Filed with the Securities and Exchange Commission on April 29, 1997
1933 Act File No. 33-6898
1940 Act File No. 811-4741
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 20
and
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20
BULL & BEAR FUNDS I, 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:
William J. Maynard Stuart R. Coleman, Esq.
Bull & Bear Advisers, Inc. Stroock & Stroock & Lavan LLP
11 Hanover Square 180 Maiden Lane
New York, NY 10005 New York, NY 10038-4982
(Name and Address of Agent for Service
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of rule 485
X on May 1, 1997 pursuant to paragraph (b) of rule 485
60 days after filing pursuant to paragraph
(a) of rule 485
on (specify date) pursuant to paragraph (a) of rule 485
The Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The notice required by such Rule for its most
recent fiscal year was filed on February 20, 1997.
<PAGE>
BULL & BEAR FUNDS I, INC.
Contents of Registration Statement
This registration statement consists of the following papers and
documents.
Cover Sheet
Table of Contents
Cross Reference Sheet - Bull & Bear U.S. and Overseas Fund
Bull & Bear U.S. and Overseas Fund
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
BULL & BEAR FUNDS I, INC.
Bull & Bear U.S. and Overseas Fund
Cross Reference Sheet
PART A - PROSPECTUS
Part A. Item No. Prospectus Caption
1 Cover Page
2 Transaction and Operating Expenses
3 Financial Highlights
Performance Information
4 General
The Fund's Investment Program
Capital Stock
5 Investment Manager
Custodian and Transfer Agent
6 Cover Page
General
Investment Manager
Distributions and Taxes
Determination of Net Asset Value
Shareholder Services
Capital Stock
Back Cover Page
7 How to Purchase Shares
Shareholder Services
Determination of Net Asset Value
Distribution of Shares
Back Cover Page
8 How to Redeem Shares
Determination of Net Asset Value
9 Not Applicable
<PAGE>
BULL & BEAR FUNDS I, INC.
Bull & Bear U.S. and Overseas Fund
Cross Reference Sheet
PART B - STATEMENT OF ADDITIONAL INFORMATION
Statement of Additional
Part B. Item No. Information Caption
10 Cover Page
11 Table of Contents
12 Cover Page
13 The Fund's Investment Program
Investment Restrictions
Options, Futures and Forward Currency
Contract Strategies
Appendix
14 Officers and Directors
15 Officers and Directors
Investment Manager
16 Investment Manager
Investment Management Agreement
Distribution of Shares
Custodian, Transfer and Dividend
Disbursing Agent
Auditors
17 Allocation of Brokerage
18 Not Applicable
19 Purchase of Shares
Determination of Net Asset Value
20 Distributions and Taxes
21 Distribution of Shares
22 Performance Information
23 Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
The investment objective of Bull & Bear U.S. and Overseas Fund ("Fund") is
to seek 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. There is no limitation on the percentage or amount
of the Fund's assets which may be invested for growth of capital or income, and
at any time the investment emphasis may be placed solely or primarily on growth
of capital or solely or primarily on income. The Fund provides a means for you
to participate in investment opportunities around the world. There is no
assurance that the Fund will achieve its investment objective.
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NEWSPAPER LISTING. Shares of the Fund are sold at the net asset value per share
which is shown daily in the mutual fund section of newspapers under the "Bull &
Bear Group" heading.
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This prospectus contains information you should know about the Fund before
you invest. Please keep it for future reference. The Fund's Statement of
Additional Information, dated May 1, 1997, has been filed with the Securities
and Exchange Commission ("SEC") and is incorporated by reference in this
prospectus. It is available at no charge by calling 1-800-847-4200. The SEC
maintains a Web site (http://www.sec.gov) that contains the Fund's Statement of
Additional Information, material incorporated by reference, and other
information regarding registrants that file electronically with the SEC, as does
the Fund. Fund shares are not bank deposits or obligations of, or guaranteed or
endorsed by any bank or any affiliate of any bank, and are not Federally insured
by, obligations of or otherwise supported by the U.S. Government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
EXPENSE TABLES. The tables and example below are designed to help you understand
the various costs and expenses that you will bear directly or indirectly as an
investor in the Fund. A $2 monthly account fee is charged if your average
monthly balance is less than $500, unless you are in the Bull & Bear Automatic
Investment Program (see "How to Purchase Shares").
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases..................... NONE
Sales Load Imposed on Reinvested Dividends.......... NONE
Deferred Sales Load................................. NONE
Redemption Fee within 30 days of purchase........... 1.00%
Redemption Fee after 30 days of purchase............ NONE
Exchange Fees....................................... NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees................................ 0.99%
12b-1 Fees..................................... 1.00%
Other Expenses ................................ 1.21%
-----
Total Fund Operating Expenses.................. 3.20%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return and a redemption at the end of each time period.............
1 year 3 years 5 years 10 years
- ------ ------- ------- --------
$32 $99 $167 $350
The example set forth above assumes reinvestment of all dividends and
distributions and assumes a 5% annual rate of return as required by the SEC. THE
EXAMPLE IS AN ILLUSTRATION ONLY AND SHOULD NOT BE CONSIDERED AN INDICATION OF
PAST OR FUTURE RETURNS AND EXPENSES. Actual returns and expenses may be greater
or less than those shown. The percentages given for Annual Fund Operating
Expenses are based on the Fund's operating expenses and average daily net assets
during its fiscal year ended December 31, 1996. This fee is higher than that
paid by most investment companies. Long term shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.'s ("NASD") rules regarding
investment companies. "Other Expenses" includes amounts paid to the Fund's
Custodian and Transfer Agent and reimbursed to the Investment Manager and the
Distributor for certain administrative and shareholder services, and does not
include interest expense from the Fund's bank borrowing.
FINANCIAL HIGHLIGHTS are presented below for a share of capital stock
outstanding throughout each period. The following information is supplemental to
the Fund's financial statements and report thereon of Tait, Weller & Baker,
independent accountants, appearing in the December 31, 1996 Annual Report to
Shareholders and incorporated by reference in the Statement of Additional
Information. On February 26, 1992, the Fund adopted its present name and
investment objective. Prior thereto it was known as Bull & Bear Overseas Fund
Ltd. and sought to obtain the highest possible total return on its assets from
long term growth of capital and from income principally through a diversified
portfolio of marketable securities of non-U.S. companies.
YEARS ENDED DECEMBER 31,
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<TABLE>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- ---- ---- ---- -----
PER SHARE DATA1
Net asset value at beginning of period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$8.36 $7.08 $8.71 $7.59 $8.37 $7.62 $8.46 $8.03 $7.46 $ 7.50
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
Income from investment operations:
Net investment income (loss)... (0.24) (0.23) (0.13) (0.20) 0.04 0.07 (0.01) (0.10) 0 .03 0.01
Net realized and unrealized gain
on investments......................(l0.68 2.00 (1.01) 2.22 (0.25) 1.64 (0.72) 0.99 0.56 (0.05
---- ---- ------ ---- ------ ---- ------ ---- ---- -----
Total from investment operations 0.44 1.77 (1.14) 2.02 (0.21) 1.71 (0.73) 0.89 0.59 (0.04
---- ---- ------ ---- ------ ---- ------ ---- ---- -----
Less distributions:
Distributions from net investment
income ----- ----- ----- ----- ----- ----- ----- (0.02) (0.02) -----
Distributions from net realized
gains (0.89) (0.49) (0.49) (0.90) (0.57) (0.96) (0.11) (0.44) ----- -----
Net asset value at end of period.. $7.91 $8.36 $7.08 $8.71 $7.59 $8.37 $7.62 $8.46 $8.03 $7.46
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN...................... 5.34% 25.11% (13.12)% 26.71% 2.57% 22.55% (8.61)% 11.10% 8.00% 0.60%
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RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(000's omitted) $9,836 $9,808 $8,454 $12,250 $9,229 $1,275 $1,158 $1,149 $1,250 $1,042
Ratio of expenses to average
net assets (a)(b 3.20% 3.55% 3.53% 3.55% 3.56% 3.56% 3.50% 3.50% 3.02% 3.20%
Ratio of net investment income (loss)
average net assets(c)............. (2.74)% (2.85)% (1.65)% (2.36)% 0.51% 0.90% (0.09)% (1.29)% .44% .57%
Portfolio turnover rate........... 255% 214% 212% 182% 175% 208% 270% 178% 140% 18%
Average commission per share...... $0.0536
</TABLE>
2
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1 Per share net investment income (loss) and net realized and unrealized gain
(loss) on investments have been computed using the average number of shares
outstanding. These computations had no effect on net asset value per share. The
selected per share data has been restated to reflect the 100% stock dividend
effective February 24, 1992. *From commencement of operations, October 29, 1987.
(a) Ratios before the Investment Manager's reimbursement of expenses were 3.84%,
3.59%, 3.69%, 4.09%, 13.35%, 11.98%, 14.36%, and 10.13%, for the years ended
December 31, 1995, 1994, 1993, 1992, 1991, 1990, 1989, and 1988, respectively.
(b) Ratio after the reduction of custodian fees under a custodian agreement was
3.49% for 1995. Prior to 1995, such reductions were reflected in the expense
ratios. There were no custodian fee credits for 1996. (c) Ratios prior to
reimbursement by the Investment Manager were (3.14)%, (1.71)%, (2.50)%, (0.02)%,
(8.89)%, (8.57)%, (12.15)%, and (6.67)%, for the years ended December 31, 1995,
1994, 1993, 1992, 1991, 1990, 1989, and 1988, respec tively.
Information relating to outstanding debt during the fiscal periods shown below:
<TABLE>
Amount of Debt Average Amount of Average Number of Average Amount of
Fiscal Year Ended Outstanding at Debt Outstanding Shares Outstanding Debt Per Share
December 31 End of Period During the Period During the Period During the Period
<S> <C> <C> <C> <C> <C>
1996 $150,468 $8,535 1,198,191 $0.01
1995 0 47,539 1,182,551 0.04
1994 0 22,355 1,234,685 0.02
1993 0 22,097 1,211,741 0.02
</TABLE>
TABLE OF CONTENTS
Expense Tables..........................2 Distributions and Taxes............12
Financial Highlights....................2 Determination of Net Asset Value...13
General.................................3 Investment Manager.................13
The Fund's Investment Program...........4 Distribution of Shares.............14
How to Purchase Shares..................7 Performance Information............14
Shareholder Services....................8 Capital Stock......................14
How to Redeem Shares...................11 Custodian and Transfer Agent.......15
GENERAL
PURPOSES OF THE FUND. The Fund is for long term investors who wish to invest in
a professionally managed portfolio of securities of U.S. and foreign issuers
without having to become involved with the research, detailed bookkeeping, and
operational procedures normally associated with direct investment in such
securities. The Fund is not intended for investors who wish to speculate on
short term swings in U.S. and foreign securities markets. The value of the
Fund's portfolio securities will fluctuate based on global market conditions as
well as those of individual economies and markets. Consistent with a long term
investment approach, you should be able to maintain your investment in the Fund
during periods of adverse market conditions, and you should not rely on an
investment in the Fund for your short term financial needs.
GLOBAL INVESTING. At various times since the end of World War II, many foreign
economies have grown faster than the United States' economy, and the return on
investments in these countries has often exceeded the return on similar
investments in the United States. Moreover, there has normally been a wide and
largely unrelated variation in performance among global equity and fixed income
markets over this period. Although there can be no assurance that these
conditions will continue in the future or that the Fund's Investment Manager
will be able to identify and acquire investments in the faster growing economies
or markets, the Investment Manager believes that investment in the securities of
U.S. and foreign issuers offers potential for significant total return. The
Fund's investment program has been developed in light of these beliefs to
provide an opportunity for you to participate in a professionally managed,
global portfolio of securities.
PORTFOLIO MANAGEMENT. Investment decisions for the Fund have since February 20,
1997 been made by the Investment Policy Committee of Bull & Bear Advisers, Inc.
("Investment Manager").
3
<PAGE>
THE FUND'S INVESTMENT PROGRAM
INVESTMENT OBJECTIVE AND POLICIES. The Fund's investment objective, which may
not be changed without shareholder approval, is to seek 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. The Fund may invest in any type of security including common stocks,
convertible securities, preferred stocks, bonds, notes and other debt securities
(including Eurodollar securities), warrants, obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, or by foreign
governments and their political subdivisions, money market instruments such as
bankers' acceptances, commercial paper, short term corporate debt securities,
and repurchase agreements. The Fund may also engage in options, futures, and
forward currency transactions.
Factors considered by the Investment Manager in evaluating and selecting
securities include economic and socio-political considerations, the values of
individual securities relative to other investment alternatives, relative
currency values and trends, trends in the determinants of corporate profits, and
management capabilities and practices. Investments may be made for growth of
capital or for income or any combination thereof for the purpose of achieving a
higher overall total return.
The Fund may invest in companies based in (or governments of or within)
Europe, the Far East, Australia, the United States, Canada, South and Central
America, and such other areas and countries as the Investment Manager may
determine. Under normal market conditions, the Fund's assets will be invested in
at least three different countries, including the United States. For this
purpose, an investment is considered made in a country where the issuer of the
security has substantial activities and interests, taking into account such
factors as location of its assets, personnel, sales and earnings, principal
corporate office, principal trading market for its securities, and place of
organization. There are no limitations on the relative amounts of the Fund's
assets that may be invested in any one country.
FIXED INCOME INVESTING. When seeking income, the Fund will normally invest in
investment grade fixed income securities of varying maturities, depending on the
Investment Manager's evaluation of market patterns and trends. The Fund may
invest up to 35% of its total assets in fixed income securities rated below
investment grade, although it has no current intention of investing more than 5%
of its total assets in such securities during the coming year. The Fund may also
invest without limit in unrated securities if they 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. For temporary defensive purposes the Fund may invest all or a portion of
its assets in high 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 Services 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. 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 capital appreciation and depreciation 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.
OVERSEAS INVESTMENTS, MARKETS, AND RISK FACTORS. You should understand and
consider carefully the substan tial risks involved in foreign investing.
Investing in foreign securities, which are generally denominated in foreign
currencies, and utilization of forward contracts on foreign currencies involves
certain considerations comprising both risk and opportunity not typically
associated with investing in U.S. securities. These considerations include:
fluctuations in currency exchange rates; restrictions on foreign investment and
repatriation of capital; costs of converting foreign currency into U.S. dollars;
greater price volatility and trading illiquidity; less public information on
issuers of securities; difficulty in enforcing legal rights outside of the
United States; lack of uniform accounting, auditing and financial reporting
standards; the possible imposition of foreign taxes, exchange controls and
currency restrictions; and the possible greater political, economic and social
instability of developing as well as developed countries including without
limitation, nationalization, expropriation of assets, and war. These risks are
often heightened for investments in developing countries and emerging markets or
when the Fund's investments
4
<PAGE>
are concentrated in a small number of countries. In addition, because
transactional and custodial expenses for foreign securities are generally higher
than for domestic securities, the expense ratio of the Fund can be expected to
be higher than that of investment companies investing exclusively in domestic
securities. Securities may be purchased by the Fund on U.S. and foreign stock
exchanges or in the over-the-counter market. Foreign stock markets are generally
not as developed or efficient as those in the United States. In most foreign
markets volume and liquidity are less than in the United States and, at times,
volatility of price can be greater than in the United States. Commissions on
some foreign stock exchanges are higher than the typically negotiated
commissions on U.S. exchanges. There is generally less government supervision
and regulation of foreign stock exchanges, brokers and companies than in the
United States. If the Fund invests in countries in which settlement of transac
tions is subject to delay, the Fund's ability to purchase and sell portfolio
securities at the time it desires may be hampered. Delays in settlement
practices in foreign countries may also affect the Fund's liquidity, making it
more difficult to meet redemption requests, or requiring the Fund to maintain a
greater portion of its assets in money market instruments in order to meet such
requests. Some of the securities in which the Fund invests may not be widely
traded, and the Fund's position in such securities may be substantial in
relation to the market for such securities. Accordingly, it may be difficult for
the Fund to dispose of such securities at prevailing market prices in order to
meet redemption requests.
Investments in the equity and fixed income markets of developing countries
involve exposure to economic structures that are generally less diverse and
mature than in the United States and other developed countries, and to political
systems which may be less stable. A developing country can be considered to be a
country which is in the initial stages of its industrialization cycle. In the
past, markets of developing countries, also known as "emerging markets", have
been more volatile than the markets of developed countries; however, such
markets often have provided higher rates of return to investors, and these
characteristics can be expected to continue in the future. Because there is no
limit on the amount of the Fund's assets which may be invested in companies in,
or governments of, developing countries, an investment in the Fund may be
subject to risks greater than those of investment companies which invest solely
or primarily in the United States and other developed countries.
Since investment in foreign securities usually involves foreign currencies and
since the Fund may temporarily hold funds in bank deposits in foreign currencies
in order to facilitate portfolio transactions, the value of the assets of the
Fund as measured in U.S. dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations. For
example, if the value of the U.S. dollar decreases relative to a foreign
currency in which a Fund investment is denominated or which is temporarily held
by the Fund to facilitate portfolio transactions, the value of such Fund assets
(and thus the Fund's net asset value per share) will increase (all else being
equal). Conversely, an increase in the value of the U.S. dollar relative to such
a foreign currency will result in a decline in the value of such Fund assets
(and its net asset value per share). The Fund may incur additional costs in
connection with conversions of currencies and securities into U.S. dollars. The
Fund will conduct its foreign currency transactions either on a spot (i.e.,
cash) basis, or through entering into forward contracts. The Fund generally will
not enter into a forward currency contract with a term of greater than one year.
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 security constitutes
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 expense 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 securities.
HEDGING AND INCOME STRATEGIES. 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
5
<PAGE>
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 futures contracts on interest rates, stock and bond indexes
and foreign currencies, 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 specific contemplated 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, it 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 enter into a
forward contract if the amount of assets set aside to cover the contract would
impede portfolio management or its ability to meet redemption requests.
Strategies with options, financial futures, and forward contracts may be
limited by market conditions, regulatory limits and tax considerations, and the
Fund might not employ any of the strategies described above. There can be no
assurance that any strategy used will be successful. The loss from investing in
futures transactions is potentially unlimited. Options and futures may fail as
hedging techniques in cases where price movements of the securities underlying
the options and futures do not follow the price movements of the portfolio
securities subject to the hedge. Gains and losses on investments in options and
futures depend on the ability of the Investment Manager to predict correctly the
direction of stock prices, interest rates, and other economic factors. In
addition, the Fund will likely be unable to control losses by closing its
position where a liquid secondary market does not exist and there is no
assurance that a liquid secondary market for hedging instruments will always
exist. It also may be necessary to defer closing out hedged positions to avoid
adverse tax consequences. The correlation between hedging instruments and the
securities or sectors being hedged also may be imperfect. The percentage of the
Fund's assets segregated to cover its obligations under options, futures, or
forward contracts could impede effective portfolio management or the ability to
meet redemption or other current obligations. To the extent that the Fund enters
into futures contracts, options on futures contracts and options on foreign
currencies traded on a Commodity Futures Trading Commission ("CFTC") regulated
exchange, in each case that is not for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money") may not
exceed 5% of the liquidation value of the Fund's portfolio, after taking into
account unrealized profits and unrealized losses on any contracts to which the
Fund is a party.
PORTFOLIO TURNOVER. Given the Fund's investment objective, the portfolio
turnover rate will not be a limiting factor when the Investment Manager deems
changes in the portfolio appropriate, and the Fund's investment strategy
therefore includes the possibility of short term transactions. The Fund's
portfolio turnover rate will vary from year to year. In 1995 it was 214% and in
1996 it was 255%. Higher turnover may increase Fund brokerage costs and taxes
payable by shareholders. (See "Distributions and Taxes" and "Allocation of
Brokerage" in the Statement of Additional Information.)
OTHER INFORMATION. The Fund is "non-diversified," as defined in the Investment
Company Act of 1940 ("1940 Act"), but intends to continue to qualify as a
regulated investment company for Federal income tax purposes. This means, in
general, that more than 5% of the Fund's total assets may be invested in the
securities of one issuer (including a foreign government), but only if at the
close of each quarter of the Fund's taxable year, the aggregate amount of such
holdings does not exceed 50% of the value of its total assets and no more than
25% of the value of its total assets is invested in the securities of a single
issuer. To the extent that the Fund's portfolio at times may include the
securities of a smaller number of issuers than if it were diversified (as
defined in the 1940 Act), the Fund will at such times be subject to greater risk
with respect to its portfolio securities than an investment company that invests
in a broader range of securities in that changes in the financial condition or
market assessment of a single issuer may cause greater fluctuation in the Fund's
total return and the price of Fund shares. The Fund may borrow money from a bank
for temporary or emergency purposes or by engaging in reverse repurchase
agreements provided that borrowings do not exceed one-third of the current value
of the
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<PAGE>
Fund's assets taken at market value, less liabilities other than borrowings. The
Fund will not purchase securities for investment while bank borrowing equaling
5% or more of its total assets is outstanding. In addition to the Fund's
fundamental investment objective, the Fund has adopted certain fundamental
investment restrictions which may not be changed without shareholder approval.
These other fundamental restrictions are set forth in the Statement of
Additional Information. All other investment policies described herein, unless
otherwise stated, are not fundamental and may be changed by the Fund's Board of
Directors without shareholder action.
