[LOGO]
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Mail this completed application to MUTUAL
the Fund's transfer agent: SERIES
Mutual Series Fund Inc. FUND
c/o PFPC Inc. INC.
P.O. Box 8901
Wilmington, DE 19899-8901
If using an overnight express delivery service
send to:
Mutual Series Fund Inc.
c/o PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809-3710
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PROSPECTUS
AND
APPLICATION
-----------
PROSPECTUS
Dated June 25, 1996
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If you have any questions after reading
this prospectus, please call the FUND
1-800-448-FUND
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Mutual European Fund
will begin operations
on July 3, 1996.
<PAGE>
Transfer Agent and Fund Addresses
Please mail new account applications, redemption requests and all
other correspondence to:
Mutual Series Fund
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901
Please mail additional investments for existing accounts to:
Mutual Series Fund
c/o PFPC Inc.
P.O. Box 8906
Wilmington, DE 19899-8906
All mail sent by any overnight carrier or priority mail should be
addressed to:
Mutual Series Fund
c/o PFPC Inc.
400 Bellevue Parkway -- Suite 108
Wilmington, DE 19809-3710
Any correspondence directed to the Fund's office rather than its
transfer agent should be sent to:
Mutual Series Fund
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Important Phone Numbers
1-800-858-3013
Mutual Series Fund Automated Telephone Inquiry System
Call this number 24 hours a day, 7 days a week.
It's the fastest way to receive net asset value, account balance and
distribution information, order duplicate statements, and confirm
your last purchase or redemption transaction.
1-800-448-FUND
Mutual Series Shareholder Services Department
Call this number Monday-Friday, 8:00 a.m. to 6:00 p.m. EST
A shareholder service representative will be happy to answer you
questions or perform purchase transactions for existing shareholders.
1-800-553-3014
Mutual Series Fund Prospectus/Document Requests
Call this number 24 hours a day, 7 days a week.
A representative will be happy to send you prospectus, applications,
annual reports or retirement account documents.
Wire Instructions
To wire an investment into an existing account, wire funds to:
PNC Bank
PHL/ABA #0310-0005-3
Attention: Mutual Series Fund
Purchase Account DDA 8551030376
[Series Name]
[Shareholder Account Number]
[Order/Confirm Number]
<PAGE>
PROSPECTUS
Dated June 25, 1996
MUTUAL SERIES FUND INC. Mutual European Fund
51 John F. Kennedy Parkway will begin operations
Short Hills, NJ 07078 on July 3, 1996.
Mutual Series Fund Inc. (the "Fund") is a no-load, diversified, open-end
management investment company organized as a series fund with five series
currently available. Each of Mutual Shares Fund ("Mutual Shares") originally
organized in 1949, Mutual Qualified Fund ("Qualified") and Mutual Beacon Fund
("Beacon") and Mutual European Fund ("European"), has capital appreciation,
which occasionally may be short term, as its principal investment objective and
income as its secondary objective. Mutual Discovery Fund ("Discovery") has
long-term capital appreciation as its objective which it will seek to achieve by
including investments in small capitalization companies. European anticipates
having at least 65% of its invested assets invested in European investments.
Each series may invest in the securities of companies involved in prospective
mergers, consolidations, liquidations and reorganizations, or as to which there
exist tender or exchange offers. The series may also invest in other debt and
equity securities including junk bonds as described on page 9. Each series may
invest up to 15% of its net assets in illiquid securities; this could result in
more risk as well as higher transaction costs than investing in more liquid
assets.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in any series of the Fund. Please retain
this Prospectus for future reference. A Statement of Additional Information,
dated June 25, 1996, containing additional and more detailed information about
the Fund and its series has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of Additional
Information and the most recent Annual Report of each series which contains
additional performance information can be obtained without charge by calling the
Fund at 1-800-553-3014, or writing to the Fund at its above address, Attention:
Shareholder Services.
If you have any questions after reading the prospectus please call the Fund
at 1-800-448-FUND.
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.
----------
Investment Adviser
HEINE SECURITIES CORPORATION
Investors should be aware that the Adviser has entered into a definitive
agreement to sell its assets to an affiliate of Franklin Resources, Inc. (the
"Transaction"). The investment personnel currently involved in managing each
series, including Michael F. Price, will continue in their present capacities
and the investment objectives and policies of each series will remain intact.
