safekeeping Agreement, filed with the Securities
and Exchange Commission on April 30, 1998,
accession number 0000788422-98-000005.
(i) Opinion and Consent of Counsel as to Legality of
Securities, filed with the Securities and Exhange
Commission on April 30, 1998, accession number
0000788422-98-000005
(j) (1) Accountants Consent: n/a.
(2) Opinion of Counsel with respect to eligibility for
effectiveness under paragraph (a) of Rule 485:
n/a.
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 CEF Advisers, Inc. (formerly Bull & Bear Advisers, Inc.)
("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.)("Winmill"), are also directors and officers of other Funds managed
by the Investment Manager ("Funds"). In addition, such officers are officers and
directors of Winmill and its other subsidiaries Investor Service Center, Inc.,
the Funds' distributor and a registered broker/dealer, Midas Management
Corporation and Rockwood Advisers, Inc., registered investment
<PAGE>
advisers. The principalbusiness of the Investment Manager, Midas Management
Corporation and Rockwood Advisers, Inc. since their founding has been to serve
as investment managers to registered investment companies. The Investment
Manager also serves as investment manager of Dollar Reserves, Inc.; Midas U.S.
and Overseas Fund Ltd.; Bexil U.S. Government Securities Fund, Inc., and Midas
Investors Ltd., 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 Midas Magic, Inc.
Item 27. Principal Underwriters
a) In addition to the Registrant, Investor Service Center, Inc. serves a
principal underwriter of Midas Investors Ltd., Dollar Reserves, Inc., Midas U.S.
and Overseas Fund Ltd., Global Income Fund, Tuxis Corporation, Midas Fund, Inc.,
and Midas Magic, Inc.
b) Service Center will serve as the Registrant's principal underwriter with
respect to Midas 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 with Position and Offices
Business Address Investor Service Center, Inc. with Registrant
- ------------------ ----------------------------- --------------------
Robert D. Anderson Vice Chairman and Director Vice Chairman
11 Hanover Square and Director
New York, NY 10005
Steven A. Landis Senior Vice President Senior Vice President
11 Hanover Square
New York, NY 10005
Thomas B. Winmill Chief Executive Officer, Chairman, Chief Executive
11 Hanover Square Director, General Counsel and Officer, President and
New York, NY 10005 President General Counsel
Deborah A. Sullivan Chief Compliance Officer, Chief Compliance Officer,
11 Hanover Square Secretary and Vice President Secretary and Vice President
New York, NY 10005
Irene K. Kawczynski Vice President None
11 Hanover Square
New York, NY 10005
Joseph Leung Chief Accounting Officer Chief Accounting Officer, Chief
11 Hanover Square and Treasurer Financial Officer and Treasurer
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 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 24th day of May, 1999.
MIDAS SPECIAL EQUITIES 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, Chief Executive May 24, 1999
- ----------------- Officer, President and
Thomas B. Winmill General Counsel
Joseph Leung Chief Accounting Officer, May 24, 1999
- ------------ Chief Financial Officer
Joseph Leung and Treasurer
Robert D. Anderson Director and Vice May 24, 1999
- ------------------ Chairman
Robert D. Anderson
Bruce B. Huber Director May 24, 1999
- --------------
Bruce B. Huber
James E. Hunt Director May 24, 1999
- -------------
James E. Hunt
John B. Russell Director May 24, 1999
- ---------------
John B. Russell
<PAGE>
EXHIBIT INDEX
PAGE
EXHIBIT NUMBER
(23)(n) Financial Data Schedule for the Fiscal Year ended December 31, 1998.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Bull &
Bear Special Equities Fund, Inc. Annual Report and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000788422
<NAME> Bull & Bear Special Equities Fund, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 32,990,587
<INVESTMENTS-AT-VALUE> 37,347,104
<RECEIVABLES> 1,683,326
<ASSETS-OTHER> 5,331
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,035,761
<PAYABLE-FOR-SECURITIES> 2,125,348
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 103,361
<TOTAL-LIABILITIES> 2,228,709
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36,415,087
<SHARES-COMMON-STOCK> 1,809,264
<SHARES-COMMON-PRIOR> 1,915,255
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,190,738)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,582,703
<NET-ASSETS> 36,807,052
<DIVIDEND-INCOME> 319,020
<INTEREST-INCOME> 38,998
<OTHER-INCOME> 0
<EXPENSES-NET> 1,446,361
<NET-INVESTMENT-INCOME> (1,088,343)
<REALIZED-GAINS-CURRENT> (627,899)
<APPREC-INCREASE-CURRENT> 11,710
<NET-CHANGE-FROM-OPS> (1,704,532)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 109,718
<NUMBER-OF-SHARES-REDEEMED> 359,846
<SHARES-REINVESTED> 144,137
<NET-CHANGE-IN-ASSETS> (7,966,349)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 64,122
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 367,537
<INTEREST-EXPENSE> 337,920
<GROSS-EXPENSE> 1,451,342
<AVERAGE-NET-ASSETS> 42,321,144
<PER-SHARE-NAV-BEGIN> 23.38
<PER-SHARE-NII> (.61)
<PER-SHARE-GAIN-APPREC> (.65)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.34
<EXPENSE-RATIO> 3.42
[AVG-DEBT-OUTSTANDING] 5,622,424
[AVG-DEBT-PER-SHARE] 3.14
</TABLE>