HOW TO PURCHASE SHARES
The Fund's shares are sold on a continuing basis at the net asset value per
share next determined after receipt and acceptance of the order by Investor
Service Center or its agent (see "Determination of Net Asset Value"). The
minimum initial investment is $1,000 for regular and Uniform Gifts/Transfers to
Minors Act custody accounts, and $500 for Bull & Bear retirement plans, which
include Individual Retirement Accounts ("IRAs"), SEP- IRAs, rollover IRAs,
profit sharing and money purchase plans, and 403(b) plan accounts. The minimum
subsequent investment is $100. The initial investment minimums are waived if you
elect to invest $100 or more each month in the Fund through the Bull & Bear
Automatic Investment Program (see "Additional Investments" below). The Fund in
its discretion may waive or lower the investment minimums.
INITIAL INVESTMENT. The Account Application that accompanies this prospectus
should be completed, signed and, with a check or other negotiable bank draft
drawn to the order of U.S. and Overseas Fund, mailed to Investor Service Center,
Box 419789, Kansas City, MO 64141-6789. Initial investments also may be made by
having your bank wire money, as set forth below, in order to avoid mail delays.
ADDITIONAL INVESTMENTS. Additional investments may be made conveniently at any
time by any one or more of the following methods:
o BULL & BEAR AUTOMATIC INVESTMENT PROGRAM. With the Bull & Bear Automatic
Investment Program, you can establish a convenient and affordable long term
investment program through one or more of the Plans explained below. Each Plan
is designed to facilitate an automatic monthly investment of $100 or more into
your Fund account.
The BULL & BEAR BANK TRANSFER PLAN lets you purchase Fund shares on a
certain day each month by transferring electronically a specified
dollar amount from your regular checking account, NOW account, or
bank money market deposit account.
In the BULL & BEAR SALARY INVESTING PLAN, part or all of your salary
may be invested electronically in Fund shares on each pay date,
depending upon your employer's direct deposit program.
The BULL & BEAR GOVERNMENT DIRECT DEPOSIT PLAN allows you to deposit
automatically part or all of certain U.S. Government payments into
your Fund account. Eligible U.S. Government payments include Social
Security, pension benefits, military or retirement benefits, salary,
veteran's benefits and most other recurring payments.
For more information concerning these Plans, or to request the necessary
authorization form(s), please call Investor Service Center, 1-800-847-4200. You
may modify or terminate the Bank Transfer Plan at any time by written notice
received at least 10 days prior to the scheduled investment date. To modify or
terminate the Salary Investing Plan or Government Direct Deposit Plan, you
should contact, respectively, your employer or the appropriate U.S. Government
agency. The Fund reserves the right to redeem any account if participation in
the Program is terminated and the account's value is less than $500. The Program
and the Plans do not assure a profit or protect against loss in a declining
market, and you should consider your ability to make purchases when prices are
low.
o CHECK. Mail a check or other negotiable bank draft ($100 minimum), drawn to
the order of U.S. and Overseas Fund, together with a Bull & Bear FastDeposit
form to Investor Service Center, Box 419789, Kansas City, MO 64141-6789. If
you do not use that form, please send a letter indicating the Fund and account
number to which the subsequent investment is to be credited, and name(s) of
the registered owner(s).
o ELECTRONIC FUNDS TRANSFER (EFT). With EFT, you may purchase additional Fund
shares quickly and simply, just by calling Investor Service Center,
1-800-847-4200. We will contact the bank you designate on your Account
Application or Authorization Form to arrange for the EFT, which is done
through the Automated Clearing House system, to your Fund account. For
requests received by 4 p.m., eastern time, the investment
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will be credited to your Fund account ordinarily within two business days.
There is a $100 minimum for each EFT investment. Your designated bank must be
an Automated Clearing House member and any subsequent changes in bank account
information must be submitted in writing with a voided check.
o FEDERAL FUNDS WIRE. You may wire money, by following the procedures set forth
below, to receive that day's net asset value per share.
INVESTING BY WIRE. For an initial investment by wire, you must first telephone
Investor Service Center, 1-800- 847-4200, 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 Bull & Bear U.S. and Overseas Fund
account number. You may then purchase shares by requesting your bank to transmit
immediately available funds ("Federal funds") by wire to: United Missouri Bank
NA, ABA #10-10-00695; for Account 98-7052-724-3; U.S. and Overseas Fund. Your
account number and name(s) must be specified in the wire as they are to appear
on the account registration. You should then enter your account number on your
completed Account Application and promptly forward it to Investor Service
Center, Box 419789, Kansas City, MO 64141-6789. This service is not available on
days when the Federal Reserve wire system is closed. Subsequent investments by
wire may be made at any time without having to call Investor Service Center by
simply following the same wiring procedures.
SHAREHOLDER ACCOUNTS. When you invest in the Fund, your account will be credited
with all full and fractional shares (to three decimal places), together with any
dividends and other distributions that are paid in additional shares (see
"Distributions and Taxes"). For joint tenant accounts, any account owner has the
authority to act on the account without notice to the other account owners.
Investor Service Center in its sole discretion and for its protection may, but
is not obligated to, require the written consent of all account owners of a
joint tenant account prior to acting upon the instructions of any account owner.
Stock certificates will be issued only for full shares when requested in
writing. In order to facilitate redemptions and exchanges and provide
safekeeping, we recommend that you do not request certificates. You will receive
transaction confirmations upon purchasing or selling shares, and quarterly
statements.
WHEN ORDERS ARE EFFECTIVE. The purchase price for Fund shares is the net asset
value of such shares next determined after receipt and acceptance by Investor
Service Center of a purchase order in proper form. All purchases are accepted
subject to collection at full face value in Federal funds. Checks must be drawn
in U.S. dollars on a U.S. bank. No third party checks will be accepted and the
Fund reserves the right to reject any order for any reason. Accounts are charged
$30 by the Transfer Agent for submitting checks for investment which are not
honored by the investor's bank.
SHAREHOLDER SERVICES
You may modify or terminate your participation in any of the Fund's special
plans or services at any time. Shares or cash should not be withdrawn from any
tax-advantaged retirement plan described below, however, without consulting a
tax adviser concerning possible adverse tax consequences. Additional information
regarding any of the following services is available from Investor Service
Center, 1-800-847-4200.
ELECTRONIC FUNDS TRANSFER (EFT). You automatically have the privilege of linking
your bank account designated on your Account Application or Authorization Form
and your Fund account through Bull & Bear's EFT service. With EFT, you use the
Automated Clearing House system to electronically transfer money quickly and
safely between your bank and Fund accounts. EFT may be used for purchasing and
redeeming Fund shares, direct deposit of dividends and other distributions into
your bank account, the Automatic Investment Program, the Systematic Withdrawal
Plan, and systematic IRA distributions. You may decline this privilege by
checking the indicated box on the Account Application. Any subsequent changes in
bank account information must be submitted in writing (and the Transfer Agent
may require the signature to be guaranteed), with a voided check.
DIVIDEND SWEEP PRIVILEGE. You may elect to have automatically invested either
all dividends or all dividends and other distributions paid by the Fund in any
other Bull & Bear Fund. Shares of the other Bull & Bear Fund will be purchased
at the current net asset value calculated on the payment date. For more
information concerning this privilege and the other Bull & Bear Funds, or to
request a Dividend Sweep Authorization Form, please call Investor Service
Center, 1-800-847-4200. You may cancel this privilege by mailing written
notification to Investor Service Center, Box 419789, Kansas City, MO 64141-6789.
To select a new Bull & Bear Fund after cancellation, you must submit a new
Authorization Form. Enrollment in or cancellation of this privilege is generally
effective three business days following receipt. This privilege is available
only for existing accounts and may not be used to open new accounts.
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SYSTEMATIC WITHDRAWAL PLAN. If you own Fund shares with a value of at least
$20,000 you may elect an automatic monthly or quarterly withdrawal of cash from
your Fund account in fixed or variable amounts, subject to a minimum amount of
$100. Under the Systematic Withdrawal Plan, all dividends and other
distributions, if any, are reinvested in the Fund.
ASSIGNMENT. Fund shares may be transferred to another owner. Instructions are
available from Investor Service Center, 1-800-847-4200.
EXCHANGE PRIVILEGE. You may exchange at least $500 worth of Fund shares for
shares of any Bull & Bear Fund listed below (provided the registration is
exactly the same, the shares may be sold in your state of residence, and the
exchange may otherwise legally be made).
To exchange shares, please call Investor Service Center toll-free at
1-800-847-4200 between 9 a.m. and 5 p.m. eastern time on any Fund business day
and provide the following information: account registration information
including address, account number and taxpayer identification number;
percentage, number, or dollar value of shares to be redeemed; name and, if
different, the account number of the Bull & Bear Fund to be purchased; and your
identity and telephone number. The other Bull & Bear Funds are:
o BULL & BEAR DOLLAR RESERVES is a high quality money market fund investing in
U.S. Government securities. Income is generally free from most state and local
income taxes. Free unlimited check writing ($250 minimum per check). Pays
monthly dividends.
o BULL & BEAR GOLD 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.
o BULL & BEAR SPECIAL EQUITIES FUND invests aggressively for maximum capital
appreciation.
Exchange requests received between 9 a.m. and 4 p.m. eastern time on any
business day of the Fund will be effected at the net asset values of the Fund
and the other Bull & Bear Fund as determined at the close of that business day.
Exchange requests received between 4 p.m. and 5 p.m. eastern time on any
business day of the Fund will be effected at the net asset values of the Fund
and the other Bull & Bear Fund as determined at the close of the next Fund
business day. The Fund is designed as a long term investment, and short term
trading is discouraged. Accordingly, if shares of the Fund held for 30 days or
less are redeemed or exchanged, the Fund will deduct a redemption fee equal to
one percent of the net asset value of shares redeemed or exchanged. The fee will
be retained by the Fund and used to offset the transaction costs that short term
trading imposes on the Fund and its shareholders. If an account contains shares
with different holding periods (i.e. some shares held 30 days or less, some
shares held 31 days or more), the shares with the longest holding period will be
redeemed first to determine if the Fund's redemption fee applies. If you are
unable to reach Investor Service Center at the above telephone number you may,
in emergencies, call 1-212-363-1100 or communicate by fax to 1-212- 363-1103 or
cable to the address BULLNBEAR NEWYORK. Exchanges may be difficult or impossible
to implement during periods of rapid changes in economic or market conditions.
Exchange privileges may be terminated or modified by the Fund without notice.
For tax purposes, an exchange is treated as a redemption and purchase of shares.
A free prospectus containing more complete information including charges,
expenses and performance, on any of the Funds listed above is available from
Investor Service Center, 1-800-847-4200. The other Fund's prospectus should be
read carefully before exchanging shares. You may give exchange instructions to
Investor Service Center by telephone without further documentation. If you have
requested share certificates, this procedure may be utilized only if, prior to
giving telephone instructions, you deliver the certificates to the Transfer
Agent for deposit into your account.
o BULL & BEAR SECURITIES (DISCOUNT BROKERAGE ACCOUNT) TRANSFERS. If you have an
account at Bull & Bear Securities, Inc., an affiliate of the Investment
Manager and a wholly owned subsidiary of Bull & Bear Group, Inc. offering
discount brokerage services, you may access your investment in any Bull & Bear
Fund to pay for securities purchased in your brokerage account and have
proceeds of securities sold in your brokerage account used to purchase shares
of any Bull & Bear Fund. You may request a Discount Brokerage Account
Application from Bull & Bear Securities, Inc. by calling toll-free at
1-800-262-5800.
TAX-ADVANTAGED RETIREMENT PLANS. These plans provide an opportunity to set aside
money for retirement in a tax-advantaged account in which earnings can be
compounded without incurring a tax liability until the money and earnings are
withdrawn. Contributions may be fully or partially deductible for Federal income
tax purposes
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as noted below. Information on any of these plans is available from Investor
Service Center by calling toll-free at 1-800-847-4200.
The minimum investment to establish a Bull & Bear IRA or other retirement plan
is $500. Minimum subsequent investments are $100. The initial investment
minimums are waived if you elect to invest $100 or more each month in the Fund
through the Bull & Bear Automatic Investment Program. There are no set-up fees
for any Bull & Bear Retirement Plans. Subject to change on 30 days' notice, the
plan custodian charges Bull & Bear IRAs a $10 annual fiduciary fee, $10 for each
distribution prior to age 59 1/2, and a $20 plan termination fee; however, the
annual fiduciary fee is waived if your IRA has assets of $10,000 or more or if
you invest regularly through the Bull & Bear Automatic Investment Program.
|X| IRA AND SEP-IRA ACCOUNTS. Anyone with earned income who is less than age 70
1/2at the end of the tax year, even if also participating in another type of
retirement plan, may establish an IRA and contribute each year up to $2,000 or
100% of earned income, whichever is less. For married couples, each spouse may
contribute up to $2,000 into an IRA regardless of whether each spouse has $2,000
of earned income, provided, however, that their aggregate earned income is at
least $4,000 (where such income is less than $4,000, special rules apply).
Employers may also make contributions to an IRA on behalf of an individual under
a Simplified Employee Pension Plan ("SEP") in any amount up to 15% of up to
$150,000 of compensation. Also, as of January 1, 1997, a small employer with 100
or fewer employees may establish a Savings Incentive Match Plan for Employees of
Small Employers ("SIMPLE"), which will allow certain eligible employees to make
elective contributions to a SIMPLE IRA of up to $6,000 per year and will require
the employer to make either matching or non-matching contributions.
Generally, taxpayers may contribute to an IRA during the tax year and through
the next year until the income tax return for that year is due, without regard
to extensions. Thus, most individuals may contribute for the 1997 tax year
through April 15, 1998 and for the 1998 tax year from January 1, 1998 through
April 15, 1999.
BULL & BEAR NO-FEE IRA(R). The $10 annual fiduciary fee is waived if your Bull
& Bear IRA or Bull & Bear SEP- IRA has assets of $10,000 or more or if you
invest through the Bull & Bear Automatic Investment Program.
DEDUCTIBILITY. IRA contributions are fully deductible for many taxpayers. For
a taxpayer who is an active participant in an employer-maintained retirement
plan (or whose spouse is), a portion of IRA contributions is deductible if
adjusted gross income (before the IRA deductions) is $40,000-$50,000 (if
married) and $25,000- $35,000 (if single). Only IRA contributions by a
taxpayer who is an active participant in an employer-main tained retirement
plan (or whose spouse is) and has adjusted gross income of more than $50,000
(if married) and $35,000 (if single) will not be deductible at all. An
eligible individual may establish a Bull & Bear IRA under the prototype plan
available through the Fund, even though such individual or spouse actively
participates in an employer-maintained retirement plan.
o IRA TRANSFER AND ROLLOVER ACCOUNTS. Special forms are available from Investor
Service Center, 1-800- 847-4200, which make it easy to transfer or roll over
IRA assets to a Bull & Bear IRA. An IRA may be transferred from one financial
institution to another without adverse tax consequences. Similarly, no taxes
need be paid on a lump-sum distribution that you may receive as a payment from
a qualified pension or profit sharing plan due to retirement, job termination
or termination of the plan, so long as the assets are put into an IRA Rollover
account within 60 days of the receipt of the payment. Withholding for Federal
income tax purposes is required at the rate of 20% for "eligible rollover
distributions" made from any retirement plan (other than an IRA) that are not
directly transferred to an "eligible retirement plan," such as a Bull & Bear
Rollover Account.
o PROFIT SHARING AND MONEY PURCHASE PLANS. These Plans provide an opportunity to
accumulate earnings on a tax-deferred basis by permitting corporations,
self-employed individuals (including partners) and their employees generally
to contribute (and deduct) up to $30,000 annually or, if less, 25% (15% for
profit sharing plans) of compensation or self-employment earnings of up to
$150,000. Corporations and partnerships, as well as all self-employed persons,
are eligible to establish these Plans. In addition, a person who is both
salaried and self-employed, such as a college professor who serves as a
consultant, may adopt these retirement plans based on self-employment
earnings.
|X| SECTION 403(B) ACCOUNTS. Section 403(b)(7) of the Internal Revenue
Code of 1986, as amended ("Code"), permits the establishment of
custodial accounts on behalf of employees of public school systems
and certain tax-exempt organizations. A participant in such a plan
does not pay taxes on any contributions made by the
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participant's employer to the participant's account pursuant to a
salary reduction agreement, up to a maximum amount, or "exclusion
allowance." The exclusion allowance is generally computed by
multiplying the participant's years of service times 20% of the
participant's compensation included in gross income received from the
employer (reduced by any amount previously contributed by the
employer to any 403(b) account for the benefit of the participant and
excluded from the participant's gross income). However, the exclusion
allow ance may not exceed the lesser of 25% of the participant's
compensation (limited as above) or $30,000. Contributions and
subsequent earnings thereon are not taxable until withdrawn, when
they are received as ordinary income.
HOW TO REDEEM SHARES
Generally, you may redeem by any of the methods explained below. Requests for
redemption should include the following information: your account registration
information including address, account number and taxpayer identification
number; dollar value, number or percentage of shares to be redeemed; how and to
where the proceeds are to be sent; if applicable, the bank's name, address, ABA
routing number, bank account registration and account number, and a contact
person's name and telephone number; and your daytime telephone number.
BY MAIL. You may request that the Fund redeem any amount of shares by submitting
a written request to Investor Service Center, Box 419789, Kansas City, MO
64141-6789, signed by the record owner(s). If the written request is sent to the
Fund, it will be forwarded to the above address. If stock certificates have been
issued for shares being redeemed, they must accompany the written request.
BY TELEPHONE. You may telephone Investor Service Center, 1-800-847-4200 to
expedite redemption of Fund shares if share certificates have not been issued.
You may redeem as little as $250 worth of shares by requesting Bull & Bear's
Electronic Funds Transfer (EFT) service. With EFT, you can redeem Fund shares
quickly and conveniently because Investor Service Center will contact the bank
designated on your Account Application or Authorization Form to arrange for the
electronic transfer of your redemption proceeds (through the Automated Clearing
House system) to your bank account. EFT proceeds are ordinarily available in
your bank account within two business days.
If you are redeeming $1,000 or more worth of shares, you may request that the
proceeds be mailed to your address of record or mailed or wired to your
authorized bank.
Telephone requests received on Fund business days by 4 p.m. eastern time will
be redeemed from your account that day, and if after, on the next Fund business
day. Any subsequent changes in bank account information must be submitted in
writing, signature guaranteed, with a voided check. If you are unable to reach
Investor Service Center at the above telephone number you may, in emergencies,
call 1-212-363-1100 or communicate by fax to 1-212-363-1103 or cable to the
address BULLNBEAR NEWYORK. Redemptions by telephone may be difficult or
impossible to implement during periods of rapid changes in economic or market
conditions.
CHECK WRITING ACCESS. You may exchange a minimum of $500 at any time by
toll-free telephone call into Bull & Bear Dollar Reserves, Bull & Bear's money
market fund, offering free personalized checks, a $250 check writing minimum
(there is no check writing minimum for Bull & Bear Securities Performance
Plus(R) discount brokerage accounts), and no limit on the number of checks that
may be written. A signature card, which should be submitted for the check
writing privilege, and a free Bull & Bear Dollar Reserves prospectus containing
more complete information including yield, charges and expenses is available
from Investor Service Center, 1-800-847- 4200. Please read the prospectus
carefully before exchanging.
REDEMPTION PRICE AND FEES. The redemption price is the net asset value per share
next determined after receipt of the redemption request in proper form. The Fund
is designed as a long term investment, and short term trading is discouraged.
Accordingly, if shares of the Fund held for 30 days or less are redeemed or
exchanged, the Fund will deduct a redemption fee equal to one percent of the net
asset value of shares redeemed or exchanged. The fee will be retained by the
Fund and used to offset the transaction costs that short term trading imposes on
the Fund and its shareholders. If an account contains shares with different
holding periods (i.e. some shares held 30 days or less, some shares held 31 days
or more), the shares with the longest holding period will be redeemed first to
determine if the Fund's redemption fee applies. Shares acquired through the
Dividend Sweep Privilege and the reinvestment of dividends and capital gains or
redeemed under the Systematic Withdrawal Plan are exempt from the redemption
fee. Registered broker/dealers, investment advisers, banks, and insurance
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companies may open accounts and redeem shares by telephone or wire and may
impose a charge for handling purchases and redemptions when acting on behalf of
others.
REDEMPTION PAYMENT. Payment for shares redeemed will ordinarily be made within
seven days after receipt of a redemption request in proper form. The right of
redemption may not be suspended, or date of payment delayed more than seven
days, except for any period (i) when the New York Stock Exchange is closed or
trading thereon is restricted as determined by the SEC; (ii) under emergency
circumstances as determined by the SEC that make it not reasonably practicable
for the Fund to dispose of securities owned by it or fairly to determine the
value of its assets; or (iii) as the SEC may otherwise permit. The mailing of
proceeds on redemption requests involving any shares purchased by personal,
corporate, or government check or EFT transfer is generally subject to a fifteen
business day delay to allow the check or transfer to clear. The fifteen day
clearing period does not affect the trade date on which a purchase or redemption
order is priced, or any dividends and capital gain distributions to which you
may be entitled through the date of redemption. The clearing period does not
apply to purchases made by wire. Due to the relatively higher cost of
maintaining small accounts, the Fund reserves the right, upon 45 days' notice,
to redeem any account, other than IRA and other Bull & Bear prototype retirement
plan accounts, worth less than $500 except if solely from market action, unless
an investment is made to restore the minimum value.