The substantive terms of the advisory agreements and the advisory fees will
remain unchanged, but the Transaction will change the ownership of the
investment adviser. The Transaction is continued upon the approval of the new
advisory agreements by the Fund's Board of Directors and by the shareholders of
record of each series as of a record date that will be determined by the Board
of Directors.
<PAGE>
ANNUAL EXPENSE TABLES
Annual Mutual Shares Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ................... .60%
Other Expenses .................... .09%
----
Total Fund Operating Expenses .69%
Example* 1 year 3 years 5 years 10 years
$7 $23 $39 $88
-----------------------------------------------
Annual Mutual Qualified Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ................... .60%
Other Expenses .................... .12%
----
Total Fund Operating Expenses .72%
Example* 1 year 3 years 5 years 10 years
$8 $24 $41 $92
-----------------------------------------------
Annual Mutual Beacon Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ................... .60%
Other Expenses .................... .12%
----
Total Fund Operating Expenses .72%
Example* 1 year 3 years 5 years 10 years
$8 $24 $41 $92
-----------------------------------------------
Annual Mutual Discovery Fund Operating Expenses
(as a percentage of average net assets)
Management Fees .................. .80%
Other Expenses ................... .19%
----
Total Fund Operating Expenses .99%
Example* 1 year 3 years 5 years 10 years
$10 $32 $56 $125
-----------------------------------------------
Annual Mutual European Fund Operating Expenses
(estimated as a percentage of average net assets)
Management Fees ................... .80%
Other Expenses .................... .20%
----
Total Fund Operating Expenses 1.00%
Example* 1 year 3 years 5 years 10 years
$11 $33 $57 $126
-----------------------------------------------
* You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return before expenses and (2) redemption at the end of each time
period.
2
<PAGE>
The purpose of the table on the prior page is to assist an investor in
understanding the various direct and indirect costs and expenses that are borne
by an investor in each of the Fund's series. The table should not be considered
a representation of past or future expenses or return. Actual expenses and
return of each of the Fund's series vary from year to year and may be higher or
lower than those shown. There are presently no sales charges, no deferred sales
charges, no redemption fees and no contingent charges which an investor is
required to pay. The Fund does not contemplate that any such charges will be
imposed in the future, but the Fund, in its discretion, is permitted to assess
such charges. The only fees and expenses presently incurred are the advisory
fees paid to Heine Securities Corporation (the "Adviser") pursuant to an
investment advisory agreement with each series and the expenses of operating the
Fund and the series, most of which are borne by the series pro rata according to
each series' total assets, either directly or through reimbursement of the
Adviser for expenses paid by the Adviser on behalf of the series. The Trustee of
Fund sponsored retirement accounts currently waives but retains the right to
charge a $9 per account annual maintenance fee for all or any portion of the
year that each retirement account is open.
PERFORMANCE INFORMATION
From time to time the Fund may include in its communications to current or
prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on an amount invested in one of
the series of the Fund from the beginning until the end of the stated period.
"Average annual total return" is the annual compounded percentage change in the
value of an amount invested in one of the series of the Fund from the beginning
until the end of the stated period. Both rates of return assume the reinvestment
of all dividends and distributions. The Fund does not have a sales load or other
charges paid by all shareholders that affect its calculation of total or average
annual total return.
The Fund's average annual total return for the 1, 5 and 10 year periods
ended December 31, 1995, respectively, are as follows:
1 Year 5 Years 10 Years
------ ------- --------
Mutual Shares .................. 29.11% 19.11% 14.98%
Qualified ...................... 26.60% 19.54% 15.26%
Beacon ......................... 25.89% 18.76% 15.64%
Discovery ...................... 28.63% 21.88%* N/A
European** ..................... N/A N/A N/A
* Mutual Discovery Fund commenced operations on December 31, 1992. The average
annual return for the three year period ended December 31, 1995 was 21.88%.