TELEPHONE PRIVILEGES. You automatically have all telephone privileges to, among
other things, authorize purchases, redemptions and exchanges, with EFT or by
other means, unless declined on the Account Application or otherwise in writing.
Neither the Fund nor Investor Service Center shall be liable for any loss or
damage for acting in good faith upon instructions received by telephone and
believed to be genuine. The Fund employs reasonable procedures to confirm that
instructions communicated by telephone are genuine and if it does not, it may be
liable for losses due to unauthorized or fraudulent transactions. These
procedures include requiring personal identification prior to acting upon
telephone instructions, providing written confirmation of such transactions, and
recording telephone conversations. The Fund may modify or terminate any
telephone privileges or shareholder services (except as noted) at any time
without notice.
SIGNATURE GUARANTEES. No signature guarantees are required when payment is to be
made to you at your address of record. If the redemption proceeds are to be paid
to a non-shareholder of record, or to an address other than your address of
record, or the shares are to be assigned, the Transfer Agent may require that
your signature be guaranteed by an entity acceptable to the Transfer Agent, such
as a commercial bank or trust company or member firm of a national securities
exchange or of the NASD. A notary public may not guarantee signatures. The
Transfer Agent may require further documentation, and may restrict the mailing
of redemption proceeds to your address of record within 60 days of such address
being changed unless you provide a signature guarantee as described above.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. The Fund pays dividends annually to its shareholders from its net
investment income, if any. The Fund also makes an annual distribution to its
shareholders out of any net realized capital gains, after offsetting any capital
loss carryover, and any net realized gains from foreign currency transactions.
Dividends and other distributions, if any, are declared and payable to
shareholders of record on a date in December of each year. Such distributions
may be paid in January of the following year, in which event they will be deemed
received by the shareholders on the preceding December 31 for tax purposes. The
Fund may also make an additional distribution following the end of its fiscal
year out of any undistributed income and capital gains.
Dividends and other distributions are paid in additional Fund shares or shares
of another Bull & Bear Fund pursuant to the Dividend Sweep Privilege, unless you
elect to receive cash on the Account Application or so elect subsequently by
calling Investor Service Center, 1-800-847-4200. For Federal income tax
purposes, dividends and other distributions are treated in the same manner
whether received in additional shares of the Fund or another Bull & Bear Fund or
in cash. Any election will remain in effect until you notify Investor Service
Center to the contrary.
TAXES. The Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of Federal income
tax on that part of its investment company taxable income (generally consisting
of net investment income, net short term capital gains, and net gains from
certain foreign currency transactions) and net capital gain (the excess of net
long term capital gain over net short term capital loss) that is distributed to
its shareholders.
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Dividends paid by the Fund from its investment company taxable income (whether
paid in cash or in additional shares) generally are taxable to its shareholders,
other than shareholders that are not subject to tax on their income, as ordinary
income to the extent of the Fund's earnings and profits; a portion of those
dividends may be eligible for the corporate dividends-received deduction.
Distributions by the Fund of its net capital gain (whether paid in cash or in
additional shares) when designated as such by the Fund, are taxable to its
shareholders as long term capital gains, regardless of how long they have held
their Fund shares. The Fund notifies its shareholders following the end of each
calendar year of the amounts of dividends and capital gain distributions paid
(or deemed paid) that year and of any portion of those dividends that qualifies
for the corporate dividends-received deduction.
Any dividend or other distribution paid by the Fund will reduce the net asset
value of Fund shares by the amount of the distribution. Furthermore, such
distribution, although similar in effect to a return of capital, will be subject
to tax.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate also is required from
dividends and capital gain distributions payable to such shareholders who are
otherwise subject to backup withholding.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Fund and its shareholders; see the
Statement of Additional Information for a further discussion. Since other
Federal, state and local tax considerations may apply, you should consult your
tax adviser.
DETERMINATION OF NET ASSET VALUE
The value of a share of the Fund is based on the value of its net assets. The
Fund's net assets are the total of its investments and all other assets minus
any liabilities. The value of one share is determined by dividing the net assets
by the total number of shares outstanding. This is referred to as "net asset
value per share" and is determined as of the close of regular trading on the New
York Stock Exchange (currently, 4 p.m. eastern time, unless weather, equipment
failure or other factors contribute to an earlier closing) each business day of
the Fund. A business day of the Fund is any day on which the New York Stock
Exchange is open for trading. The following are not business days of the Fund:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities and other assets of the Fund are valued primarily on the
basis of market quotations, if readily available. Foreign securities are valued
on the basis of quotations from a primary market in which they are traded and
are translated from the local currency into U.S. dollars using current exchange
rates. Securities and other assets for which quotations are not readily
available will be valued at fair value as determined in good faith by or under
the direction of the Board of Directors.
INVESTMENT MANAGER
Bull & Bear Advisers, Inc. ("Investment Manager") acts as general manager of
the Fund, being responsible for the various functions assumed by it, including
regularly furnishing advice with respect to portfolio transactions. The
Investment Manager manages the investment and reinvestment of the Fund's assets,
subject to the control and final direction of the Board of Directors. The
Investment Manager is authorized to place portfolio transactions with Bull &
Bear Securities, Inc., an affiliate of the Investment Manager, and may allocate
brokerage transactions by taking into account the sales of shares of the Fund
and other affiliated investment companies. The Investment Manager may also
allocate transactions to broker/dealers that remit a portion of their
commissions as a credit against the Fund's expenses.
For its services, the Investment Manager receives a fee, payable monthly,
based on the average daily net assets of the Fund, at the annual rate of 1% on
the first $10 million, 7/8 of 1% over $10 million up to $30 million, 3/4 of 1%
over $30 million up to $150 million, 5/8 of 1% over $150 million up to $500
million, and 1/2 of 1% over $500 million. From time to time, the Investment
Manager may waive all or part of this fee or reimburse the Fund to improve the
Fund's total return. During the fiscal year ended December 31, 1996, investment
management fees paid by the Fund represented approximately 0.99% of average
daily net assets net of reimbursement pursuant to the expense guaranty of the
Investment Manager. The Investment Manager provides certain administrative
services to the Fund at cost. The Investment Manager is a wholly owned
subsidiary of Bull & Bear Group, Inc. ("Group"). Group, a publicly owned company
whose securities are listed on the Nasdaq Stock Market, is a New York based
manager of mutual funds and discount brokerage services. Bassett S. Winmill may
be
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deemed a controlling person of Group and, therefore, may be deemed a controlling
person of the Investment Manager.
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement, Investor Service Center, Inc., 11
Hanover Square, New York, NY 10005 ("Distributor"), acts as the Fund's principal
agent for the sale of its shares. The Investment Manager is an affiliate of the
Distributor. The Fund has also adopted a plan of distribution ("Plan") pursuant
to Rule 12b-1 under the 1940 Act. Pursuant to the Plan, the Fund pays the
Distributor monthly a distribution fee in an amount of three-quarters of one
percent per annum of the Fund's average daily net assets and a service fee in an
amount of one-quarter of one percent per annum of the Fund's average daily net
assets. The service fee portion is intended to cover personal services provided
to Fund shareholders and maintenance of shareholder accounts. The distribution
fee portion is intended to cover all other activities and expenses primarily
intended to result in the sale of the Fund's shares. These fees may be retained
by the Distributor or passed through to brokers, banks and others who provide
services to their customers who are Fund shareholders or to the Distributor. The
Fund will pay the fees to the Distributor until either the Plan is terminated or
not renewed. In that event, the Distributor's expenses in excess of fees
received or accrued through the termination day will be the Distributor's sole
responsibility and not obligations of the Fund. During the period they are in
effect, the Distribution Agreement and Plan obligate the Fund to pay fees to the
Distributor as compensation for its service and distribution activities. If the
Distributor's expenses exceed the fees, the Fund will not be obligated to pay
any additional amount to the Distributor. If the Distributor's expenses are less
than such fees, it may realize a profit. Certain other advertising and sales
materials may be prepared to promote the sale of Fund shares and shares of one
or more other affiliated investment companies. In such cases, the expenses will
be allocated among the Funds involved based on the inquiries resulting from the
materials or other factors deemed appropriate by the Board of Directors. The
costs of personnel and facilities of the Distributor to respond to inquiries by
shareholders and prospective shareholders will also be allocated based on such
relative inquiries or other factors. There is no certainty that the allocation
of any of the foregoing expenses will precisely allocate to the Fund costs
commensurate with the benefits it receives, and it may be that the other
affiliated investment companies and Bull & Bear Securities, Inc. will benefit
therefrom.
PERFORMANCE INFORMATION
Advertisements and other sales literature for the Fund may refer to the Fund's
"average annual total return" and "cumulative total return." All such quotations
are based upon historical earnings and are not intended to indicate future
performance. The investment return on and principal value of an investment in
the Fund will fluctuate, so that an investor's shares when redeemed may be worth
more or less than their original cost. In addition to advertising average annual
total return and cumulative total return, comparative performance information
may be used from time to time in advertising the Fund's shares, including data
from Morningstar, Inc., Lipper Analytical Services, Inc. and other sources.
"Average annual total return" is the average annual compounded rate of return on
a hypothetical $1,000 investment made at the beginning of the advertised period.
In calculating average annual total return, all dividends and other
distributions are assumed to be reinvested. "Cumulative total return" is
calculated by subtracting a hypothetical $1,000 payment to the Fund from the
ending redeemable value of such payment (at the end of the relevant advertised
period), dividing such difference by $1,000 and multiplying the quotient by 100.
In calculating ending redeemable value, all dividends and other distributions
are assumed to be reinvested in additional Fund shares. Although the Fund
imposes a 1% redemption fee on the redemption of shares held for 30 days or
less, all of the periods for which performance is quoted are longer than 30
days, and therefore the 1% fee is not reflected in the performance calculations.
In addition, there is no sales charge upon reinvestment of dividends or other
distributions. Additional information regarding the Fund's performance is
available in its Annual Report to Shareholders, which is available at no charge
upon request to Investor Service Center, 1-800-847-4200.
CAPITAL STOCK
The Fund is a series of Bull & Bear Funds I, Inc. ("Corporation"), a Maryland
corporation organized in 1986. Prior to September 23, 1993, the Corporation
operated under the name Bull & Bear U.S. and Overseas Fund Ltd. The Corporation
is an open-end management investment company and is authorized to issue up to
1,000,000,000 shares ($.01 par value). The Board of Directors has designated
250,000,000 shares as shares of Bull & Bear U.S. and Overseas Fund. The
Corporation's Board of Directors may establish one or more other series,
although it has no current intention of doing so.
14
<PAGE>
The Fund's stock is freely assignable by way of pledge (as, for example, for
collateral purposes), gift, settlement of an estate and also by an investor to
another investor. Each share has equal dividend, voting, liquidation and
redemption rights with every other share. The shares have no preemptive,
conversion or cumulative voting rights and they are not subject to further call
or assessment.
The Fund's By-Laws provide that there will be no annual meeting of
shareholders in any year except as required by law. In practical effect, this
means that the Fund will not hold an annual meeting of shareholders in years in
which the only matters which would be submitted to shareholders for their
approval are the election of Directors and ratification of the Directors'
selection of accountants, although holders of 25% of the Fund's shares may call
a meeting at any time. There will normally be no meetings of shareholders for
the purpose of electing Directors unless fewer than a majority of the Directors
holding office have been elected by shareholders. Shareholder meetings will be
held in years in which shareholder vote on the Fund's investment management
agreement, plan of distribution, or fundamental investment objective, policies
or restrictions is required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02109, acts as
custodian of the Fund's assets, performs certain accounting services for the
Fund, and may appoint one or more subcustodians provided such subcustodianship
is in compliance with the rules and regulations promulgated under the 1940 Act.
The Fund may maintain a portion of its assets in foreign countries pursuant to
such subcustodianships and related foreign depositories. Utilization by the Fund
of such foreign custodial arrangements and depositories will increase the Fund's
expenses.
The Fund's transfer and dividend disbursing agent is DST Systems, Inc., Box
419789, Kansas City, MO 64141-6789. The Distributor provides certain shareholder
administration services to the Fund and is reimbursed its cost by the Fund. The
costs of facilities, personnel and other related expenses are allocated among
the Fund and other affiliated investment companies based on the relative number
of inquiries and other factors. The Fund may also enter into agreements with
brokers, banks and others who may perform on behalf of their customers certain
shareholder services not otherwise provided by the Transfer Agent or the
Distributor.
15
<PAGE>
[Left Side of Back Cover Page]
U.S. AND
OVERSEAS
FUND
- -----------------------------------------------------
1-800-847-4200
CALL TOLL-FREE FOR FUND PERFORMANCE, TELEPHONE
PURCHASES, EXCHANGES AMONG THE BULL & BEAR
FUNDS, AND TO OBTAIN INFORMATION CONCERNING
YOUR ACCOUNT. OR, ACCESS THE FUND ON THE WEB
AT HTTP://WWW.BULL-AND-BEAR.COM
11 HANOVER SQUARE
NEW YORK, NY 10005
Printed on recycled paper.
[Right Side of Back Cover Page]
U.S. AND
OVERSEAS
FUND
- ---------------------------------------------------------
INVESTING WORLDWIDE
FOR THE HIGHEST POSSIBLE
TOTAL RETURN
ELECTRONIC FUNDS TRANSFERS
AUTOMATIC INVESTMENT PROGRAM
RETIREMENT PLANS: IRA, SEP-IRA,
QUALIFIED PROFIT SHARING/MONEY
PURCHASE, 403(B), KEOGH
- ---------------------------------------------------------
PROSPECTUS
MAY 1, 1997
- ---------------------------------------------------------
MINIMUM INITIAL INVESTMENT:
REGULAR ACCOUNTS, $1,000;
IRAS, $500; AUTOMATIC
INVESTMENT PROGRAMS, $100
MINIMUM SUBSEQUENT INVESTMENTS: $100
BULL
&
BEAR-----------------------------------------
PERFORMANCE DRIVEN(R)
16
<PAGE>
ACCOUNT APPLICATION
You can use this Account Application to open a regular Bull & Bear Mutual Fund
Account.
First type in your name, address, and other requested information in the blank
text boxes, then print out on your printer. Sign and mail the completed Account
Application, along with your check drawn to the order of the Bull & Bear Fund
you have chosen, to: INVESTOR SERVICE CENTER, BOX 419789, KANSAS CITY, MO
64141-6789.
For IRA Account Applications with The Bull & Bear Mutual Funds, call toll-free
1-888-503-FUND.
If you need assistance in completing this Account Application, please call
1-800-847-4200.
1/ FUND(S) CHOSEN AND AMOUNT INVESTED ($1,000 MINIMUM PER FUND): Note: The
$1,000 minimum initial investment is waived if you elect to invest $100 or more
each month through the Bull & Bear Bank Transfer Plan, the Bull & Bear Salary
Investing Plan and/or the Bull & Bear Government Direct Deposit Plan (see
Section 4 below).
BULL & BEAR DOLLAR RESERVES $ ________________________________________________
BULL & BEAR SPECIAL EQUITIES FUND $ ____________________________________________
BULL & BEAR GOLD INVESTORS $ __________________________________________________
BULL & BEAR U.S. AND OVERSEAS FUND $ ___________________________________________
BY CHECK -- Please enclose your check for the total drawn to the order of the
Bull & Bear Fund you have chosen with this Account Application.
BY WIRE -- Funds were wired on ___________________ Date account number was
assigned (see instructions) ____________________________________________________
BY EXCHANGE -- To exchange into another Bull & Bear Fund (no Account Application
needed) just call 1-800-847-4200 or go back to the home page after filling out
this application and press the TRANSACT BUSINESS NOW button to go to our
transaction site.
2/ REGISTRATION (PLEASE PRINT)
INDIVIDUAL:
First Name ___________________________________________________________________
Middle Initial ________________________________________________________________
Last Name _____________________________________________________________________
Social Security Number ________________________________________________________
E-mail Address ________________________________________________________________
<PAGE>
JOINT TENANT (IF ANY):
First Name ___________________________________________________________________
Middle Initial _______________________________________________________________
Last Name ____________________________________________________________________
Social Security Number _______________________________________________________
E-mail Address _______________________________________________________________
GIFT/TRANSFER TO A MINOR:
Name of Custodian (only one) as Custodian for
- -----------------------------
Name of Minor (only one)under the ___________________________________________
Custodian's State of Residence Uniform Gifts/Transfers to Minors
Act.
Minor's Social Security Number _______ _____ _______
Minor's Date of Birth _______________________
CORPORATIONS, PARTNERSHIP, TRUSTS AND OTHERS:
Name of Corporation, Partnership, or other Organization
- ------------------------------------------
Individual(s) Authorized to Act for the Corporation, Partnership,
or other
Organization ____________________________________________________________
Taxpayer Identification Number
- --------------------------------------
Name of Trustee(s) ________________________________________________________
Date of Trust Instrument
- ------------------------------------------
3/ MAILING ADDRESS, TELEPHONE NUMBER, AND CITIZENSHIP:
Street __________________________________________
City __________________________________________
State _______________
Zip _________________
Daytime Telephone Number ______________________________________
Owner - Citizen of: ( ) U.S. ( ) Other __________________________
(Please indicate and submit Form W-8):
Joint Owner - Citizen of: ( ) U.S. ( ) Other __________________________
- ------------------------
(Please indicate and submit Form W-8):
If you have another Bull & Bear Fund account, please indicate the following:
Name of Fund: ______________________________________________
Account Number: _____________________________________________
Your Bull & Bear Fund accounts will appear on a combined statement unless
declined by checking box .
4/ BULL & BEAR AUTOMATIC INVESTMENT PROGRAM
( ) BANK TRANSFER PLAN -- Automatically purchase shares by
<PAGE>
transferring the dollar amount you specify from your regular checking account,
NOW account, or bank money market deposit account. Please attach a voided bank
account check.
Fund Name ________________________________________________
Amount $($100 minimum) ___________________________
Schedule: ( )Monthly ( )Quarterly
Day of Month: ( )10th ( )15th ( )20th
( ) SALARY INVESTING PLAN - The enrollment form will be sent to the above
address or call 1-800-847-4200 to have form sent to your place of employment.
( ) GOVERNMENT DIRECT DEPOSIT PLAN - Your request will be processed and you will
receive the enrollmentform.
5/ DISTRIBUTIONS
If no box is checked, the Automatic Compounding Option will be assigned to
reinvest all dividends and distributions in your account to increase the shares
you own.
AUTOMATIC COMPOUNDING OPTION -
( ) Dividends and distributions reinvested in additional
shares.
PAYMENT OPTION -
( ) Dividends in cash, distributions reinvested.
( ) Dividends and distributions in cash.
SYSTEMATIC WITHDRAWAL PLAN -
( )Please send me a check monthly for $($100 minimum).
Available only for accounts of $20,000 or more.
6/ INVESTMENTS, EXCHANGES, AND REDEMPTIONS BY TELEPHONE Shareholders
automatically enjoy the privilege of calling 1-800- 847-4200 to purchase
additional shares of the Fund, exchange their investment among eligible Bull &
Bear Funds, or to expedite a redemption and have the proceeds sent directly to
their address or to their bank account, unless declined by checking the
following box. The Bull & Bear link with your bank account offers flexible
access to your money. Transfers occur only when you initiate them and may be
made by either bank wire or bank clearing house transfer with Bull & Bear's
Electronic Funds Transfer service.
TO ESTABLISH THE BULL & BEAR LINK TO YOUR BANK, PLEASE ATTACH A VOIDED CHECK
FROM YOUR BANK ACCOUNT. One common name must appear on your Bull & Bear Fund
account and bank account.
7/ SIGNATURE AND CERTIFICATION TO AVOID BACKUP WITHHOLDING "I certify that I
have received and read the prospectus for the
<PAGE>
Fund in which I am investing, agree to its terms, and have the legal capacity to
purchase its shares. I understand all telephone conversations with Investor
Service Center, Inc. ("ISC") representatives are recorded and hereby consent to
such recording. I agree that neither the Fund nor ISC will be liable for acting
on instructions believed genuine and under reasonable procedures designed to
prevent unauthorized transactions. I certify (1) the Social Security or taxpayer
identification number provided above is correct, and (2) I am not subject to
backup withholding because (a) I am exempt from backup withholding, or (b) I
have not been notified by the IRS that I am subject to backup withholding, or
(c) I have been notified by the IRS that I am no longer subject to backup
withholding." (Please cross out item 2 if it does not apply to you.) The
Internal Revenue Service does not require yourconsent to any provision of this
document other than the certifications required to avoid backup withholding.
X_____________________________________________________
Signature ( )Owner ( )Trustee ( )Custodian Date
X_____________________________________________________
Signature of Joint Owner (if any) Date
INSTRUCTIONS FOR COMPLETING ACCOUNT APPLICATION
1/ INVESTMENT SELECTION: Indicate the Fund(s) in which you are
opening an account.
PAYMENT OF INITIAL INVESTMENT: By Check: The minimum is $1,000 ($100 under the
Bull & Bear Automatic Investment Program including the Bull & Bear Bank Transfer
Plan - see Section 4 to get started) and the minimum subsequent investment is
$100. Enclose a check drawn to the order of the Bull & Bear Fund you have chosen
with this Account Application.
BY WIRE: Please call toll-free 1-800-847-4200 before making an initial
investment by wire, as an account number must be assigned to you. Then request
your bank to transmit immediately available funds (Federal funds) by wire to:
United Missouri Bank NA, ABA #10-10-00695, for Account Number 98-7052-724-3 /
(Bull & Bear Fund name). It is important that the wire include your name,
account number, and taxpayer identification or social security number. In
addition, this Account Application should be sent promptly to: INVESTOR SERVICE
CENTER, BOX 419789, KANSAS CITY, MO 64141-6789.
2/ REGISTRATION: If there is more than one owner of the account,
the registration will be "Joint Tenants With Right of
Survivorship" unless you specify "Tenants in Common."
<PAGE>
3/ COMBINED STATEMENT: Provides a convenient quarterly year-to-date record of
your Bull & Bear Fund accounts, and can include other household accounts, such
as a spousal IRA, if you wish.
4/ BULL & BEAR AUTOMATIC INVESTMENT PROGRAM: Please attach a
voided bank account check.
5/ THE AUTOMATIC COMPOUNDING OPTION: Permits shareholders to
reinvest dividends and distributions at no charge to increase the
number of shares owned. This Option is automatically assigned for
those in the Systematic Withdrawal Plan.
6/ AUTOMATIC BENEFITS: Prior to making a telephone exchange, please read the
current prospectus for the Fund into which you are exchanging. You may use the
Investment by Telephone privilege normally within 20 business days after your
Account Application is processed. Your bank may charge a fee. This feature is
not available with passbook savings accounts. Call 1-800-847-4200 for more
details. Please attach a voided bank account check to the Account Application.
7/ SIGNATURE: Please sign and date the Account Application and return it with
your investment check and a voided bank account check to have a Bull & Bear link
with your bank account.
8/ CHECK WRITING PRIVILEGE: To request check writing privileges
for your Bull & Bear Dollar Reserves account, please call 1-800-
847-4200 for a signature card and other information.
IF YOU NEED ANY ASSISTANCE IN COMPLETING THIS ACCOUNT APPLICATION, PLEASE CALL
AN INVESTOR SERVICE REPRESENTATIVE AT 1- 800-847-4200.
THANK YOU FOR INVESTING WITH BULL & BEAR!
USO-EDG-5/7
<PAGE>
Statement of Additional Information May 1, 1997
BULL & BEAR U.S. AND OVERSEAS FUND
11 Hanover Square
New York, NY 10005
1-800-847-4200
Bull & Bear U.S. and Overseas Fund ("Fund") is a non-diversified series
of Bull & Bear Funds I, Inc. ("Corporation"), an open-end management investment
company organized as a Maryland corporation. This Statement of Additional
Information regarding the Fund is not a prospectus and should be read in
conjunction with the Fund's Prospectus dated May 1, 1997. The Prospectus is
available to prospective investors without charge upon request to Investor
Service Center, Inc., the Fund's Distributor, by calling 1-800-847-4200.
TABLE OF CONTENTS
THE FUND'S INVESTMENT PROGRAM....................................2
INVESTMENT RESTRICTIONS..........................................5
OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACT STRATEGIES........7
THE INVESTMENT COMPANY COMPLEX..................................16
OFFICERS AND DIRECTORS..........................................17
INVESTMENT MANAGER..............................................19
INVESTMENT MANAGEMENT AGREEMENT.................................19
DETERMINATION OF NET ASSET VALUE................................20
PURCHASE OF SHARES..............................................20
PERFORMANCE INFORMATION.........................................21
DISTRIBUTION OF SHARES..........................................25
ALLOCATION OF BROKERAGE.........................................27
DISTRIBUTIONS AND TAXES.........................................28
REPORTS TO SHAREHOLDERS.........................................31
CUSTODIAN AND TRANSFER AGENT....................................31
AUDITORS........................................................31
FINANCIAL STATEMENTS............................................31
APPENDIX -- DESCRIPTIONS OF BOND RATINGS........................32
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.
FOREIGN SECURITIES. Because the Fund may invest in foreign securities,
investment in the Fund involves investment risks of adverse political and
economic developments that are different from an investment in a fund which
invests only in the securities of U.S. issuers. Such risks may include adverse
movements in the market value of foreign securities during days on which the
Fund's net asset value per share is not determined (see "Determination of Net
Asset Value"), the possible imposition of withholding taxes by foreign
governments on dividend or interest income payable on the securities held in the
portfolio, possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of dividends
or principal and interest on securities in the portfolio.
The Fund may invest in foreign securities by purchasing American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other
securities convertible into securities of issuers based in foreign countries.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement.
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. These instruments are often
restricted securities because the securities are either themselves exempt from
registration or sold in transactions not requiring registration. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend either on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to
2
<PAGE>
satisfy share redemption orders on a timely basis. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing certain restricted securities held
by the Fund, however, could affect adversely the marketability of such portfolio
securities, and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
The Board of Directors has delegated the function of making day-to-day
determinations of liquidity to 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, (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 is authorized to invest up to 35%
of its total assets in debt securities rated below investment grade, although it
has no current intention of investing more than 5% of its total assets in such
securities during the coming year. Debt securities rated 'Ba' or lower by
Moody's Investors Service, Inc. ("Moody's") and 'BB' or lower by Standard &
Poor's Ratings Group ("S&P") are considered below investment grade. Debt
securities rated below investment grade are deemed by these rating agencies to
be predominantly speculative with respect to the issuers' capacity to pay
interest and repay principal and may involve major risk exposure to adverse
conditions. Debt securities rated lower than B may include securities that are
in default or face the risk of default with respect to principal or interest.
Ratings of debt securities represent the rating agencies' opinions
regarding their quality, are not a guarantee of quality and may be reduced after
the Fund has acquired the security. The Investment Manager will consider such an
event in determining whether the Fund should continue to hold the security but
is not required to dispose of it. Credit ratings attempt to evaluate the safety
of principal and interest payments and do not evaluate the risks of fluctuations
in market value. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates. See the Appendix to
this Statement of Additional Information for further information regarding S&P's
and Moody's ratings.
Lower rated debt securities generally offer a higher current yield than
that available from higher grade issues. However, lower rated securities involve
higher risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
adverse changes in the financial condition of the issuers and to price
fluctuations in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of interest and principal and increase the possibility of default. In
addition, the market for lower rated securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically, but such higher yields did not reflect the value of the income
stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructuring or default. There can be no
assurance that such decline in price will not recur. The market for lower rated
debt securities may be thinner and less active than that for higher quality
securities, which may limit the Fund's ability to sell such securities at their
fair value in response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
3
<PAGE>
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.
FOREIGN GOVERNMENT SECURITIES. The foreign government securities in
which the Fund may invest generally consist of obligations supported by
national, state or provincial governments or similar political subdivisions.
Foreign government securities also include debt obligations of supranational
entities, which include international organizations designated or supported by
governmental entities to promote economic reconstruction or development,
international banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the World
Bank), the European Coal and Steel Community, the Asian Development Bank and the
Inter-American Development Bank. Foreign government securities also include debt
securities of "quasi-governmental agencies" and debt securities denominated in
multinational currency units (such as the European Currency Unit) of an issuer
(including supranational issuers).
PREFERRED SECURITIES. The Fund may invest in preferred stocks of U.S.
and foreign issuers. 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.
REVERSE REPURCHASE AGREEMENTS. Although it has no intention of doing so
during its current fiscal year, the Fund may enter into reverse repurchase
agreements with banks. Such agreements involve the sale of securities held by
the Fund subject to its agreement to repurchase the securities held by the Fund
at an agreed-upon date and price reflecting a market rate of interest. Such
agreements are considered to be borrowings. All borrowings by the Fund are
limited to one-third of the Fund's assets and may be entered into only for
temporary or emergency purposes. Additionally, while a reverse repurchase
agreement is outstanding, the Fund will maintain with its Custodian in a
segregated account permissible liquid assets, marked to market daily, in an
amount at least equal to the Fund's obligations under the reverse repurchase
agreement.
SHORT SALES. The Fund may engage in short sales if it owns or, by
virtue of its ownership of other securities, has the right to obtain without
additional cost securities equivalent in kind or amount to the securities sold.
This investment technique is known as a short sale "against the box." In a short
sale, the Fund sells a borrowed security and has a corresponding obligation to
the lender to return the identical security. The Fund will not dispose of the
securities underlying a short sale while a short sale is outstanding. The Fund
intends to engage in short sales against the box for hedging purposes. The
Investment Manager expects that the Fund will engage in short sales against the
box as a hedge when the Investment Manager believes that the price of a security
may decline, or when the Fund wants to sell the security it owns at the current
price but wants to defer recognition of gain or loss for tax purposes, or to
satisfy certain tests applicable to regulated investment companies under the
Internal Revenue Code of 1986, as amended ("Code"). The Investment Manager
currently anticipates that no more than 5% of the Fund's total assets would be
involved in short sales against the box.
LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to engage in
securities lending transactions in an amount up to one-third of the Fund's total
assets, although it has no current intention of entering into such transactions
in excess of 5% of its net assets during the coming year. If the Fund engages in
lending transactions, it will enter into lending
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agreements that require that the loans be continuously secured by cash,
securities issued or guaranteed by the U.S. government or its agencies, or any
combination of cash and such securities, as collateral equal at all times to at
least the market value of the assets lent. The Fund will typically receive the
dividends and interest paid on the assets lent, if any, while simultaneously
earning interest on the loan or a flat fee from the borrower. The Fund will
normally pay administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest on cash or securities held as
collateral to the borrower or placing broker. There may be risks of delay to the
Fund in receiving additional collateral and risks of delay in recovery of, and
failure to recover, the assets lent should the borrower fail financially or
otherwise violate the terms of the lending agreement. Loans will be made only to
borrowers deemed by the Investment Manager to be of good standing and when, in
the judgment of the Investment Manager, the consideration which can be earned
currently from such lending transactions justifies the attendant risk. Any loan
made by the Fund will provide that it may be terminated by either party upon
reasonable notice to the other party.
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. Purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in such issuer or the Fund
would own or hold 10% of the outstanding securities of that issuer,
except that up to 50% of the Fund's total assets may be invested
without regard to this limitation and provided that this limitation
does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or securities of other
investment companies;
2. Lend money or securities, provided that (i) the making of time or
demand deposits with banks, (ii) the purchase of debt securities such
as bonds, debentures, commercial paper, repurchase agreements and short
term obligations in accordance with its investment objective and
policies and (iii) engaging in securities loan transactions limited to
one-third of the Fund's total assets are not prohibited;
3. Borrow money, except to the extent permitted by the Investment Company Act of
1940, as amended ("1940 Act");
4. Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry. This limitation shall not apply to obligations issued by the
U.S. government or its agencies or instrumentalities;
5. Invest in commodities or commodity futures contracts, although it may enter
into financial and foreign currency futures contracts and options thereon,
options on foreign currencies and forward contracts on foreign currencies;
6. Invest in real estate, although it may invest in securities which are secured
by real estate and securities of issuers which invest or deal in real estate;
7. Underwrite the securities of other issuers except to the extent the
Fund may be deemed to be an underwriter under the Federal securities
laws in connection with the disposition of the Fund's securities. The
Fund may buy and sell securities outside the United States which are
not registered with the Securities and Exchange Commission ("SEC") or
marketable in the United States; or
8. Issue senior securities as defined in the 1940 Act. The following will not be
deemed to be senior securities for this purpose: (i) evidences of indebtedness
that the Fund is permitted to incur, (ii) the issuance of additional series or
classes that the
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directors may establish, (iii) the Fund's futures, options and forward
currency transactions, and (iv) to the extent consistent with the 1940
Act and applicable rules and policies adopted by the SEC, (A) the
establishment or use of a margin account with a broker for the purpose
of effecting securities transactions on margin and (B) short sales;
9. The Fund, notwithstanding any other investment policy or restriction
(whether or not fundamental) may invest all of its assets in the
securities or beneficial interests of a single pooled investment fund
having substantially the same objectives, policies and limitations as
the Fund.
The Corporation's Board of Directors has established the following
non-fundamental investment limitations that may be changed by the Board without
shareholder approval:
1. The Fund may not purchase or otherwise acquire any security or invest
in a repurchase agreement if, as a result, more than 15% of the Fund's
net assets (taken at current value) would be invested in illiquid
assets, including repurchase agreements not entitling the holder to
payment of principal within seven days;
2. The Fund may not purchase the securities of any investment company (as
defined in the 1940 Act) except (a) by purchase in the open market where no
commission or profit to a sponsor or dealer results from such purchase, provided
that immediately after such purchase no more than: 10% of the Fund's total
assets are invested in securities issued by investment companies, 5% of the
Fund's total assets are invested in securities issued by any one investment
company, or 3% of the voting securities of any one such investment company are
owned by the Fund, and (b) when such purchase is part of a plan of merger,
consolidation, reorganization or acquisition of assets;
3. The aggregate value of securities underlying put options on securities
written by the Fund, determined as of the date the put options are
written, will not exceed 25% of the Fund's net assets, and the
aggregate value of securities underlying call options on securities
written by the Fund, determined as of the date the call options are
written, will not exceed 25% of the Fund's net assets;
4. The Fund may purchase a put or call option on a security or a security
index, including any straddles or spreads, only if the value of its
premium, when aggregated with the premiums on all other such
instruments held by the Fund, does not exceed 5% of the Fund's total
assets;
5. To the extent that the Fund enters into futures contracts, options on futures
contracts and options on foreign currencies traded on a Commodity Futures
Trading Commission ("CFTC") regulated exchange, in each case that is not for
bona fide hedging purposes (as defined by the CFTC), the aggregate initial
margin and premiums required to establish these positions (excluding the amount
by which options are "in-the-money") may not exceed 5% of the liquidation value
of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any contracts the Fund has entered into;
6. The Fund may not purchase securities on margin, except that the Fund
may obtain such short term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits
made in connection with transactions in options, futures contracts,
forward contracts and other derivative instruments shall not be deemed
to constitute purchasing securities on margin;
7. The Fund may not mortgage, pledge or hypothecate any assets in excess of
one-third of the Fund's total assets;
8. The Fund may not make short sales of securities or maintain a short
position, except (a) the Fund may buy and sell options, futures
contracts, options on futures contracts, and forward contracts, and (b)
the Fund may sell "short against the box" where the Fund
contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short; and
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9. The Fund may not borrow money, except (a) from a bank for temporary or
emergency purposes (not for leveraging or investment) or (b) by engaging in
reverse repurchase agreements, provided that immediately after all borrowings
pursuant to (a) and (b) there is asset coverage of at least 300 per centum for
all borrowings; provided that in the event that such asset coverage shall at any
time fall below 300 per centum the Fund shall within three days thereafter (not
including Sundays and holidays) reduce the amount of its borrowings such that
the asset coverage of such borrowings shall be at least 300 per centum. The Fund
may not purchase securities for investment while any bank borrowing equaling 5%
or more of its total assets is outstanding.
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 se curities 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. Certain special characteristics of and risks associated
with using these instruments are discussed below. In addition to the
non-fundamental investment restrictions 4 and 5 described above, the use of
options, forward currency contracts and futures by the Fund is subject to the
applicable regulations of the SEC, the several options and futures exchanges
upon which such instruments may be traded, the CFTC and the various state
regulatory authorities.
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 limita tions 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 with its Custodian 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.
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The Fund may purchase call options on securities (both equity and debt)
that the Investment Manager intends to include in the Fund's portfolio in order
to fix the cost of a future purchase. Call options also may be used as a means
of enhancing returns by, for example, participating in an anticipated price
increase of a security. In the event of a decline in the price of the underlying
security, use of this strategy would serve to limit the potential loss to the
Fund to the option premium paid; conversely, if the market price of the
underlying security increases above the exercise price and the Fund either sells
or exercises the option, any profit eventually realized would be reduced by the
premium paid.
The Fund may purchase put options on securities in order to hedge
against a decline in the market value of securities held in its portfolio or to
attempt to enhance return. The put option enables the Fund to sell the
underlying security at the predetermined exercise price; thus, the potential for
loss to the Fund below the exercise price is limited to the option premium paid.
If the market price of the underlying security is higher than the exercise price
of the put option, any profit the Fund realizes on the sale of the security
would be reduced by the premium paid for the put option less any amount for
which the put option may be sold.
The Fund may on certain occasions wish to hedge against a decline in
the market value of securities held in its portfolio at a time when put options
on those particular securities are not available for purchase. The Fund may
therefore purchase a put option on other carefully selected securities, the
values of which historically have a high degree of positive correlation to the
value of such portfolio securities. If the Investment Manager's judgment is
correct, changes in the value of the put options should generally offset changes
in the value of the portfolio securities being hedged. However, the correlation
between the two values may not be as close in these transactions as in
transactions in which the Fund purchases a put option on a security held in its
portfolio. If the Investment Manager's judgment is not correct, the value of the
securities underlying the put option may decrease less than the value of the
Fund's portfolio securities and therefore the put option may not provide
complete protection against a decline in the value of the Fund's portfolio
securities below the level sought to be protected by the put option.
The Fund may write 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 se curity 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 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
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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 se curity 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 in a segregated account with its Custodian equivalent in value to
the amount, if any, by which the put is "in-the-money," that is, that amount by
which the exercise price of the put exceeds the current market value of the
underlying security.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS. The Fund may 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.
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 under lying 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
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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 (that is, 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 securities 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 securi
ties 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 secur ity, 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 curren cies) 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.
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(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 port folio 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. 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 se curities 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 securi ties, which securities may then
be purchased in an orderly fashion. This strategy may mini mize 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.
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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 securities 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 security position. The Fund may also purchase call or put
options on foreign currency futures contracts to obtain a fixed foreign currency
exchange rate at limited risk. The Fund may purchase a call option on a foreign
currency futures contract to hedge against a rise in the foreign currency
exchange rate while intending to invest in a security denominated in that
currency. The Fund may purchase put options on foreign currency futures
contracts as a hedge against a decline in the foreign currency exchange rates or
the value of its foreign portfolio securities. The Fund may write a 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 also purchase and write covered straddles on interest rate
or securities index futures contracts. A long straddle is a combination of a
call and a put purchased on the same security at the same exercise price. The
Fund would enter into a long straddle when it 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
put written on the same futures contract at the same exercise price where the
same security or futures contract is considered "cover" for both the put and the
call. The Fund would enter into a short straddle when it believes that it is
unlikely that 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 in a segregated account with its Custodian equal
in value to the amount, if any, by which the put is "in-the-money," that is the
amount by which the exercise price of the put exceeds the current market value
of the underlying security.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS
TRADING. No price is paid upon entering into a futures contract. Instead, upon
entering into a futures contract, the Fund is required to deposit with its
Custodian in a segregated account in the name of the futures broker through whom
the transaction is effected an amount of cash or liquid securities whose value
is marked to the market daily generally equal to 10% or less of the
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<PAGE>
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 performance bond or good-faith deposit on the contract that is
returned to the Fund upon termination of the transaction, assuming all
obligations have been satisfied. Under certain circumstances, such as periods of
high volatility, the Fund may be required by an exchange to increase the level
of its initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. Subsequent payments,
called "variation margin," to and from the broker, are made on a daily basis as
the value of the futures or options position varies, a process known as "marking
to the market." For example, when the Fund purchases a contract and the value of
the contract rises, the Fund receives from the broker a variation margin payment
equal to that increase in value. Conversely, if the value of the futures
position declines, the Fund is required to make a variation margin payment to
the broker equal to the decline in value. Variation margin does not involve
borrowing to finance the 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 securi
ties, 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
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<PAGE>
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 require ments 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
underlying 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, 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
14
<PAGE>
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 payments are made or
received.
The Fund also may hedge by using forward currency contracts in
connection with portfo lio 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. Certain of these strategies may result in income
subject to the "Short-Short Limitation" described under "Distributions and
Taxes."
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 se curities between the date the forward
contract is entered into and the date it matures. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency on the spot (that
is, cash) market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
the market value of the security exceeds the amount of foreign currency the Fund
is obligated to deliver. The projection of short term currency market movements
is extremely difficult and the successful execution of a short term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Fund to sustain losses on these contracts and transaction costs. Under normal
circumstances, consideration of the prospects for currency parities will be
incorporated into the longer term decisions made with regard to overall
investment strategies. However, the Investment Manager believes that it is
important to have the flexibility to enter into 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
15
<PAGE>
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 curren cies 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 Bull & Bear Group, Inc.
("Investment Company Complex") are:
Bull & Bear Dollar Reserves
Bull & Bear U.S. Government Securities Fund, Inc.
Bull & Bear Municipal Income Fund, Inc.
Bull & Bear Global Income Fund, Inc.
Bull & Bear U.S. and Overseas Fund
Bull & Bear Special Equities Fund, Inc.
Bull & Bear Gold Investors Ltd.
Midas Fund, Inc.
Rockwood Fund, Inc.
OFFICERS AND DIRECTORS
The officers and Directors of the Corporation, 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.
BASSETT S. WINMILL* -- Chairman of the Board. He is Chairman of the Board of
seven other investment companies in the Investment Company Complex and of the
parent of the Investment Manager, Bull & Bear Group, Inc. ("Group"). He was born
February 10, 1930. 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. He is the father of Mark C. Winmill and Thomas B.
Winmill.
ROBERT D. ANDERSON* -- Vice Chairman and Director. He is Vice Chairman and a
Director of seven other investment companies in the Investment Company Complex
and of the Investment Manager and its affiliates. He was born December 7, 1929.
He is a member of the Board of Governors of the Mutual Fund Education Alliance,
and of its predecessor, the No-Load Mutual Fund Association. He has also been a
member of the District #12, District Business Conduct and Investment Companies
Committees of the NASD.
BRUCE B. HUBER, CLU, ChFC, MSFS -- Director. 3443 Highway 66, Neptune, NJ 07753.