** Mutual European Fund commenced operations on July 3, 1996.
The Fund's total return is a historical measure of past
performance and is not intended to indicate future
performance. Because investment return and principal value
will fluctuate, the Fund's shares may become worth more or
less than their original cost.
3
<PAGE>
CONDENSED FINANCIAL INFORMATION
MUTUAL SHARES FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year ...... $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43 $57.57
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net Investment
Income ................. 1.99 1.34 1.41 1.55 2.04 3.32 4.03 2.64 2.23 2.43
Net Gains or Losses on
Securities (realized and
unrealized) .......... 20.51 2.28 13.89 12.07 9.69 (9.86) 6.00 14.98 1.78 7.29
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations ......... 22.50 3.62 15.30 13.62 11.73 (6.54) 10.03 17.62 4.01 9.72
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net
investment income) ... 1.93 1.34 1.38 1.59 2.00 3.34 4.09 2.63 2.52 2.34
Distributions
(from capital gains) . 12.81 4.56 6.31 3.16 1.63 .89 6.55 5.05 4.09 4.52
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions .. 14.74 5.90 7.69 4.75 3.63 4.23 10.64 7.68 6.61 6.86
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value,
End of Year ............ $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return* ............ 29.11% 4.53% 21.00% 21.33% 20.99% (9.82)% 14.93 30.69% 6.34% 16.99%
===== ==== ===== ===== ===== ===== ===== ===== ==== =====
Ratios/Supplemental Data:
Net Assets,
End of Year (millions) . $5,230 $3,746 $3,527 $2,913 $2,640 $2,521 $3,403 $2,551 $1,685 $1,403
Ratio of Expenses to
Average Net Assets ..... .69% .72% .74% .78% .82% .85% .65%+ .67%+ .69% .70%
Ratio of Net Investment
Income to Average Net
Assets ................. 2.47% 1.80% 1.90% 2.18% 3.08% 4.88% 5.57%+ 4.16%+ 3.32% 4.07%
Portfolio Turnover Rate .. 79.32% 66.55% 48.78% 41.06% 47.89% 43.41% 71.54% 89.67% 77.72% 122.30%
</TABLE>
* Total Return includes changes in share price and reinvestment of dividends and
capital gain distributions. The Fund's total return is a historical measure of
past performance and is not intended to indicate future performance. Investment
return and principal value will fluctuate; therefore the Fund's shares may
become worth more or less than their original cost.
+ After reduction of expenses by the Investment Adviser. Had the Investment
Adviser not undertaken such action, the ratios of operating expenses and net
investment income would have been .67% and 5.55% in 1989 and .74% and 4.09% in
1988.
4
<PAGE>
CONDENSED FINANCIAL INFORMATION
MUTUAL QUALIFIED FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year ...... $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06 $19.15
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net Investment
Income ................. .66 .43 .38 .49 .67 1.22 1.34 .84 .77 .90
Net Gains or Losses on
Securities (realized and
unrealized) .......... 6.33 1.10 5.12 4.27 3.18 (3.45) 1.91 4.95 .86 2.42
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations ......... 6.99 1.53 5.50 4.76 3.85 (2.23) 3.25 5.79 1.63 3.32
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net
investment income) ... .65 .43 .37 .49 .67 1.23 1.36 .83 .88 .85
Distributions
(from capital gains) . 3.27 1.43 2.56 1.02 .37 .38 2.39 1.62 1.44 1.56
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions .. 3.92 1.86 2.93 1.51 1.04 1.61 3.75 2.45 2.32 2.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value,
End of Year ............ $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $22.21 $22.71 $19.37 $20.06
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return* ............ 26.60% 5.73% 22.71% 22.70% 21.13% (10.12)% 14.44 30.15% 7.72% 17.51%
===== ==== ===== ===== ===== ====== ===== ===== ==== =====
Ratios/Supplemental Data:
Net Assets,
End of Year (millions) . $3,002 $1,792 $1,511 $1,251 $1,110 $1,075 $1,470 $1,094 $686 $561
Ratio of Expenses to
Average Net Assets ..... .72% .73% .78% .82% .87% .89% .70%+ .62%+ .71% .68%
Ratio of Net Investment
Income to Average Net
Assets ................. 2.71% 1.91% 1.65% 2.10% 3.09% 5.40% 5.61%+ 3.96%+ 3.43% 4.55%
Portfolio Turnover Rate .. 75.59% 67.65% 56.22% 47.39% 51.99% 46.12% 73.41% 85.05% 73.50% 123.50%
</TABLE>
* Total return includes changes in share price and reinvestment of dividends
and capital gain distributions. The Fund's total return is a historical
measure of past performance and is not intended to indicate future
performance. Investment return and principal value will fluctuate;
therefore the Fund's shares may become worth more or less than their
original cost.
+ After reduction of expenses by the Investment Adviser. Had the Investment
Adviser not undertaken such action, the ratios of operating expenses and
net investment income would have been .71% and 5.60% in 1989 and .69% and
3.89% in 1988.
5
<PAGE>
CONDENSED FINANCIAL INFORMATION
MUTUAL BEACON FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
<TABLE>
<CAPTION>
Sept. 1, Year Ended
Year Ended December 31, 1987 to August 31,
------------------------------------------------------------------------ Dec. 31, ---------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period ................. $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27 $15.73
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net Investment
Income ............... .87 .46 .37 .45 .75 1.08 1.12 .77 .22 .37 .28
Net Gains or Losses on
Securities (realized
and unrealized) ...... 7.09 1.28 5.81 4.85 2.88 (3.03) 2.84 4.80 (3.96) 6.39 3.51
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations ......... 7.96 1.74 6.18 5.30 3.63 (1.95) 3.96 5.57 (3.74) 6.76 3.79
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net
investment income) ... .84 .44 .37 .46 .74 1.08 1.17 .80 .51 .31 .25
Distributions (from
capital gains) ....... 2.21 1.36 1.82 1.10 .33 .26 1.55 1.41 1.04 .94 -0-
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
Distributions ...... 3.05 1.80 2.19 1.56 1.07 1.34 2.72 2.21 1.55 1.25 .25
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value,
End of Period .......... $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78 $19.27
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return** ........... 25.89% 5.61% 22.93% 22.92% 17.60% (8.17)% 17.46% 28.79% (15.12)% 37.33% 24.34%
===== ==== ===== ===== ===== ===== ===== ===== ====== ===== =====
Ratios/Supplemental Data:
Net Assets, End of
Period (millions) ...... $3,573 $2,060 $1,062 $534 $398 $388 $409 $214 $131 $159 $65
Ratio of Expenses to
Average Net Assets ..... .72% .75% .73% .81% .85% .85% .67%+ .59%+ .87%* .85% 1.16%
Ratio of Net Income to
Average Net Assets ..... 2.89% 1.96% 1.53% 1.90% 3.07% 4.59% 4.98%+ 3.64%+ 2.86%* 2.50% 2.86%
Portfolio Turnover Rate .. 73.18% 70.63% 52.88% 57.52% 56.63% 57.74% 67.18% 86.79% 28.07% 73.41% 112.91%
</TABLE>
* Annualized.
** Total return includes changes in share price and reinvestment of dividends
and capital gain distributions. The Fund's total return is a historical
measure of past performance and is not intended to indicate future
performance. Investment return and principal value will fluctuate;
therefore the Fund's shares may become worth more or less than their
original cost.
+ After reduction of expenses by the Investment Adviser. Had the Investment
Adviser not undertaken such action, the ratios of operating expenses and
net investment income would have been .68% and 4.97% in 1989 and .66% and
3.57% in 1988.