He is Senior Consultant with The Berger Financial Group, LLC, specializing in
financial, estate and insurance matters. From March 1995 to December 1995, he
was President of Huber Hogan Knotts Consulting, Inc., financial consultants and
insurance planners. He was born February 7, 1930. From 1988 to 1990, he was
Chairman of Bruce Huber Associates. He is also a Director of eight other
investment companies in the Investment Company Complex.
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<PAGE>
JAMES E. HUNT -- Director. One Dag Hammarskjold Plaza, New York, NY 10017. He is
a principal of Hunt & Howe Inc., executive recruiting consultants. He was born
December 14, 1930. From 1976 until 1983 he was Vice President of Russell
Reynolds Associates, Inc., also executive recruiting consultants. He is also a
Director of eight other investment companies in the Investment Company Complex.
FREDERICK A. PARKER, JR. -- Director. 219 East 69th Street, New York, NY 10021.
He is President and Chief Executive Officer of American Pure Water Corporation,
a manufacturer of water purifying equipment. He was born November 14, 1926. He
is also a Director of eight other investment companies in the Investment Company
Complex.
JOHN B. RUSSELL -- Director. 334 Carolina Meadows Villa, Chapel Hill, NC 27514.
He was Executive Vice President and a Director of Dan River, Inc., a diversified
textile company, from 1969 until he retired in 1981. He was born February 9,
1923. He is a Director of Wheelock, Inc., a manufacturer of signal products, and
a consultant for the National Executive Service Corps in the health care
industry. He is also a Director of eight other investment companies in the
Investment Company Complex.
MARK C. WINMILL -- Co-President, Co-Chief Executive Officer, and Chief Financial
Officer. He is Co-President, Co-Chief Executive Officer, and Chief Financial
Officer of the Investment Company Complex and of Group and certain of its
affiliates, Chairman of the Investment Manager and Investor Service Center, Inc.
("Distributor"), and President of Bull & Bear Securities, Inc. ("BBSI"). He was
born November 26, 1957. He received his M.B.A. from the Fuqua School of Business
at Duke University in 1987. From 1983 to 1985 he was Assistant Vice President
and Director of Marketing of E.P. Wilbur & Co., Inc., a real estate development
and syndication firm and Vice President of E.P.W. Securities, its broker/dealer
subsidiary. He is a son of Bassett S. Winmill and brother of Thomas B. Winmill.
He is also a Director of five other investment companies in the Investment
Company Complex.
THOMAS B. WINMILL -- Co-President, Co-Chief Executive Officer, and General
Counsel. He is Co- President, Co-Chief Executive Officer, and General Counsel of
the Investment Company Complex and of Group and certain of its affiliates,
President of the Investment Manager and the Distributor, and Chairman of BBSI.
He was born June 25, 1959. He was associated with the law firm of Harris,
Mericle & Orr from 1984 to 1987. He is a member of the New York State Bar and
the SEC Rules Committee of the Investment Company Institute. He is a son of
Bassett S. Winmill and brother of Mark C. Winmill. He is also a Director of six
other investment companies in the Investment Company Complex.
STEVEN A. LANDIS -- Senior Vice President. He is Senior Vice President of the
Investment Company Complex, the Investment Manager and certain of its
affiliates. He was born March 1, 1955. From 1993 to 1995, he was Associate
Director -- Proprietary Trading at Barclays De Zoete Wedd Securities Inc., from
1992 to 1993 he was Director, Bond Arbitrage at WG Trading Company, and from
1989 to 1992 he was Vice President of Wilkinson Boyd Capital Markets.
JOSEPH LEUNG, CPA -- Treasurer and Chief Accounting Officer. He is Treasurer and
Chief Accounting Officer of the Investment Company Complex, the Investment
Manager and its affiliates. From 1992 to 1995 he held various positions with
Coopers & Lybrand L.L.P., a public accounting firm. From 1991 to 1992, he was
the accounting supervisor at Retirement Systems Group, a mutual fund company.
From 1987 to 1991, he held various positions with Ernst & Young LLP, a public
accounting firm. He is a member of the American Institute of Certified Public
Accountants. He was born September 15, 1965.
WILLIAM J. MAYNARD -- Vice President and Secretary. He is Vice President and
Secretary of the Investment Company Complex, the Investment Manager and its
affiliates. He was born September 13, 1964. From 1991 to 1994 he was associated
with the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. He is a member of
the New York State Bar.
* Bassett S. 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.
COMPENSATION TABLE
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<TABLE>
NAME OF PERSON, Aggregate Pension or Estimated Total Compensation From
POSITION Compensa- Retirement Annual Benefits Registrant and Investment
tion From Benefits Accrued Upon Retirement Company Complex Paid to
Registrant as Part of Fund Directors
Expenses
<S> <C> <C> <C> <C>
Bruce B. Huber, $1,000 None None $12,500 from 9
Director Investment Companies
James E. Hunt, $1,000 None None $12,500 from 9
Director Investment Companies
Frederick A. $1,000 None None $12,500 from 9
Parker, Investment Companies
Director
John B. Russell, $1,000 None None $12,500 from 9
Director Investment Companies
</TABLE>
Information in the above table is based on fees paid during the year
ended December 31, 1996.
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 1, 1997, officers and Directors of the Fund
owned less than 1% of the outstanding shares of the Fund. As of April 1, 1997,
no shareowner of record owned 5% or more of the Fund's outstanding shares.
INVESTMENT MANAGER
The Fund's Investment Manager is Bull & Bear Advisers, Inc., 11 Hanover
Square, New York, NY 10005. The Investment Manager, a registered investment
adviser, is a wholly-owned subsidiary of Group. The other principal subsidiaries
of Group include Investor Service Center, Inc., the Fund's Distributor and a
registered broker/dealer, Midas Management Corporation and Rockwood Advisers,
Inc., registered investment advisers, and Bull & Bear Securities, Inc., a
registered broker/dealer providing discount brokerage services.
Group is a publicly owned company whose securities are listed on the
Nasdaq Stock Market and traded in the over-the-counter market. Bassett S.
Winmill may be deemed a controlling person of Group and the Investment Manager
on the basis of his ownership of 100% of Group's voting stock. The Fund and its
investment company affiliates had net assets in excess of $340,000,000 as of
April 17, 1997.
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. For the fiscal
years ended December 31, 1994, 1995, and 1996, the Fund paid to the Investment
Manager aggregate investment management fees of $99,685, $96,092, and $102,565,
respectively, of which $5,401, $27,939, and $0 was waived for the years 1994,
1995, and 1996, respectively, pursuant to the expense guarantee described below.
The Investment Manager has agreed in the Investment Management
Agreement that it will guarantee that the operating expenses of the Fund
(including investment management fees but excluding taxes, interest, brokerage
commissions, expenses incurred pursuant to a
18
<PAGE>
distribution plan under Rule 12b-1 of the 1940 Act, and certain extraordinary
expenses), expressed as a percentage of average daily net assets, will not
exceed for each fiscal year 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 limitation.
If requested by the Board of Directors, the Investment Manager may
provide other services to the Fund such as, without limitation, the functions of
billing, accounting, certain shareholder communications and services,
administering state and Federal registra tions, filings and controls and other
administrative services. Any services so requested and performed will be for the
account of the Fund and the costs of the Investment Manager in rendering such
services shall be reimbursed by the Fund, subject to examination by those
directors of the Fund who are not interested persons of the Investment Manager
or any affiliate thereof. For such services, the Fund reimbursed the Investment
Manager $10,877, $11,376, and $6,275 for the fiscal years ended December 31,
1994, 1995, and 1996, respectively.
The Investment Management Agreement is not assignable and terminates
automatically in the event of its assignment. The Investment Management
Agreement may also be terminated without penalty on 60 days' written notice at
the option of either party thereto or by a vote of the Corporation's
shareholders. The Investment Management Agreement provides that the Investment
Manager shall not be liable to the Corporation or the Fund or any shareholder of
the Corporation or the Fund for any error of judgment or mistake of law or for
any loss suffered by the Corporation or the Fund or the Corporation's
shareholders in connection with the matters to which the Investment Management
Agreement relates. Nothing contained in the Investment Management Agreement,
however, shall be construed to protect the Investment Manager against any
liability to the Corporation or the Fund or the Corporation's shareholders 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.
Group has granted the Fund a non-exclusive license to use various
service marks including "Bull & Bear", "Bull & Bear Performance Driven", and
"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 Group. If the license is
terminated, the Fund will eliminate all reference to "Bull & Bear" 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 calculated as of the close of
regular trading for 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.
The NYSE is closed on the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Because a substantial portion of the Fund's net assets may be
invested in foreign securities and/or foreign currencies, trading in each of
which is conducted in foreign markets which are not necessarily closed on U.S.
holidays, the net asset value per share may be significantly affected on days
when a shareholder has 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 New York
Stock Exchange, 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 ask
quotations, if available, or at their fair value as determined in good faith by
or under the 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
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<PAGE>
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.
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 CONDITIONS OF ORDERS. The Fund will only issue shares upon payment of the
purchase price by check made drawn to the Fund's order in U.S. dollars on a U.S.
bank, or by Federal Reserve wire transfer. Third party checks, credit cards, and
cash will not be accepted. The Fund reserves the right to reject any order, to
cancel any order due to nonpayment, to accept initial orders by telephone or
telegram, and to waive the limit on subsequent orders by telephone, with respect
to any person or class of persons. Orders to purchase shares are not binding on
the Fund until they are confirmed by the Fund's transfer agent. If an order is
canceled because of non-payment or because the purchaser's check does not clear,
the purchaser will be responsible for any loss the Fund incurs. If the purchaser
is already a shareholder, the Fund can redeem shares from the purchaser's
account to reimburse the Fund for any loss. In addition, the purchaser may be
prohibited or restricted from placing future purchase orders in the Fund or any
of the other Funds in the Investment Company Complex. In order to permit the
Fund's shareholder base to expand, to avoid certain shareholder hardships, to
correct transactional errors, and to address similar exceptional situations, the
Fund may waive or lower the investment minimums with respect to any person or
class of persons.
PERFORMANCE INFORMATION
All advertised or published average annual total return and total
return figures are based upon historical performance information and are not
intended to indicate future performance. The investment returns and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Consequently,
quotations of average annual total return and total return should not be
considered as representative of what the Fund's total return will be in the
future. Although the Fund imposes a 1% redemption fee on the redemption of
shares held for 30 days or less, all of the periods for which performance is
quoted are longer than 30 days, and therefore the 1% fee is not reflected in the
performance calculations. In addition, there is no sales charge upon
reinvestment of dividends or other distributions. Performance is a function of
the type and quality of portfolio securities and will reflect general market
conditions and operating expenses. This Statement of Additional Information may
be in use for a full year and performance results for periods subsequent to
December 31, 1996 may vary substantially from those shown below.
TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN
The Fund will advertise its average annual total return over specified
periods. The Fund computes its average annual total return by determining the
average annual compounded rate of return during specified periods that compares
the initial amount invested to the ending redeemable value of such investment.
This is done by dividing the ending redeemable value of a hypothetical $1,000
initial payment by $1,000 and raising the quotient to a power equal to one
divided by the number of years (or fractional portion thereof) covered by the
computation and subtracting one from the result. This calculation can be
expressed as follows:
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T = (ERV OVER P) SUP {1 OVER n}-1
Where:
T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period which
assumes all dividends and other distributions by the
Fund are reinvested on the reinvestment date during
the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of years.
The Fund's average annual total return for the period from October 29,
1987 (commencement of operations) to December 31, 1996, and for the five year
and one year periods ended December 31, 1996 was 7.92%, 8.27%, and 5.34%,
respectively.
"Total return" or "cumulative total return" or "cumulative growth" is
calculated by subtracting the amount of the Fund's net asset value per share at
the beginning of a stated period from the net asset value per share at the end
of the period (after giving effect to the reinvestment of all distributions
during the period), and dividing the result by the net asset value per share at
the beginning of the period. The Fund's "total return" or "cumulative total
return" or "cumulative growth," expressed as a percentage rate and as the value
of a hypothetical $1,000 and $10,000 initial investment at the end of the
period, for the periods set forth below, commencing on the date set forth and
ending on December 31, 1996, together with the average annual return for such
periods, are set forth below:
START OF PERIODS AVERAGE TOTAL ENDING ENDING VALUE
ENDING 12/31/96 ANNUAL RETURN VALUE OF A OF A
RETURN $1,000 $10,000
INVESTMENT INVESTMENT
===================================================================
January 1, 1996 5.34% 5.34% $1,053.45 $10,534.46
January 1, 1995 14.80% 31.80% $1,317.96 $13,179.56
January 1, 1994 4.62% 14.50% $1,145.01 $11,450.12
January 1, 1993 9.75% 45.08% $1,450.84 $14,508.44
January 1, 1992 8.27% 48.81% $1,488.81 $14,881.15
January 1, 1991 10.53% 82.37% $1,823.68 $18,236.85
January 1, 1990 7.57% 66.67% $1,666.67 $16,666.65
January 1, 1989 8.01% 85.17% $1,851.67 $18,516.65
January 1, 1988 8.00% 99.98% $1,999.80 $19,997.98
October 29, 1987 7.92% 101.18% $2,011.80 $20,117.97
The Fund may provide the above described standardized total return for
a period which ends as of not earlier than the most recent calendar quarter end
and which begins either twelve months before or at the time of commencement of
the Fund's operations. In addition, the Fund may provide nonstandardized total
return results for differing periods, such as for a recent month or quarter. For
example, the Fund's nonstandardized total return for the three months ended
December 31, 1996 was approximately 0.31%. Such nonstandardized total returns
are computed as otherwise described above except that no annualization is made.
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The Investment Manager and certain of its affiliates serve as
investment managers to the Fund and other affiliated investment companies, which
have individual and institutional shareholder investors throughout the United
States and in 37 foreign countries. The Fund may also provide performance
information based on an initial investment in the Fund and/or cumulative
investments of varying amounts over periods of time. Some or all of this
information may be provided either graphically or in tabular form.
SOURCE MATERIAL
From time to time, in marketing pieces and other Fund literature, the
Fund's performance may be compared to the performance of broad groups of
comparable mutual funds or unmanaged indexes of comparable securities.
Evaluations of Fund performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for Fund performance information may
include, but are not limited to, the following:
Bank Rate Monitor, a weekly publication which reports yields on various bank
money market accounts and certificates of deposit.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance and other data.
Bloomberg, a computerized market data source and portfolio analysis system.
Bond Buyer Municipal Bond Index (20 year), an index of municipal bonds provided
by a national periodical reporting on municipal securities.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CDA/Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' back grounds, management policies, salient features,
management results, income and dividend records, and price ranges.
Consumer's Digest, a bimonthly magazine that periodically features the
performance of a variety of investments, including mutual funds.
Financial Times, Europe's business newspaper, which from time to time reports
the performance of specific investment companies in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Goldman Sachs Convertible Bond Index -- currently includes 67 bonds and 33
preferred shares. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds.
Growth Fund Guide, a newsletter providing a mutual fund rating service published
for over 25 years.
IBC's Money Fund Report, a weekly publication of money market fund total net
assets, yield, and portfolio composition.
Individual Investor, a newspaper that periodically reviews mutual fund
performance and other data.
Investment Advisor, a monthly publication reviewing performance of mutual funds.
22
<PAGE>
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.
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 Brothers GNMA Index -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
Salomon Brothers High-Grade Corporate Bond Index -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
23
<PAGE>
Salomon Brothers Broad Investment-Grade Bond Index -- is a market-weighted index
that contains approximately 4,700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
Salomon Brothers Market Performance tracks the Salomon Brothers bond index.
Standard & Poor's 500 Composite Stock Price Index -- is an index of 500
companies representing the U.S. stock market.
Standard & Poor's 100 Composite Stock Price Index -- is an index of 100
companies representing the U.S. stock market.
Standard & Poor's Preferred Index is an index of preferred securities.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
businesses, often featuring mutual fund performance data.
USA Today, a national newspaper that periodically reports mutual fund
performance data.
U.S. News and World Report, a national weekly that periodically reports mutual
fund performance data.
The Wall Street Journal, a nationally distributed newspaper which regularly
covers financial news.
The Wall Street Transcript, a periodical reporting on financial markets and
securities.
Wilshire 5000 Equity Indexes -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
Indices prepared by the research departments of such financial
organizations as Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith,
Inc., Bear Stearns & Co., Inc., and Ibbotson Associates may be used, as well as
information provided by the Federal Reserve Board.
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement, Investor Service Center, Inc.
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 promotion al 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.
24
<PAGE>
Among other things, the Plan provides that (1) the Distributor will
submit to the Corporation'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 Board of Directors,
including those Directors who are not "interested persons" of the Fund and who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related to the Plan ("Plan Directors"), acting in person at a
meeting called for that purpose, unless terminated by vote of a majority of the
Plan Directors, or by vote of a majority of the outstanding voting securities of
the Fund, (3) payments by the Fund under the Plan shall not be materially
increased without the affirmative vote of the holders of a majority of the
outstanding voting securities of the Fund and (4) while the Plan remains in
effect, the selection and nomination of Directors who are not "interested
persons" of the Fund shall be committed to the discretion of the Directors who
are not interested persons of the Fund.
With the approval of the vote of a majority of the entire Board of
Directors and of the Plan Directors of the Fund, the Distributor has entered
into a related agreement with Hanover Direct Advertising Company, Inc. ("Hanover
Direct"), a wholly owned subsidiary of Group, in an attempt to obtain cost
savings on the marketing of the Fund's shares. Hanover Direct will provide
services to the Distributor on behalf of the Fund 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, 1996, approximately $2,104 represented paid expenses incurred
for advertising, $54,654 for printing and mailing prospectuses and other
information to other than current shareholders, $31,313 for salaries of
marketing and sales personnel, $2,749 for payments to third parties who sold
shares of the Fund and provided certain services in connection therewith, and
$12,359 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
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<PAGE>
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. 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.
Transactions are directed to brokers and dealers qualified to execute orders or
provide research, brokerage or other services, and who may sell shares of the
Fund or of other affiliated funds. 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,
brokerage or other services furnished to the Investment Manager or upon sale of
Fund shares. 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
Fund shares or of other affiliated funds, and allocation of commissions to the
Fund's Custodian. With respect to brokerage and research services, consideration
may be given in the selection of broker/dealers to brokerage or research
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 bro ker/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, 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
26
<PAGE>
to benefits realized by the Fund or to collateral benefits, if any, conferred on
affiliated entities. These services may include "brokerage and research
services" as defined in Section 28(e)(3) of the 1934 Act, which presently
include (1) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities and the availability of
securities or purchasers or sellers of securities, (2) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (3) effecting
securities trans actions and performing functions incidental thereto (such as
clearance, settlement, and custody). Pursuant to arrangements with certain
broker/dealers, such broker/dealers provide and pay for various computer
hardware, software and services, market pricing information, investment
subscriptions and memberships, and other third party and internal research of
assistance to the Investment Manager in the performance of its investment
decision-making responsibilities for transactions effected by such
broker/dealers for the Fund. Commission "soft dollars" may be used only for
"brokerage and research services" provided directly or indirectly by the
broker/dealer and under no circumstances will cash payments be made by such
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.
Investment decisions for the Fund and for the other Funds managed by
the Investment Manager or its affiliates are made independently based on each
Fund's investment objectives and policies. The same investment decision,
however, may occasionally be made for two or more Funds. In such a case, the
Investment Manager may combine orders for two or more Funds for a particular
security if it appears that a combined order would reduce brokerage commissions
and/or result in a more favorable transaction price. Combined purchase or sale
orders are then averaged as to price and allocated as to amount according to a
formula deemed equitable to each Fund. While in some cases this practice could
have a detrimental effect upon the price or quantity available of the security
with respect to the Fund, the Investment Manager believes that the larger volume
of combined orders can generally result in better execution and prices.
During the fiscal years ended December 31, 1994, 1995, and 1996, the
Fund paid total brokerage commissions of $91,313, $77,049, and $106,792,
respectively. For the fiscal year ended December 31, 1996, $97,501 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. No transactions were directed to
broker/dealers during such periods for selling shares of the Fund or of other
affiliated funds. During the Fund's fiscal years ended December 31, 1994, 1995,
and 1996, the Fund paid $9,218, $4,422, and $9,291, respectively, in brokerage
commissions to BBSI, which represented 10.0%, 5.70%, and 8.70%, respectively, of
the total brokerage commissions paid by the Fund and 20.5%, 12.3%, and 22.62%,
respectively, of the aggregate dollar amount of transactions involving the
payment of commissions.
The Fund is not obligated to deal with any particular broker, dealer or
group thereof. Certain broker/dealers that the Fund or other affiliated
investment companies do business with may, from time to time, own more than 5%
of the publicly traded Class A non-voting Common Stock of Group, the parent of
the Investment Manager, and may provide clearing services to BBSI.
The Fund's portfolio turnover rate may vary from year to year and will
not be a limiting factor when the Investment Manager deems portfolio changes
appropriate. The portfolio turnover rate is calculated by dividing the lesser of
the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of securities in the
portfolio during the year.
27
<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 credit the shareholder's account with additional Fund shares at the
then current net asset value in lieu of the cash payment and to thereafter issue
such shareholder's distributions in additional Fund shares.
The Fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Code. To qualify for that treatment, the
Fund must distribute to its shareholders for each taxable year at least 90% of
its investment company taxable income (consisting generally of net investment
income, net short term capital gain and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. Among these requirements are the following: (1) at least 90% of
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures, or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or any of the
following, that were held for less than three months - options, futures, or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures, or forward contracts thereon) that are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect thereto) ("Short-Short Limita tion"); and (3)
the Fund's investments must satisfy certain diversification requirements. In any
year during which the applicable provisions of the Code are satisfied, the Fund
will not be liable for Federal income tax on net income and gains that are
distributed to its shareholders. If for any taxable year the Fund does not
qualify for treatment as a RIC, all of its taxable income would be taxed at
corporate rates.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or in additional Fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by the Fund from U.S.
corporations. However, dividends received by a 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.
28
<PAGE>
Pursuant to the election, the Fund would treat those taxes as dividends paid to
its shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by the shareholder, the shareholder's proportionate
share of those taxes, (2) treat the shareholder's share of those taxes and of
any dividend paid by the Fund that represents income from foreign or U.S.
possessions sources as the shareholder's own income from those sources, and (3)
either deduct the taxes deemed paid by the shareholder in computing the
shareholder's taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against the shareholder's Federal income tax.
The Fund will report to its shareholders shortly after each taxable year their
respective shares of the Fund's income from sources within, and taxes paid to,
foreign countries and U.S. possessions if it makes this election.
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to Federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain from disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If the Fund invests in a PFIC and elects to treat the PFIC
as a "qualified electing fund", then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long term capital gain over net short term
capital loss) even if they are not distributed to the Fund; those amounts likely
would have to be distributed to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax. In most instances it will be very difficult, if
not impossible, to make this election because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Fund,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
OPTIONS, FUTURES, AND FORWARD CONTRACTS. The Fund's use of hedging
strategies, such as selling (writing) and purchasing options and futures
contracts and entering into forward contracts, involves complex rules that will
determine for income tax purposes the timing of recognition and character of the
gains and losses the Fund realizes in connection therewith. Gains from the
disposition of foreign currencies (except certain gains that may be excluded by
future regulations), and gains from options, futures, and forward contracts
derived by the Fund with respect to its business of investing in securities or
foreign currencies, will qualify as permissible income under the Income
Requirement. However, income from the disposition of options, futures and
forward contracts (other than those on foreign currencies) will be subject to
the Short-Short Limitation if they are held for less than three months. Income
from the disposition of foreign currencies, and options, futures and forward
contracts on foreign currencies also will be subject to the Short-Short
Limitation if they are held for less than three months and are not directly
related to the Fund's principal business of investing in securities (or options
and futures with respect thereto).
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not so qualify, it may be
forced to defer the closing out of certain options, futures, forward contracts
and foreign currency positions beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.
29
<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,
income and expense, and changes in net assets of the Fund. The Fund's fiscal
year ends on December 31.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company, Box 2197, Boston, MA 02109, 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, 1994, 1995
and 1996 approximately $24,778, $19,919, and $11,899, respectively.
AUDITORS
Tait, Weller & Baker, Two Penn Center Plaza, Suite 700, Philadelphia,
PA 19102-1707, are the Fund's independent accountants. The Fund's financial
statements are audited annually.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended December 31,
1996, together with the Report of the Fund's independent accountants thereon,
appear in the Fund's Annual Report to Shareholders and are incorporated herein
by reference.
30
<PAGE>
APPENDIX -- DESCRIPTIONS OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edged". Interest payments are
protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long term risk appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA An obligation rated AAA has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitments on the obligation is
still strong.
31
<PAGE>
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.
32
<PAGE>
BULL & BEAR FUNDS I, INC.
Part C - Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements to be included in Part A of this Registration
Statement:
Financial Highlights
Financial Statements to be included in Part B of this
Registration Statement:
The financial statements contained in the Fund's Annual Report
to Shareholders for the fiscal year ended December 31, 1996 are
incorporated into Part B by reference, except that the letter to
shareholders and other information contained on pages one and
two of said Annual Report is not so incorporated by reference
and is not part of this Registration Statement.
(b) Exhibits
(1) Amended and Restated Articles of Incorporation. Incorporated by
reference to corresponding Exhibit of Post-Effective Amendment No. 15 to
the Registration Statement, SEC File No. 33-6898, filed March 2, 1994.
(2) Amended By-Laws. Incorporated by reference to corresponding Exhibit of
Post-Effective Amendment No. 15 to the Registration Statement, SEC File
No. 33-6898, filed March 2, 1994.
(3) Voting trust agreement -- none
(4) (a) Specimen security with respect to Bull & Bear U.S. and Overseas
Fund. Incorporated by reference to corresponding Exhibit of
Post-Effective Amendment No. 17 to the Registration Statement,
SEC File No. 33-6898, filed April 28, 1995.
(5) Investment Advisory Contract with respect to Bull & Bear U.S. and
Overseas Fund. Incorporated by reference to corresponding Exhibit of
Post-Effective Amendment No. 15 to the Registration Statement, SEC File
No. 33-6898, filed March 2, 1994.
(6) Distribution Agreement. Incorporated by reference to corresponding
Exhibit of Post-Effective Amendment No. 15 to the Registration
Statement, SEC File No. 33-6898, filed March 2, 1994.
(7) Bonus, profit sharing or pension plans -- not applicable
(8) (a) Custodian Agreement. Incorporated herein by reference to
corresponding Exhibit of Post-Effective Amendment No. 5 to the
Registration Statement, SEC File No. 33-6898, filed May 1, 1990.
(b) Amendment to Custodian Agreement. Incorporated by reference to
corresponding Exhibit of Post-Effective Amendment No. 13 to the
Registration Statement, SEC File No. 33-6898, filed April 30,
1993.
(c) Amendment dated September 28, 1993 to Custodian Agreement.
Incorporated by reference to corresponding Exhibit of Post-
Effective Amendment No. 15 to the Registration Statement, SEC
File No. 33-6898, filed March 2, 1994.
<PAGE>
(d) Depository agreements. Incorporated by reference to
corresponding Exhibit of Post-Effective Amendment No. 13 to the
Registration Statement, SEC File No. 33-6898, filed April 30,
1993.
(e) Service and Agency Agreement. Incorporated by reference to
corresponding Exhibit of Post-Effective Amendment No. 17 to the
Registration Statement, SEC File No. 33-6898, filed April 28,
1995.
(f) Custodial Agreement and IRA Disclosure Statement. Incorporated
by reference to corresponding Exhibit of Post-Effective
Amendment No. 17 to the Registration Statement, SEC File No. 33-
6898, filed April 28, 1995.
(g) IRA Agreement. Incorporated by reference to corresponding
Exhibit of Post-Effective Amendment No. 17 to the Registration
Statement, SEC File No. 33-6898, filed April 28, 1995.
(h) Custody and Investment Accounting Agreement with Investors
Fiduciary Trust Company. Filed herewith.
(9) (a) Transfer Agency Agreement Incorporated by reference to
corresponding Exhibit of Post-Effective Amendment No. 17 to the
Registration Statement, SEC File No. 33-6898, filed April 28,
1995.
(b) Assignment Agreement. Incorporated by reference to corresponding
Exhibit of Post-Effective Amendment No. 17 to the Registration
Statement, SEC File No. 33-6898, filed April 28, 1995.
(c) Shareholder Services Agreement. Incorporated by reference to
corresponding Exhibit of Post-Effective Amendment No. 15 to the
Registration Statement, SEC File No. 33-6898, filed March 2,
1994.
(d) Agency Agreement. Incorporated by reference to corresponding
Exhibit of Post-Effective Amendment No. 17 to the Registration
Statement, SEC File No. 33-6898, filed April 28, 1995.
(e) Credit Agreement. Incorporated by reference to corresponding
Exhibit of Post-Effective Amendment No. 18 to the Registration
Statement, SEC File No. 33-6898, filed April 30, 1996.
(10) Opinion of counsel. Incorporated by reference to corresponding Exhibit
of the initial Registration Statement, SEC File No. 33-6898, filed July
3, 1986.
(11) Other opinions, appraisals, rulings and consents:
(a) Accountants' consent with respect to Bull & Bear U.S. and
Overseas Fund. Filed herewith.
(b) Opinion of counsel with respect to eligibility for effectiveness
under paragraph (b) of Rule 485. Filed herewith.
(12) Financial statements omitted from Item 23 -- not applicable
(13) Agreement for providing initial capital. Incorporated by reference to
corresponding Exhibit of Pre-Effective Amendment No. 2 to the
Registration Statement, SEC File No. 33-6898, filed June 12, 1987.
(14) Prototype retirement plans. Incorporated by reference to corresponding
Exhibit of Post-Effective Amendment No. 17 to the Registration
Statement, SEC File No. 33-6898, filed April 28, 1995.
(a) Standardized Profit Sharing Adoption Agreement
(b) Defined Contribution Basic Plan Document
(c) Standardized Money Purchase Adoption Agreement
(d) Simplified Profit Sharing Adoption Agreement
(e) Simplified Money Purchase Adoption Agreement
<PAGE>
(15) (a) Plan pursuant to Rule 12b-1 with respect to Bull & Bear U.S. and
Overseas Fund. Incorporated by reference to corresponding
Exhibit of Post-Effective Amendment No. 15 to the Registration
Statement, SEC File No. 33-6898, filed March 2, 1994.
(c) Related Agreement to Plans of Distribution pursuant to Rule 12b-
1 between Investor Service Center, Inc. and Hanover Direct
Advertising Company, Inc. Incorporated by reference to
corresponding Exhibit of Post-Effective Amendment No. 15 to the
Registration Statement, SEC File No. 33-6898, filed March 2,
1994.
(d) Broker services agreements. Incorporated by reference to
corresponding Exhibit of Post-Effective Amendment No. 13 to the
Registration Statement, SEC File No. 33-6898, filed April 30,
1993.
(16) (a) Schedule for computation of performance quotations with respect
to Bull & Bear U.S. and Overseas Fund. Incorporated by reference
to corresponding Exhibit of Post-Effective Amendment No. 15 to
the Registration Statement, SEC File No. 33-6898, filed March 2,
1994.
(17) Financial Data Schedule. Filed herewith.
(18) Plan pursuant to Rule 18f-3 -- not applicable.
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class (as of April 23, 1997)
- -------------- ----------------------
Shares of Common Stock, 1,413
$0.01 par value, Bull & Bear U.S. and
Overseas Fund
Item 27. 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
<PAGE>
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.
Paragraph 12 of the Investment Management Agreement between the Registrant
and Bull & Bear Advisers, Inc. ("Investment Manager") with respect to Bull &
Bear U.S. and Overseas Fund ("Investment Management Agreement") provides that
the Investment Manager shall not be liable to the Registrant or the Fund or any
shareholder of the Registrant for any error of judgment or mistake of law or for
any loss suffered by the Registrant in connection with the matters to which the
Investment Management Agreement relates, but nothing herein contained shall be
construed to protect the Investment Manager against any liability to the
Registrant or the Fund or the Registrant's shareholders by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
by reasons of its reckless disregard of obligations and duties under the
Overseas 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
<PAGE>
Center and any retail dealer, or arising out of supplementary literature or
advertising used by Service Center in connection with the Distribution
Agreement.
The Registrant undertakes to carry out all indemnification provisions of its
Articles of Incorporation and By-Laws and the above-described contract in
accordance with Investment Company Act Release No. 11330 (September 4, 1980) and
successor releases.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be provided to directors, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant with the successful defense of any action, suit or
proceeding or payment pursuant to any insurance policy) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
Item 28. Business and other Connections of Investment Adviser
The directors and officers of Bull & Bear Advisers, Inc., the Investment
Manager, are also directors and officers of other Funds managed by the
Investment Manager, Midas Management Corporation and Rockwood Advisers, Inc.,
both of which are wholly-owned subsidiaries of Bull & Bear Group, Inc.,
("Funds"). In addition, such officers are officers and directors of Bull & Bear
Group, Inc. and its other subsidiaries; Investor Service Center, Inc., the
distributor of the Funds and a registered broker/dealer, Midas Management
Corporation and Rockwood Advisers, Inc., registered investment advisers, and
Bull & Bear Securities, Inc., a discount brokerage firm. The Investment Manager
also serves as investment manager of Bull & Bear Dollar Reserves, a series of
Bull & Bear Funds II, Inc.; Bull & Bear Global Income Fund, Inc.; Bull & Bear
U.S. Government Securities Fund, Inc.; Bull & Bear Municipal Income Fund, Inc.;
Bull & Bear Gold Investors Ltd. and Bull & Bear Special Equities Fund, Inc.;
Midas Management Corporation serves as investment adviser to Midas Fund, Inc.;
and Rockwood Advisers, Inc. serves as investment adviser to Rockwood Fund, Inc.
Item 29. Principal Underwriters
a) In addition to the Registrant, Investor Service Center, Inc. ("Service
Center") serves as principal underwriter of Bull & Bear Gold Investors Ltd.,
Bull & Bear Funds II, Inc., Bull & Bear Special Equities Fund, Inc., Midas Fund,
Inc., and Rockwood Fund, Inc.
b) Service Center serves as the Registrant's principal underwriter with
respect to Bull & Bear Funds I, 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.
<PAGE>
<TABLE>
Name and Principal Position and Offices with Position and Offices
Business Address Investor Service Center, Inc. with Registrant
----------------- ----------------------------- ---------------
<S> <C> <C>
Bassett S. Winmill Director Chairman of the Board
11 Hanover Square
New York, NY 10005
Robert D. Anderson Vice Chairman and Director Vice Chairman and Director
11 Hanover Square
New York, NY 10005
Steven A. Landis Senior Vice President Senior Vice President
11 Hanover Square
New York, NY 10005
Mark C. Winmill Chairman, Director and Chief Co-President and Chief Financial
11 Hanover Square Financial Officer Officer
New York, NY 10005
Thomas B. Winmill President, Director Co-President and General Counsel
11 Hanover Square
New York, NY 10005
William J. Maynard Vice President and Secretary Vice President and Secretary
11 Hanover Square
New York, NY 10005
Kathleen B. Fliegauf Vice President and Assistant None
11 Hanover Square Secretary
New York, NY 10005
Irene K. Kawczynski Vice President None
11 Hanover Square
New York, NY 10005
Joseph Leung Treasurer Treasurer
11 Hanover Square
New York, NY 10005
</TABLE>
Item 30. Location of Accounts and Records
The minute books of Registrant and copies of its filings with the Commission
are located at 11 Hanover Square, New York, NY 10005 (the offices of the
Registrant and its Investment Manager). All other records required by Section
31(a) of the Investment Company Act of 1940 are located at Investors Bank &
Trust Company, 89 South Street, Boston, MA 02109 (the offices of Registrant's
custodian) and at DST Systems, Inc., P.O. Box 419789, Kansas City, MO 64141-4789
(the offices of the Registrant's transfer and dividend disbursing agent). Copies
of certain of the records located at Investors Bank & Trust Company and DST
Systems are kept at 11 Hanover Square, New York, NY 10005 (the offices of the
Registrant and its Investment Manager).
Item 31. Management Services -- none
Item 32. Undertakings -- The Registrant hereby undertakes to furnish
each person to whom a prospectus is delivered with a copy of the
Registrant's annual report to shareholders upon request and
without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485 (b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City, County and State of New York on this 29th day of
April, 1997.
BULL & BEAR FUNDS I, INC.
/s/ 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:
<TABLE>
<S> <C> <C>
Mark C. Winmill Co-President and Co-Chief April 29, 1997
- ---------------
Mark C. Winmill Executive Officer
Thomas B. Winmill Co-President and Co-Chief April 29, 1997
- -----------------
Thomas B. Winmill Executive Officer
Bassett S. Winmill Director, Chairman of the April 29, 1997
- ------------------
Bassett S. Winmill Board of Directors
Joseph Leung Treasurer, Principal April 29, 1997
- ------------
Joseph Leung Accounting Officer
Robert D. Anderson Director April 29, 1997
- ------------------
Robert D. Anderson
Bruce B. Huber Director April 29, 1997
- --------------
Bruce B. Huber
James E. Hunt Director April 29, 1997
- -------------
James E. Hunt
Frederick A. Parker, Jr. Director April 29, 1997
- ------------------------
Frederick A. Parker, Jr.
John B. Russell Director April 29, 1997
John B. Russell
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
8 (h) Custody and Investment Accounting Agreement
11 (a) Accountant's Consent
11 (b) Opinion of counsel with respect to eligibility for effectiveness
under paragraph (b) of Rule 485
17 Financial Data Schedule
<PAGE>
CUSTODY AND INVESTMENT ACCOUNTING AGREEMENT
THIS AGREEMENT made the 25th day of April, 1996, by and between
INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of
the state of Missouri, having its trust office located at l27 West 10th Street,
Kansas City, Missouri 64105 ("Custodian"), and each registered investment
company listed on Exhibit A hereto, as it may be amended from time to time, each
a having its principal office and place of business at 11 Hanover Square, New
York, NY 10005 (each a "Fund" and collectively the "Funds").
WITNESSETH:
WHEREAS, each Fund desires to appoint Investors Fiduciary Trust Company
as custodian of the securities and monies of such Fund's investment portfolio
and as its agent to perform certain investment accounting and recordkeeping
functions; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment; NOW THEREFORE, for and in consideration of the mutual promises
contained herein, the parties hereto, intending to be legally bound, mutually
covenant and agree as follows:
1. APPOINTMENT OF CUSTODIAN. Each Fund hereby constitutes and appoints
Custodian as:
A. Custodian of the securities and monies at any time owned by the Fund; and
B. Agent to perform certain accounting and recordkeeping functions relating to
portfolio transactions required of a duly registered investment company under
Rule 31a of the Investment Company Act of 1940 (the "1940 Act") and to calculate
the net asset value of the Fund.
2. REPRESENTATIONS AND WARRANTIES.
A. Each Fund hereby represents, warrants and acknowledges to Custodian:
1. That it is a corporation duly organized and existing and in good standing
under the laws of its state of organization, and that it is registered under the
1940 Act; and
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2. That it has the requisite power and authority under
applicable law, its articles of incorporation and its
bylaws to enter into this Agreement; that it has
taken all requisite action necessary to appoint
Custodian as custodian and investment accounting and
recordkeeping agent for the Fund; that this Agreement
has been duly executed and delivered by Fund; and
that this Agreement constitutes a legal, valid and
binding obligation of Fund, enforceable in accordance
with its terms.
B. Custodian hereby represents, warrants and acknowledges to the Funds:
1. That it is a trust company duly organized and existing and in good standing
under the laws of the State of Missouri; and
2. That it has the requisite power and authority under
applicable law, its charter and its bylaws to enter
into and perform this Agreement; that this Agreement
has been duly executed and delivered by Custodian;
and that this Agreement constitutes a legal, valid
and binding obligation of Custodian, enforceable in
accordance with its terms.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery of Assets
Except as permitted by the 1940 Act, each Fund will deliver or
cause to be delivered to Custodian on the effective date of
this Agreement, or as soon thereafter as practicable, and from
time to time thereafter, all portfolio securities acquired by
it and monies then owned by it or from time to time coming
into its possession during the time this Agreement shall
continue in effect. Custodian shall have no responsibility or
liability whatsoever for or on account of securities or monies
not so delivered.
B. Delivery of Accounts and Records
Each Fund shall turn over or cause to be turned over to
Custodian all of the Fund's relevant accounts and records
previously maintained. Custodian shall be entitled to rely
conclusively on the completeness and correctness of the
accounts and records turned over to it, and each Fund shall
indemnify and hold Custodian
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harmless of and from any and all expenses, damages and losses
whatsoever arising out of or in connection with any error,
omission, inaccuracy or other deficiency of such Fund's
accounts and records or in the failure of such Fund to
provide, or to provide in a timely manner, any accounts,
records or information needed by the Custodian to perform its
functions hereunder.
C. Delivery of Assets to Third Parties
Custodian will receive delivery of and keep safely the assets
of each Fund delivered to it from time to time segregated in a
separate account, and if any Fund is comprised of more than
one portfolio of investment securities (each a "Portfolio")
Custodian shall keep the assets of each Portfolio segregated
in a separate account. Custodian will not deliver, assign,
pledge or hypothecate any such assets to any person except as
permitted by the provisions of this Agreement or any agreement
executed by it according to the terms of Section 3.S. of this
Agreement. Upon delivery of any such assets to a subcustodian
pursuant to Section 3.S. of this Agreement, Custodian will
create and maintain records identifying those assets which
have been delivered to the subcustodian as belonging to the
applicable Fund, by Portfolio if applicable. The Custodian is
responsible for the safekeeping of the securities and monies
of the Funds only until they have been transmitted to and
received by other persons as permitted under the terms of this
Agreement, except for securities and monies transmitted to
subcustodians appointed under Section 3.S. of this Agreement,
for which Custodian remains responsible to the extent provided
in Section 3.S. hereof. Custodian may participate directly or
indirectly through a subcustodian in the Depository Trust
Company (DTC), Treasury/Federal Reserve Book Entry System (Fed
System), Participant Trust Company (PTC) or other depository
approved by the Funds (as such entities are defined at 17 CFR
Section 270.17f-4(b)) (each a "Depository" and collectively,
the "Depositories").