6
<PAGE>
CONDENSED FINANCIAL INFORMATION
MUTUAL DISCOVERY FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year ................... $ 12.55 $ 13.05 $ 10.00
--------- --------- ---------
Income from Investment Operations:
Net Investment Income ............................... .17 .15 .10
Net Gains on Securities (realized and unrealized) ... 3.40 .32 3.48
--------- --------- ---------
Total from Investment Operations ................... 3.57 .47 3.58
--------- --------- ---------
Less Distributions:
Dividends (from net investment income) .............. .14 .16 .09
Distributions (from capital gains) .................. .82 .81 .44
--------- --------- ---------
Total Distributions ................................ .96 .97 .53
--------- --------- ---------
Net Asset Value, End of Year ......................... $ 15.16 $ 12.55 $ 13.05
========= ========= =========
Total Return* ........................................ 28.63% 3.62% 35.85%
========= ========= =========
Ratios/Supplemental Data:
Net Assets, End of Year (millions) ................... $ 1,370 $ 725 $ 548
Ratio of Expenses to Average Net Assets .............. .99% .99% 1.07%
Ratio of Net Investment Income to Average Net Assets . 2.00% 1.64% 1.17%
Portfolio Turnover Rate .............................. 73.23% 72.70% 90.37%
</TABLE>
* Total Return includes changes in share price and reinvestment of dividends
and capital gain distributions. The Fund's total return is a historical
measure of past performance and is not intended to indicate future
performance. Investment return and principal value will fluctuate;
therefore the Fund's shares may become worth more or less than their
original cost.
The preceding tables set forth information regarding financial highlights
for each series of the Fund. Prior to February 19, 1988 Mutual Shares, Qualified
and Beacon were separate entities; as series of the Fund they continue their
separate economic identities. Beacon's fiscal year end was changed from August
31 to December 31 in connection with the merger into the Fund.
The tables on the preceding pages should be read in conjunction with each
of the Fund's financial statements and related notes included in their Annual
Reports (incorporated by reference into the Statement of Additional Information)
which have been audited by Ernst & Young LLP, the Fund's independent auditors,
since January 1, 1987 for Mutual Shares and Mutual Qualified, since September 1,
1987 for Mutual Beacon and for Mutual Discovery since its inception. Further
information regarding performance is contained in the Fund's Annual Reports to
Shareholders, which is available upon request and without charge by calling
1-800-553-3014.
7
<PAGE>
THE FUND
Mutual Series Fund Inc. (the "Fund") is a no-load, diversified, open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act") organized as a series fund with five separate series
currently outstanding, each of which is designed to provide investors with
participation in diversified investments under the supervision of experienced
investment counsel. This type of investment company is commonly called a mutual
fund. The Fund was organized as a Maryland corporation on November 12, 1987.
Mutual Shares Corporation, Mutual Qualified Income Fund Inc. and Mutual Beacon
Fund, Inc. (the "predecessor funds" or "Funds") were merged into the Fund on
February 19, 1988 and became Mutual Shares, Qualified and Beacon, respectively.
Discovery was added on December 31, 1992. European commenced operations on July
3, 1996. The Fund may add additional series from time to time. Each of the
series should be perceived as being only a portion of a balanced investment
strategy.
Investment Objectives and Policies and Risks
Mutual Shares, Qualified, Beacon and European each has as its principal
objective capital appreciation, which may occasionally be short term. A
secondary objective is income. These objectives are fundamental. Discovery has
long-term capital appreciation as its objective, which it will seek to achieve
by including investments in small capitalization companies. European will
normally invest at least 65% of its invested assets in the securities of issuers
organized under the laws of or whose principal business operations or at least
50% of whose revenue is earned from European countries. European countries are
given a broad definition which includes all of the countries that are members of
the European Union, United Kingdom, Scandinavia, Eastern and Western Europe, and
those regions of Russia and the former Soviet Union that are considered part of
Europe. European may also invest up to 35% of its invested assets in U.S.
securities as well as in securities of issuers from the Levant, Middle East and
the rest of the world. European is currently expected to invest primarily in
Western Europe and Scandinavia but may also include other countries'
investments. European will normally invest in at least 5 countries although it
may invest all of its assets in a single country. However, European may include
securities of issuers from outside of Europe and the U.S. For short term
purposes, European anticipates that it generally will buy short term securities
denominated in U.S. dollars. European will normally attempt to maintain at least
50% of the value of its assets invested in stocks or securities of foreign
corporations at the close of each taxable year. Each series pursues these
objectives primarily through investments in common stock and preferred stock as
well as debt securities and securities convertible into common stock (including
convertible preferred and convertible debt securities). An investor should bear
in mind that since every investment carries risk, the value of the assets of
each series of the Fund fluctuates with changes in the market value of its
investments. Therefore, there is no assurance that the Fund's objectives will be
achieved. Except for the Fund's primary and secondary investment objectives,
these objectives are not fundamental and the Board of Directors of the Fund
reserves the right to change them without shareholder approval, which may result
in the Fund having an investment objective different from that which an investor
deemed appropriate at the time of investment.
The general investment policy of each existing series is to invest in
common stock, preferred stock and corporate debt securities, which may be
convertible into common stock and the other investments described below which,
in the opinion of the series' investment adviser, Heine Securities Corporation
(the "Adviser"), are available at prices less than their intrinsic value. (See
"Non-U.S. Securities," "Repurchase Agreements and Loans of Securities" and
"Hedging.") The Adviser also has no pre-set limits as to the percentage of each
series' portfolio which may be invested in equity securities, debt securities
(including "junk bonds" as described below), or cash equivalents. The Adviser's
opinions are based upon analysis and research, taking into account, among other
factors, the relationship of book value to market value of the securities, cash
flow, and multiples of earnings of comparable securities. These factors are not
8
<PAGE>
applied formulaically, as the Adviser examines each security separately; the
Adviser has no general criteria as to asset size, earnings or industry type
which would make a security unsuitable for purchase by a series. Although the
Fund may invest in securities from any size issuer, Mutual Shares, Qualified and
Beacon will tend to invest in securities of issuers with market capitalizations
in excess of $500 million due to the larger size of these series. Each series
may invest in securities that are traded on U.S. or foreign exchanges, NASDAQ
national market or in the over-the-counter market. The series may invest in any
industry sector although no series will be concentrated in any one industry.
Debt securities in which the Fund invests (such as corporate and U.S. government
bonds, debentures and notes) may or may not be rated by rating agencies such as
Moody's Investors Service, Inc. or Standard & Poor's Corporation, and, if rated,
such rating may range from the very highest to the very lowest, currently C for
Moody's and D for Standard & Poor's. Medium and lower-rated debt securities in
which each series expects to invest are commonly known as "junk bonds." The
series may be subject to investment risks as to these unrated or lower rated
securities that are greater in some respects than the investment risks incurred
by a fund which invests only in securities rated in higher categories. In
addition, the secondary market for such securities may be less liquid and market
quotations less readily available than higher rated securities, thereby
increasing the degree to which judgment plays a role in valuing such securities.
The general policy of each series is to invest in debt instruments, including
junk bonds, for the same reasons underlying investments in equities, i.e.,
whenever such instruments are available, in the Adviser's opinion, at prices
less than their intrinsic value. Consequently, the Adviser's own analysis of a
debt instrument exercises a greater influence over the investment decision than
the stated coupon rate or credit rating. The series have historically invested
in debt instruments issued by reorganizing or restructuring companies, or
companies which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated or
low rated securities that are often in, or about to default, that the Adviser
identifies securities which are sometimes available at prices which it believes
are less than their intrinsic value. Although such debt securities may pose a
greater risk than higher rated debt securities of loss of principal, the debt
securities of reorganizing or restructuring companies typically rank senior to
the equity securities of such companies. See "Statement of Additional
Information -- Medium and Lower Rated Corporate Debt Securities."
Each series also seeks to invest in the securities of domestic and foreign
companies involved in mergers, consolidations, liquidations and reorganizations
or as to which there exist tender or exchange offers, and may participate in
such transactions. Although there are no restrictions limiting the extent to
which each series may invest in such transactions, no series presently
anticipates investing more than 50% of its portfolio in such investments. There
can be no assurance that any merger, consolidation, liquidation, reorganization
or tender or exchange offer proposed at the time a series makes its investment
will be consummated or will be consummated on the terms and within the time
period contemplated. The series from time to time may also purchase indebtedness
and participations therein, both secured and unsecured, of debtor companies in
reorganization or financial restructuring ("Indebtedness"). Such Indebtedness
may be in the form of loans, notes, bonds or debentures. Participations normally
are made available only on a nonrecourse basis by financial institutions, such
as banks or insurance companies, or by governmental institutions, such as the
Resolution Trust Corporation or the Federal Deposit Insurance Corporation or the
Pension Benefit Guaranty Corporation or may include supranational organizations
such as World Bank. When a series purchases a participation interest it assumes
the credit risk associated with the bank or other financial intermediary as well
as the credit risk associated with the issuer of any underlying debt instrument.