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D. Registration of Securities
The Custodian shall at all times hold registered securities of
the Funds in the name of the Custodian, the applicable Fund,
or a nominee of either of them, unless specifically directed
by instructions to hold such registered securities in
so-called "street name," provided that, in any event, all such
securities and other assets shall be held in an account of the
Custodian containing only assets of the applicable Fund, or
only assets held by the Custodian as a fiduciary or custodian
for customers, and provided further, that the records of the
Custodian at all times shall indicate the Fund or other
customer for which such securities and other assets are held
in such account and the respective interests therein. If,
however, any Fund directs the Custodian to maintain securities
in "street name", notwithstanding anything contained herein to
the contrary, the Custodian shall be obligated only to utilize
its best efforts to timely collect income due the Fund on such
securities and to notify the Fund of relevant corporate
actions including, without limitation, pendency of calls,
maturities, tender or exchange offers. All securities, and the
ownership thereof by the applicable Fund, which are held by
Custodian hereunder, however, shall at all times be
identifiable on the records of the Custodian. Each Fund agrees
to hold Custodian and its nominee harmless for any liability
as a shareholder of record of its securities held in custody.
E. Exchange of Securities
Upon receipt of instructions as defined herein in Section 4.A,
Custodian will exchange, or cause to be exchanged, portfolio
securities held by it for the account of a Fund for other
securities or cash issued or paid in connection with any
reorganization, recapitalization, merger, consolidation,
split-up of shares, change of par value, conversion or
otherwise, and will deposit any such securities in accordance
with the terms of any reorganization or protective plan.
Without instructions, Custodian is authorized to exchange
securities held by it in temporary form for securities in
definitive form, to effect an exchange of shares when the par
value of the stock is changed, and, upon receiving payment
therefor, to surrender
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bonds or other securities held by it at maturity or when
advised of earlier call for redemption, except that Custodian
shall receive instructions prior to surrendering any
convertible security.
F. Purchases of Investments of a Fund - Other Than Options and Futures Each Fund
will, on each business day on which a purchase of securities (other than options
and futures) shall be made by it, deliver to Custodian instructions which shall
specify with respect to each such purchase:
1. If applicable, the name of the Portfolio making such purchase;
2. The name of the issuer and description of the security;
3. The number of shares and the principal amount purchased, and accrued
interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage commission, taxes and other
expenses payable in connection with the purchase;
7. The total amount payable upon such purchase;
8. The name of the person from whom or the broker or dealer through whom
the purchase was made; and
9. Whether the security is to be received in certificated form or via a specifie
Depository.
In accordance with such instructions, Custodian will pay for
out of monies held for the account of the applicable Fund, but
only insofar as such monies are available for such purpose,
and receive the portfolio securities so purchased by or for
the account of the applicable Fund, except that Custodian may
in its sole discretion advance funds to the Fund which may
result in an overdraft because the monies held by the
Custodian on behalf of the Fund are insufficient to pay the
total amount payable upon such purchase. Except as otherwise
instructed by the applicable Fund, such payment shall be made
by the Custodian only upon receipt of securities: (a) by the
Custodian; (b) by a clearing corporation of a national
exchange of which
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the Custodian is a member; or (c) by a Depository.
Notwithstanding the foregoing, (i) in the case of a repurchase
agreement, the Custodian may release funds to a Depository
prior to the receipt of advice from the Depository that the
securities underlying such repurchase agreement have been
transferred by book-entry into the account maintained with
such Depository by the Custodian, on behalf of its customers,
provided that the Custodian's instructions to the Depository
require that the Depository make payment of such funds only
upon transfer by book-entry of the securities underlying the
repurchase agreement in such account; (ii) in the case of time
deposits, call account deposits, currency deposits and other
deposits, foreign exchange transactions, futures contracts or
options, the Custodian may make payment therefor before
receipt of an advice or confirmation evidencing said deposit
or entry into such transaction; and (iii) in the case of the
purchase of securities, the settlement of which occurs outside
of the United States of America, the Custodian may make, or
cause a subcustodian appointed pursuant to Section 3.S.2. of
this Agreement to make, payment therefor in accordance with
generally accepted local custom and market practice.
G. Sales and Deliveries of Investments of a Fund - Other Than Options and
Futures
Each Fund will, on each business day on which a sale of investment securities
other than options and futures) of such Fund has been made, deliver to Custodian
instructions specifying with respect to each such sale:
1. If applicable, the name of the Portfolio making such sale;
2. The name of the issuer and description of the securities;
3. The number of shares and principal amount sold, and accrued interest, if
any;
4. The date on which the securities sold were purchased or other information
identifying the securities sold and to be delivered;
5. The trade date;
6. The settlement date;
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7. The sale price per unit and the brokerage commission, taxes or other
expenses payable in connection with such sale;
8. The total amount to be received by Fund upon such sale; and
9. The name and address of the broker or dealer through whom or person to
whom the sale was made.
In accordance with such instructions, Custodian will deliver
or cause to be delivered the securities thus designated as
sold for the account of the applicable Fund to the broker or
other person specified in the instructions relating to such
sale. Except as otherwise instructed by the applicable Fund,
such delivery shall be made upon receipt of: (a) payment
therefor in such form as is satisfactory to the Custodian; (b)
credit to the account of the Custodian with a clearing
corporation of a national securities exchange of which the
Custodian is a member; or (c) credit to the account of the
Custodian, on behalf of its customers, with a Depository.
Notwithstanding the foregoing: (i) in the case of securities
held in physical form, such securities shall be delivered in
accordance with "street delivery custom" to a broker or its
clearing agent; or (ii) in the case of the sale of securities,
the settlement of which occurs outside of the United States of
America, the Custodian may make, or cause a subcustodian
appointed pursuant to Section 3.S.2. of this Agreement to
make, such delivery upon payment therefor in accordance with
generally accepted local custom and market practice.
H. Purchases or Sales of Options and Futures Each Fund will, on each business
day on which a purchase or sale of the following options and/or futures shall be
made by it, deliver to Custodian instructions which shall specify with respect
to each such purchase or sale:
1. If applicable, the name of the Portfolio making such purchase or sale;
2. Security Options
a. The underlying security;
b. The price at which purchased or sold;
c. The expiration date;
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d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising, expiring or
closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded; and
j. Name and address of the broker or dealer through whom the sale or
purchase was made.
3. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
d. The premium;
e. The multiple;
f. The expiration date;
g. Whether the transaction is an opening, exercising, expiring or
closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased; and
j. The name and address of the broker or dealer through whom the
sale or purchase was made, or other applicable settlement
instructions.
4. Security Index Futures Contracts
a. The last trading date specified in the contract and, when available,
the closing level, thereof;
b. The index level on the date the contract is entered into;
c. The multiple;
d. Any margin requirements;
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e. The need for a segregated margin account (in
addition to instructions, and if not already
in the possession of Custodian, Fund shall
deliver a substantially complete and
executed custodial safekeeping account and
procedural agreement which shall be
incorporated by reference into this Custody
Agreement); and
f. The name and address of the futures commission merchant through
whom the sale or purchase was made, or other applicable settlement
instructions.
5. Options on Index Future Contracts
a. The underlying index future contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
f. Whether the transaction involves an opening, exercising, expiring
or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Securities Pledged or Loaned
If specifically allowed for in the prospectus of the applicable Fund, and
subject to such additional terms and conditions as Custodian may require:
1. Upon receipt of instructions, Custodian will release or cause to be released
securities held in custody to the pledgee designated
in such instructions by way of pledge or
hypothecation to secure any loan incurred by such
Fund; provided, however, that the securities shall be
released only upon payment to Custodian of the monies
borrowed, except that in cases where additional
collateral is required to secure a borrowing already
made, further securities may be released or caused to
be released for that purpose upon receipt of
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instructions. Upon receipt of instructions, Custodian
will pay, but only from funds available for such
purpose, any such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing such loan.
2. Upon receipt of instructions, Custodian will release
securities held in custody to the borrower designated
in such instructions; provided, however, that the
securities will be released only upon deposit with
Custodian of full cash collateral as specified in
such instructions, and that such Fund will retain the
right to any dividends, interest or distribution on
such loaned securities. Upon receipt of instructions
and the loaned securities, Custodian will release the
cash collateral to the borrower.
J. Routine Matters
Custodian will, in general, attend to all routine and
mechanical matters in connection with the sale, exchange,
substitution, purchase, transfer, or other dealings with
securities or other property of the Funds except as may be
otherwise provided in this Agreement or directed from time to
time by the applicable Fund in writing.
K. Deposit Accounts
Custodian will open and maintain one or more special purpose
deposit accounts for each Fund in the name of Custodian
("Accounts"), subject only to draft or order by Custodian upon
receipt of instructions. All monies received by Custodian from
or for the account of any Fund shall be deposited in the
appropriate Accounts. Barring events not in the control of the
Custodian such as strikes, lockouts or labor disputes, riots,
war or equipment or transmission failure or damage, fire,
flood, earthquake or other natural disaster, action or
inaction of governmental authority or other causes beyond its
control, at 9:00 a.m., Kansas City time, on the second
business day after deposit of any check into an Account,
Custodian agrees to make Fed Funds available to the applicable
Fund in the amount of the check. Deposits made by Federal
Reserve wire will be available to the Fund immediately and ACH
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wires will be available to the Fund on the next business day.
Income earned on the portfolio securities will be credited to
the Fund based on the schedule attached as Exhibit A. The
Custodian will be entitled to reverse any credited amounts
where credits have been made and monies are not finally
collected. If monies are collected after such reversal, the
Custodian will credit the Fund in that amount. Custodian may
open and maintain Accounts in such banks or trust companies as
may be designated by it or by the applicable Fund in writing,
all such Accounts, however, to be in the name of Custodian and
subject only to its draft or order. Funds received and held
for the account of different Portfolios shall be maintained in
separate Accounts established for each Portfolio.
L. Income and Other Payments to the Funds
Custodian will:
1. Collect, claim and receive and deposit for the
account of the applicable Fund all income and other
payments which become due and payable on or after the
effective date of this Agreement with respect to the
securities deposited under this Agreement, and credit
the account of such Fund in accordance with the
schedule attached hereto as Exhibit A. If, for any
reason, the Fund is credited with income that is not
subsequently collected, Custodian may reverse that
credited amount.
2. Execute ownership and other certificates and affidavits for all federal,
state and local tax purposes in connection with the collection of bond and note
coupons; and
3. Take such other action as may be necessary or proper in connection with:
a. the collection, receipt and deposit of such income and other
payments, including but not limited to the presentation for payment
of:
1. all coupons and other income items requiring presentation;
and
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2. all other securities which may mature or be called,
redeemed, retired or otherwise become payable and
regarding which the Custodian has actual knowledge, or
should reasonably be expected to have knowledge; and
b. the endorsement for collection, in the name of the applicable Fund,
of all checks, drafts or other negotiable instruments.
Custodian, however, will not be required to institute suit or
take other extraordinary action to enforce collection except
upon receipt of instructions and upon being indemnified to its
satisfaction against the costs and expenses of such suit or
other actions. Custodian will receive, claim and collect all
stock dividends, rights and other similar items and will deal
with the same pursuant to instructions.
M. Payment of Dividends and Other Distributions
On the declaration of any dividend or other distribution on
the shares of capital stock of any Fund ("Fund Shares") by the
Board of Directors of such Fund, such Fund shall deliver to
Custodian instructions with respect thereto. On the date
specified in such instructions for the payment of such
dividend or other distribution, Custodian will pay out of the
monies held for the account of such Fund, insofar as the same
shall be available for such purposes, and credit to the
account of the Dividend Disbursing Agent for such Fund, such
amount as may be specified in such instructions.
N. Shares of a Fund Purchased by Such Fund
Whenever any Fund Shares are repurchased or redeemed by a
Fund, such Fund or its agent shall advise Custodian of the
aggregate dollar amount to be paid for such shares and shall
confirm such advice in writing. Upon receipt of such advice,
Custodian shall charge such aggregate dollar amount to the
account of such Fund and either deposit the same in the
account maintained for the purpose of paying for the
repurchase or redemption of Fund Shares or deliver the same in
accordance with such advice. Custodian shall not have any duty
or responsibility to determine that Fund Shares have been
removed from the proper shareholder account or
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accounts or that the proper number of Fund Shares have been
canceled and removed from the shareholder records.
O. Shares of a Fund Purchased from Such Fund
Whenever Fund Shares are purchased from any Fund, such Fund
will deposit or cause to be deposited with Custodian the
amount received for such shares. Custodian shall not have any
duty or responsibility to determine that Fund Shares purchased
from any Fund have been added to the proper shareholder
account or accounts or that the proper number of such shares
have been added to the shareholder records.
P. Proxies and Notices
Custodian will promptly deliver or mail or have delivered or
mailed to the applicable Fund all proxies properly signed, all
notices of meetings, all proxy statements and other notices,
requests or announcements affecting or relating to securities
held by Custodian for such Fund and will, upon receipt of
instructions, execute and deliver or cause its nominee to
execute and deliver or mail or have delivered or mailed such
proxies or other authorizations as may be required. Except as
provided by this Agreement or pursuant to instructions
hereafter received by Custodian, neither it nor its nominee
will exercise any power inherent in any such securities,
including any power to vote the same, or execute any proxy,
power of attorney, or other similar instrument voting any of
such securities, or give any consent, approval or waiver with
respect thereto, or take any other similar action.
Q. Disbursements
Custodian will pay or cause to be paid, insofar as funds are
available for the purpose, bills, statements and other
obligations of each Fund (including but not limited to
obligations in connection with the conversion, exchange or
surrender of securities owned by such Fund, interest charges,
dividend disbursements, taxes, management fees, custodian
fees, legal fees, auditors' fees, transfer agents' fees,
brokerage commissions, compensation to personnel, and other
operating expenses of such Fund) pursuant to instructions of
such Fund setting forth the name of the
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person to whom payment is to be made, the amount of the payment,
and the purpose of the payment.
R. Daily Statement of Accounts
Custodian will, within a reasonable time, render to each Fund
a detailed statement of the amounts received or paid and of
securities received or delivered for the account of the Fund
during each business day. Custodian will, from time to time,
upon request by any Fund, render a detailed statement of the
securities and monies held for such Fund under this Agreement,
and Custodian will maintain such books and records as are
necessary to enable it to do so. Custodian will permit such
persons as are authorized by any Fund, including such Fund's
independent public accountants, reasonable access to such
records or will provide reasonable confirmation of the
contents of such records, and if demanded, Custodian will
permit federal and state regulatory agencies to examine the
securities, books and records. Upon the written instructions
of any Fund or as demanded by federal or state regulatory
agencies, Custodian will instruct any subcustodian to permit
such persons as are authorized by such Fund, including such
Fund's independent public accountants, reasonable access to
such records or to provide reasonable confirmation of the
contents of such records, and to permit such agencies to
examine the books, records and securities held by such
subcustodian which relate to such Fund.
S. Appointment of Subcustodians
1. Notwithstanding any other provisions of this Agreement, all or any of the
monies or securities of the Funds may be held in Custodian's own custody
or in the custody of one or more other banks or trust companies acting as
subcustodians as may be selected by Custodian. Any such subcustodian
selected by the Custodian must have the qualifications required for a
custodian under the 1940 Act, as amended. Custodian shall be responsible
to the applicable Fund for any loss, damage or expense suffered or incurred
by the Fund resulting from the actions or omissions of any subcustodians
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selected and appointed by Custodian (except
subcustodians appointed at the request of the Fund
and as provided in Subsection 2 below) to the same
extent Custodian would be responsible to the Fund
under Section 5. of this Agreement if it committed
the act or omission itself. Upon request of any Fund,
Custodian shall be willing to contract with other
subcustodians reasonably acceptable to the Custodian
for purposes of (i) effecting third-party repurchase
transactions with banks, brokers, dealers, or other
entities through the use of a common custodian or
subcustodian, or (ii) providing depository and
clearing agency services with respect to certain
variable rate demand note securities, or (iii) for
other reasonable purposes specified by such Fund;
provided, however, that the Custodian shall be
responsible to the Fund for any loss, damage or
expense suffered or incurred by the Fund resulting
from the actions or omissions of any such
subcustodian only to the same extent such
subcustodian is responsible to the Custodian. The
Fund shall be entitled to review the Custodian's
contracts with any such subcustodians appointed at
its request. Custodian shall be responsible to the
applicable Fund for any loss, damage or expense
suffered or incurred by the Fund resulting from the
actions or omissions of any Depository only to the
same extent such Depository is responsible to
Custodian.
2. Notwithstanding any other provisions of this Agreement, each Fund's foreign
securities (as defined in Rule 17f-5(c)(1) under the 1940 Act) and each Fund's
cash or cash equivalents, in amounts deemed by the Fund to be reasonably
necessary to effect Fund's foreign securities transactions, may be held in the
custody of one or more banks or trust companies acting as subcustodians, and
thereafter, pursuant to a written contract or contracts as approved by such
Fund's Board of Directors, may be transferred to accounts maintained by any such
subcustodian with eligible foreign custodians, as defined in Rule 17f-5(c)(2).
Custodian shall be responsible to the Fund for any loss, damage or expense
suffered or incurred by the
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Fund resulting from the actions or omissions of any
foreign subcustodian only to the same extent the
foreign subcustodian is liable to the domestic
subcustodian with which the Custodian contracts for
foreign subcustody purposes.
T. Accounts and Records
Custodian will prepare and maintain, with the direction and as
interpreted by each Fund, its accountants and/or other
advisors, in complete, accurate and current form all accounts
and records (i) required to be maintained by such Fund with
respect to portfolio transactions under Rule 31a of the 1940
Act, (ii) required to be maintained as a basis for calculation
of such Fund's net asset value, and (iii) as otherwise agreed
upon between the parties. Custodian will preserve said records
in the manner and for the periods prescribed in the 1940 Act
or for such longer period as is agreed upon by the parties.
Custodian relies upon each Fund to furnish, in writing or its
electronic or digital equivalent, accurate and timely
information needed by Custodian to complete such Fund's
records and perform daily calculation of such Fund's net asset
value. Custodian shall incur no liability and each Fund shall
indemnify and hold harmless Custodian from and against any
liability arising from any failure of such Fund to furnish
such information in a timely and accurate manner, even if such
Fund subsequently provides accurate but untimely information.
It shall be the responsibility of each Fund to furnish
Custodian with the declaration, record and payment dates and
amounts of any dividends or income and any other special
actions required concerning each of its securities when such
information is not readily available from generally accepted
securities industry services or publications.
U. Accounts and Records Property of the Funds
Custodian acknowledges that all of the accounts and records
maintained by Custodian pursuant to this Agreement are the
property of the applicable Fund, and will be made available to
such Fund for inspection or reproduction within a reasonable
period of time, upon demand. Custodian will assist any Fund's
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independent auditors, or upon approval of the Fund, or upon
demand, any regulatory body, in any requested review of the
Fund's accounts and records but shall be reimbursed by the
Fund for all expenses and employee time invested in any such
review outside of routine and normal periodic reviews. Upon
receipt from any Fund of the necessary information or
instructions, Custodian will supply information from the books
and records it maintains for such Fund that the Fund needs for
tax returns, questionnaires, periodic reports to shareholders
and such other reports and information requests as such Fund
and Custodian shall agree upon from time to time.
V. Adoption of Procedures
Custodian and each Fund may from time to time adopt procedures
as they agree upon, and Custodian may conclusively assume that
no procedure approved or directed by a Fund or its accountants
or other advisors conflicts with or violates any requirements
of its prospectus, articles of incorporation, bylaws, any
applicable law, rule or regulation, or any order, decree or
agreement by which such Fund may be bound. Each Fund will be
responsible to notify Custodian of any changes in statutes,
regulations, rules, requirements or policies which might
necessitate changes in Custodian's responsibilities or
procedures.
W. Calculation of Net Asset Value
Custodian will calculate each Fund's net asset value, in
accordance with such Fund's prospectus. Custodian will price
the securities and foreign currency holdings of each Fund for
which market quotations are available by the use of outside
services designated by such Fund which are normally used and
contracted with for this purpose; all other securities and
foreign currency holdings will be priced in accordance with
such Fund's instructions. Custodian will have no
responsibility for the accuracy of the prices quoted by these
outside services or for the information supplied by any Fund
or for acting upon such instructions.
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X. Advances
In the event Custodian or any subcustodian shall, in its sole
discretion, advance cash or securities for any purpose
(including but not limited to securities settlements, purchase
or sale of foreign exchange or foreign exchange contracts and
assumed settlement) for the benefit of any Fund or Portfolio
thereof, the advance shall be payable by the applicable Fund
or Portfolio on demand. Any such cash advance shall be subject
to an overdraft charge at the rate set forth in the
then-current fee schedule from the date advanced until the
date repaid. As security for each such advance, each Fund
hereby grants Custodian and such subcustodian a lien on and
security interest in all property at any time held for the
account of the Fund or applicable Portfolio, including without
limitation all assets acquired with the amount advanced.
Should the Fund fail to promptly repay the advance, the
Custodian and such subcustodian shall be entitled to utilize
available cash and to dispose of such Fund's or Portfolio's
assets pursuant to applicable law to the extent necessary to
obtain reimbursement of the amount advanced and any related
overdraft charges.
Y. Exercise of Rights; Tender Offers
Upon receipt of instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar securities to the
issuer or trustee thereof, or to the agent of such issuer or
trustee, for the purpose of exercise or sale, provided that
the new securities, cash or other assets, if any, are to be
delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the
consideration for such securities is to be paid or delivered
to the Custodian or the tendered securities are to be returned
to the Custodian.
4. INSTRUCTIONS.
A. The term "instructions", as used herein, means written
(including telecopied or telexed) or oral instructions which
Custodian reasonably believes were given by a designated
representative of any Fund. Each Fund shall deliver to
Custodian, prior to delivery of any assets to Custodian and
thereafter from time to time as changes
18
<PAGE>
therein are necessary, written instructions naming one or more
designated representatives to give instructions in the name
and on behalf of such Fund, which instructions may be received
and accepted by Custodian as conclusive evidence of the
authority of any designated representative to act for such
Fund and may be considered to be in full force and effect (and
Custodian will be fully protected in acting in reliance
thereon) until receipt by Custodian of notice to the contrary.
Unless such written instructions delegating authority to any
person to give instructions specifically limit such authority
to specific matters or require that the approval of anyone
else will first have been obtained, Custodian will be under no
obligation to inquire into the right of such person, acting
alone, to give any instructions whatsoever which Custodian may
receive from such person. If any Fund fails to provide
Custodian any such instructions naming designated
representatives, any instructions received by Custodian from a
person reasonably believed to be an appropriate representative
of such Fund shall constitute valid and proper instructions
hereunder. "Designated representatives" of a Fund may include
its employees and agents, including investment managers and
their employees.
B. No later than the next business day immediately following each
oral instruction, the applicable Fund will send Custodian
written confirmation of such oral instruction. At Custodian's
sole discretion, Custodian may record on tape, or otherwise,
any oral instruction whether given in person or via telephone,
each such recording identifying the date and the time of the
beginning and ending of such oral instruction.
C. If Custodian shall provide any Fund any direct access to any
computerized recordkeeping and reporting system used hereunder
or if Custodian and any Fund shall agree to utilize any
electronic system of communication, such Fund shall be fully
responsible for any and all consequences of the use or misuse
of the terminal device, passwords, access instructions and
other means of access to such system(s) which are utilized by,
assigned to or otherwise made available to the Fund. Each Fund
agrees to implement and enforce appropriate security policies
and procedures
19
<PAGE>
to prevent unauthorized or improper access to or use of such
system(s). Custodian shall be fully protected in acting
hereunder upon any instructions, communications, data or other
information received by Custodian by such means as fully and
to the same effect as if delivered to Custodian by written
instrument signed by the requisite authorized
representative(s) of the applicable Fund. Each Fund shall
indemnify and hold Custodian harmless from and against any and
all losses, damages, costs, charges, counsel fees, payments,
expenses and liability which may be suffered or incurred by
Custodian as a result of the use or misuse, whether authorized
or unauthorized, of any such system(s) by such Fund or by any
person who acquires access to such system(s) through the
terminal device, passwords, access instructions or other means
of access to such system(s) which are utilized by, assigned to
or otherwise made available to the Fund, except to the extent
attributable to any negligence or willful misconduct by
Custodian.
5. LIMITATION OF LIABILITY OF CUSTODIAN.
A. Custodian shall at all times use reasonable care and due diligence and act in
good faith in performing its duties under this Agreement. Custodian shall not be
responsible for, and the applicable Fund shall indemnify and hold Custodian
harmless from and against, any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liability which may be asserted against Custodian,
incurred by Custodian or for which Custodian may be held to be liable, arising
out of or attributable to:
1. All actions taken by Custodian pursuant to this Agreement or any
instructions provided to it hereunder, provided that Custodian has acted in
good faith and with due diligence and reasonable care; and
2. The Fund's refusal or failure to comply with the
terms of this Agreement (including without limitation
the Fund's failure to pay or reimburse Custodian
under this indemnification provision), the Fund's
negligence or willful misconduct, or the failure of
any representation or warranty of the
20
<PAGE>
Fund hereunder to be and remain true and correct in
all respects at all times.
B. Custodian may request and obtain at the expense of the
applicable Fund the advice and opinion of counsel for such
Fund or of its own counsel with respect to questions or
matters of law, and it shall be without liability to such Fund
for any action taken or omitted by it in good faith, in
conformity with such advice or opinion. If Custodian
reasonably believes that it could not prudently act according
to the instructions of any Fund or the Fund's accountants or
counsel, it may in its discretion, with notice to the Fund,
not act according to such instructions.
C. Custodian may rely upon the advice and statements of any Fund,
its accountants and officers or other authorized individuals,
and other persons believed by it in good faith to be expert in
matters upon which they are consulted, and Custodian shall not
be liable for any actions taken, in good faith, upon such
advice and statements.
D. If any Fund requests Custodian in any capacity to take any
action which involves the payment of money by Custodian, or
which might make it or its nominee liable for payment of
monies or in any other way, Custodian shall be indemnified and
held harmless by such Fund against any liability on account of
such action; provided, however, that nothing herein shall
obligate Custodian to take any such action except in its sole
discretion.
E. Custodian shall be protected in acting as custodian hereunder upon any
instructions, advice, notice, request, consent, certificate or other
instrument or paper appearing to it to be genuine and to have been properly
executed. Custodian shall be entitled to receive upon request as conclusive
proof of any fact or matter required to be ascertained from any Fund
hereunder a certificate signed by an officer or designated representative
of the Fund. Each Fund shall also provide Custodian instructions with
respect to any matter concerning this Agreement requested by Custodian.
21
<PAGE>
F. Custodian shall be under no duty or obligation to inquire into, and shall not
be liable for:
1. The validity of the issue of any securities purchased by or for any Fund, the
legality of the purchase of any securities or foreign currency positions or
evidence of ownership required by any Fund to be received by Custodian, or the
propriety of the decision to purchase or amount paid therefor;
2. The legality of the sale of any securities or foreign currency positions by
or for any Fund, or the propriety of the amount for which the same are sold;
3. The legality of the issue or sale of any Fund Shares, or the sufficiency of
the amount to be received therefor;
4. The legality of the repurchase or redemption of any Fund Shares, or the
propriety of the amount to be paid therefor; or
5. The legality of the declaration of any dividend by any Fund, or the legality
of the issue of any Fund Shares in payment of any stock dividend.
G. Custodian shall not be liable for, or considered to be
Custodian of, any money represented by any check, draft, wire
transfer, clearinghouse funds, uncollected funds, or
instrument for the payment of money to be received by it on
behalf of the applicable Fund until Custodian actually
receives such money; provided, however, that it shall advise
such Fund promptly if it fails to receive any such money in
the ordinary course of business and shall cooperate with the
Fund toward the end that such money shall be received.
H. Except as provided in Section 3.S., Custodian shall not be
responsible for loss occasioned by the acts, neglects,
defaults or insolvency of any broker, bank, trust company, or
any other person with whom Custodian may deal.
I. Custodian shall not be responsible or liable for the failure
or delay in performance of its obligations under this
Agreement, or those of any entity for which it is responsible
hereunder, arising out of or caused, directly or indirectly,
by circumstances beyond the affected entity's reasonable
control, including, without limitation: any interruption, loss
or malfunction of any utility, transportation, or
22
<PAGE>
communication service or computer (hardware or software)
services of third parties unrelated to Custodian; inability to
obtain labor, material, equipment or transportation, or a
delay in mails; governmental or exchange action, statute,
ordinance, rulings, regulations or direction; war, strike,
riot, emergency, civil disturbance, terrorism, vandalism,
explosions, labor disputes, freezes, floods, fires, tornados,
acts of God or public enemy, revolutions, or insurrection.
J. EXCEPT FOR VIOLATIONS OF SECTION 9, IN NO EVENT AND UNDER NO
CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE
TO ANYONE, INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY,
FOR CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES FOR ANY ACT OR
FAILURE TO ACT UNDER ANY PROVISION OF THIS AGREEMENT EVEN IF
ADVISED OF THIS POSSIBILITY THEREOF.
6. COMPENSATION. In consideration for its services hereunder as Custodian and
- ------------
investment accounting and recordkeeping agent, each Fund will pay to Custodian
such compensation as shall be set forth in a separate fee schedule to be agreed
to by the Funds and Custodian from time to time. A copy of the initial fee
schedule is attached hereto and incorporated herein by reference. Custodian
shall also be entitled to receive, and each Fund agrees to pay to Custodian, on
demand, reimbursement for Custodian's cash disbursements and reasonable
out-of-pocket costs and expenses, including attorney's fees, incurred by
Custodian in connection with the performance of services hereunder. Custodian
may charge such compensation against monies held by it for the account of the
applicable Fund. Custodian will also be entitled to charge against any monies
held by it for the account of the applicable Fund the amount of any loss,
damage, liability, advance, overdraft or expense for which it shall be entitled
to reimbursement from such Fund, including but not limited to fees and expenses
due to Custodian for other services provided to the Fund by Custodian. Custodian
will be entitled to reimbursement by the Fund for the losses, damages,
liabilities, advances, overdrafts and expenses of subcustodians only to the
extent that (i) Custodian would have been entitled to reimbursement hereunder if
it
23
<PAGE>
had incurred the same itself directly, and (ii) Custodian is obligated
to reimburse the subcustodian therefor.
7. TERM AND TERMINATION. The initial term of this Agreement shall be for a
period --------------------
of one year. Thereafter, each Fund and Custodian may terminate the same by
notice in writing, delivered or mailed, postage prepaid, to the other and
received not less than ninety (90) days prior to the date upon which such
termination will take effect. Upon termination of this Agreement, each
applicable Fund will pay Custodian its fees and compensation due hereunder and
its reimbursable disbursements, costs and expenses paid or incurred to such date
and each applicable Fund shall designate a successor custodian by notice in
writing to Custodian by the termination date. In the event no written order
designating a successor custodian has been delivered to Custodian on or before
the date when such termination becomes effective, then Custodian may, at its
option, deliver the securities, funds and properties of the Fund to a bank or
trust company at the selection of Custodian, and meeting the qualifications for
custodian set forth in the 1940 Act and having not less that Two Million Dollars
($2,000,000) aggregate capital, surplus and undivided profits, as shown by its
last published report, or apply to a court of competent jurisdiction for the
appointment of a successor custodian or other proper relief, or take any other
lawful action under the circumstances; provided, however, that the applicable
Fund shall reimburse Custodian for its costs and expenses, including reasonable
attorney's fees, incurred in connection therewith. Custodian will, upon
termination of this Agreement and payment of all sums due to Custodian from each
applicable Fund hereunder or otherwise, deliver to the successor custodian so
specified or appointed, or as specified by the court, at Custodian's office, all
securities then held by Custodian hereunder, duly endorsed and in form for
transfer, and all funds and other properties of each applicable Fund deposited
with or held by Custodian hereunder, and Custodian will co-operate in effecting
changes in book-entries at all Depositories. Upon delivery to a successor
custodian or as specified by the court, Custodian will have no further
obligations or liabilities under this Agreement. Thereafter such successor will
be the successor custodian under this Agreement and will be entitled to
reasonable compensation for its services. In the event that securities, funds
24
<PAGE>
and other properties remain in the possession of the Custodian after
the date of termination hereof owing to failure of any Fund to appoint
a successor custodian, the Custodian shall be entitled to compensation
as provided in the then-current fee schedule hereunder for its services
during such period as the Custodian retains possession of such
securities, funds and other properties, and the provisions of this
Agreement relating to the duties and obligations of the Custodian shall
remain in full force and effect.
8. NOTICES. Notices, requests, instructions and other writings addressed
to any Fund at 11 Hanover Square, New York, NY 10005, or at such other
address as the Funds may have designated to Custodian in writing, will
be deemed to have been properly given to such Fund hereunder; and
notices, requests, instructions and other writings addressed to
Custodian at its offices at 127 West 10th Street, Kansas City, Missouri
64105, Attention: Custody Department, or to such other address as it
may have designated to the Funds in writing, will be deemed to have
been properly given to Custodian hereunder.
9. CONFIDENTIALITY.
A. Each Fund shall preserve the confidentiality of the computerized investment
portfolio and custody recordkeeping and accounting systems used by Custodian
(the "Systems") and the tapes, books, reference manuals, instructions, records,
programs, documentation and information of, and other materials relevant to, the
Systems and the business of Custodian ("Confidential Information"). Each Fund
agrees that it will not voluntarily disclose any such Confidential Information
to any other person other than its own employees who reasonably have a need to
know such information pursuant to this Agreement. Each Fund shall return all
such Confidential Information to Custodian upon termination or expiration of
this Agreement.
B. Each Fund has been informed that the Systems are licensed for use by
Custodian from third parties ("Licensors"), and each Fund acknowledges that
Custodian and the Licensors have proprietary rights in and to the Systems and
all other Custodian or Licensor programs, code, techniques, know-how, data
bases, supporting documentation, data formats, and procedures, including without
limitation any
25
<PAGE>
changes or modifications made at the request or expense or
both of any Fund (collectively, the "Protected Information").
Each Fund acknowledges that the Protected Information
constitutes confidential material and trade secrets of
Custodian and the Licensors. Each Fund shall preserve the
confidentiality of the Protected Information, and each Fund
hereby acknowledges that any unauthorized use, misuse,
disclosure or taking of Protected Information, residing or
existing internal or external to a computer, computer system,
or computer network, or the knowing and unauthorized accessing
or causing to be accessed of any computer, computer system, or
computer network, may be subject to civil liabilities and
criminal penalties under applicable law. Each Fund shall so
inform employees and agents who have access to the Protected
Information or to any computer equipment capable of accessing
the same. The Licensors are intended to be and shall be third
party beneficiaries of the Funds' obligations and undertakings
contained in this paragraph.
10. MULTIPLE FUNDS AND PORTFOLIOS.
A. Each Fund, and as to any Fund which is comprised of more than one Portfolio,
each Portfolio, shall be regarded for all purposes hereunder as a separate party
apart from each other. Unless the context otherwise requires, with respect to
every transaction covered by this Agreement, every reference herein to a Fund
shall be deemed to relate solely to the particular Fund, and, if applicable,
Portfolio thereof to which such transaction relates. Under no circumstances
shall the rights, obligations or remedies with respect to a particular Fund or
Portfolio constitute a right, obligation or remedy applicable to any other. The
use of this single document to memorialize the separate agreement of each Fund
is understood to be for clerical convenience only and shall not constitute any
basis for joining the Funds for any reason.
B. Additional Funds and Portfolios may be added to this Agreement, provided that
Custodian consents to such addition. Rates or charges for each additional Fund
or Portfolio shall be as agreed upon by Custodian and the applicable Fund in
writing.
26
<PAGE>
Additional Funds may be added hereto by execution of
instruments amending Exhibit A to add such Funds thereto.
11. MISCELLANEOUS.
A. This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws of the State of
Missouri, without reference to the choice of laws principles thereof.
B. All terms and provisions of this Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns.
C. The representations and warranties, the indemnifications extended hereunder,
and the provisions of Section 9. hereof are intended to and shall continue after
and survive the expiration, termination or cancellation of this Agreement.
D. No provisions of the Agreement may be amended or modified in any manner
except by a written agreement properly authorized and executed by each party
hereto.
E. The failure of any party to insist upon the performance of any terms or
conditions of this Agreement or to enforce any rights resulting from any breach
of any of the terms or conditions of this Agreement, including the payment of
damages, shall not be construed as a continuing or permanent waiver of any such
terms, conditions, rights or privileges, but the same shall continue and remain
in full force and effect as if no such forbearance or waiver had occurred. No
waiver, release or discharge of any party's rights hereunder shall be effective
unless contained in a written instrument signed by the party sought to be
charged.
F. The captions in the Agreement are included for convenience of reference only,
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
G. This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
27
<PAGE>
H. If any provision of this Agreement shall be determined to be invalid or
unenforceable, the remaining provisions of this Agreement shall not be affected
thereby, and every provision of this Agreement shall remain in full force and
effect and shall remain enforceable to the fullest extent permitted by
applicable law.
I. This Agreement may not be assigned by any Fund or Custodian without the prior
written consent of the other.
J. Neither the execution nor performance of this Agreement shall be deemed to
create a partnership or joint venture by and between Custodian and any Fund or
Funds.
K. Except as specifically provided herein, this Agreement does not in any way
affect any other agreements entered into among the parties hereto and any
actions taken or omitted by either party hereunder shall not affect any rights
or obligations of the other party hereunder. IN WITNESS WHEREOF, the parties
have caused this Agreement to be executed by their respective duly authorized
officers.
INVESTORS FIDUCIARY TRUST COMPANY
By:
Title:
EACH REGISTERED INVESTMENT
COMPANY LISTED ON EXHIBIT A HERETO
By:
Title:
28
<PAGE>
EXHIBIT A
LIST OF FUNDS
Bull & Bear Funds I, Inc.:
Bull & Bear U.S. and Overseas Fund
Bull & Bear Funds II, Inc.:
Bull & Bear Dollar Reserves
Bull & Bear Global Income Fund, Inc.
Bull & Bear U.S. Government Securities Fund, Inc.
Bull & Bear Special Equities Fund, Inc.
Bull & Bear Gold Investors Ltd.
Bull & Bear Municipal Income Fund, Inc.
Midas Fund, Inc.
Rockwood Fund, Inc.
29
<PAGE>
EXHIBIT B
INVESTORS FIDUCIARY TRUST COMPANY
AVAILABILITY SCHEDULE BY TRANSACTION TYPE
<TABLE>
TRANSACTION DTC PHYSICAL FED
TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE
- ---- ----------- ---------- ----------- ---------- ----------- ----------
=================== =============== ============= =================== ============= =============== ==========================
<S> <C> <C> <C> <C> <C> <C>
Calls Puts As Received C or F* As Received C or F*
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
Tender Reorgs. As Received C As Received C N/A
Dividends Paydate C Paydate C N/A
Floating Rate Int. Paydate C Paydate C N/A
Floating Rate Int. N/A As Rate Received C N/A
(No Rate)
Mtg. Backed P&I Paydate C Paydate + 1 Bus. C Paydate F
Day
Fixed Rate Int. Paydate C Paydate C Paydate F
Euroclear N/A C Paydate C
=================== =============== ============= =================== ============= =============== ==========================
</TABLE>
Legend
C = Clearinghouse Funds
F = Fed Funds
N/A = Not Applicable
* Availability based on how received.
30
<PAGE>
Consent of Independent Certified Public Accounts
We consent to the use of our report dated January 17, 1997 on the financial
statements and financial highlights of Bull & Bear U.S. and Overseas Fund.
Such financial statements and financial highlights appear in the 1996 Annual
Report to Shareholders which is incorporated by reference in the Statement of
Additional Information filed in Post-Effective Amendment No. 20 under
the Securities Act of 1933 and Amendment No. 20 under the Investment Company Act
of 1940 to the Registration Statement on Form N-1A of Bull & Bear U.S. and
Overseas Fund. We also consent to the references to our Firm in the
Registration Statement and Prospectus.
/S/ Tait, Weller & Baker
Tait, Weller & Baker
Philadelphia, Pennsylvania
April 18, 1997
April 22, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are counsel to Bull & Bear Funds I, Inc. (the "Fund"), and in
so acting have reviewed Post-Effective Amendment No. 20 (the
"Post-Effective Amendment") to the Fund's Registration Statement
on Form N-1A, Registration File No. 33-6898, pertaining to the
Fund's Bull & Bear U.S. and Overseas Fund. Representatives of the
Fund have advised us that the Fund will file the Post-Effective
Amendment pursuant to paragraph (b) of Rule 485 ("Rule 485")
promulgated under the Securities Act of 1933. In connection
therewith, the Fund has requested that we provide this letter.
In our examination of the Post-Effective Amendment, we have
assumed the conformity to the originals of all documents submitted
to us as copies.
Based upon the foregoing, we hereby advise you that the prospectus
included as part of the Post-Effective Amendment does not include
disclosure which we believe would render it ineligible to become
effective pursuant to paragraph (b) of Rule 485.
Very truly yours,
STROOCK & STROOCK & LAVAN LLP
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information wxtraced form Bull & Bear
U.S. and Overseas Fund Annual Report and is qualifies in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000796532
<NAME> Bull & Bear Funds I, Inc.
<SERIES>
<NUMBER> 1
<NAME> U.S. and Overseas
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<INVESTMENTS-AT-COST> 8,864,171
<INVESTMENTS-AT-VALUE> 10,041,377
<RECEIVABLES> 4,638
<ASSETS-OTHER> 58,367
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,104,382
<PAYABLE-FOR-SECURITIES> 55,906
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 212,344
<TOTAL-LIABILITIES> 268,250
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,581,246
<SHARES-COMMON-STOCK> 1,243,151
<SHARES-COMMON-PRIOR> 1,173,429
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 77,652
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,177,234
<NET-ASSETS> 9,836,132
<DIVIDEND-INCOME> 36,872
<INTEREST-INCOME> 11,208
<OTHER-INCOME> 0
<EXPENSES-NET> 331,205
<NET-INVESTMENT-INCOME> (283,125)
<REALIZED-GAINS-CURRENT> 1,217,380
<APPREC-INCREASE-CURRENT> (397,162)
<NET-CHANGE-FROM-OPS> 820,218
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1,009,699
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 321,372
<NUMBER-OF-SHARES-REDEEMED> 595,238
<SHARES-REINVESTED> 113,076
<NET-CHANGE-IN-ASSETS> 28,353
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (17,859)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 102,565
<INTEREST-EXPENSE> 705
<GROSS-EXPENSE> 331,205
<AVERAGE-NET-ASSETS> 10,317,934
<PER-SHARE-NAV-BEGIN> 8.36
<PER-SHARE-NII> (.24)
<PER-SHARE-GAIN-APPREC> .68
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.89)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.91
<EXPENSE-RATIO> 3.20
<AVG-DEBT-OUTSTANDING> 8,535
<AVG-DEBT-PER-SHARE> .01
</TABLE>