The series may also purchase trade and other claims against, and other unsecured
obligations of, such debtor companies, which generally represent money due a
supplier of goods or services to such company. Some corporate debt securities,
including Indebtedness, purchased by the Fund may have very long maturities. The
length of time remaining until maturity is one factor the Adviser considers in
purchasing a particular Indebtedness. The purchase of Indebtedness of a troubled
9
<PAGE>
company always involves a risk as to the creditworthiness of the issuer and the
possibility that the investment may be lost. The Adviser believes that the
difference between perceived risk and actual risk creates the opportunity for
profit which can be realized through proper analysis. There are no established
markets for some of this Indebtedness and thus it is less liquid than more
heavily traded securities. Indebtedness which represents indebtedness of the
debtor company to a bank are not securities of the banks issuing or selling
them. The series purchase loans from national and state chartered banks as well
as foreign ones. The series normally invest in senior indebtedness of the debtor
companies, although on occasion subordinated indebtedness may also be acquired.
Each series does not invest more than 15% of its portfolio in assets which are
illiquid, including Indebtedness which are not readily marketable. The series
may invest in securities considered illiquid such as those described above as
well as restricted securities not registered under the Securities Act of 1933,
OTC options and securities that are otherwise considered illiquid as a result of
market or other factors. The series may invest in securities eligible for resale
under Rule 144A of the Securities Act ("144A securities"). The Board of
Directors of the Fund has adopted procedures in accordance with Rule 144A
whereby specific 144A securities held in the Fund may be deemed to be liquid.
Nevertheless, due to changing market or other factors 144A securities may be
subject to a greater possibility of becoming illiquid than registered
securities. Fund purchases of 144A securities may increase the level of
illiquidy and institutional buyers may become disinterested in purchasing such
securities. The series may also invest in cash equivalents such as Treasury
bills and high quality commercial paper. The series generally purchases
securities for investment purposes and not for the purpose of influencing or
controlling management of the issuer. However, in certain circumstances when the
Adviser perceives that one or more of the series may benefit, the Fund may
itself seek to influence or control management or may invest in other entities
that purchase securities for the purpose of influencing or controlling
management, such as investing in a potential takeover or leveraged buyout or
investing in other entities engaged in such activities. The series may also
invest in distressed mortgage obligations and other debt secured by real
property and may sell short securities it does not own up to 5% of its assets.
Short sales have risks of loss if the price of the security sold short increases
after the sale, but the series can profit if the price decreases. The series may
also sell securities "short against the box" without limit. See "Statement of
Additional Information -- Short Sales" for further discussion of these
practices.
Discovery expects to invest to a greater degree than the other series in
smaller capitalized companies which may involve greater risks than investing in
securities of larger companies. The smaller companies in which Discovery invests
are often not well known, may often trade at a discount and may not be followed
by institutions.
Each series may invest in common stock, preferred stock and corporate debt
securities in such proportions as the Adviser deems advisable. The Adviser
typically keeps a portion of the assets of each series invested in short-term
debt securities and preferred stocks although it may choose not do so when
circumstances dictate. In addition, while no series may purchase securities of
registered open-end investment companies or affiliated investment companies,
they may invest from time to time in other investment company securities,
subject to the limitation that each series will not purchase more than 3% of the
voting securities of another investment company. In addition, no series will
invest more than 5% of its assets in the securities of any single investment
company and no series will invest more than 10% of its assets in investment
company securities. Investors should recognize that a series' purchase of the
securities of such investment companies results in layering of expenses such
that investors indirectly bear a proportionate share of the expenses of such
investment companies, including operating costs, and investment advisory and
administrative fees.
Non-U.S. Securities
The series may purchase securities of non-U.S. issuers and Discovery
expects that up to approximately 50% of its assets may be so invested. European
10
<PAGE>
will normally invest at least 65% of its invested assets in European countries
(as defined above). The series may purchase securities denominated in any
currency and generally expects that it will hedge against currency risks to the
extent that hedging is available. Investments in securities of non-U.S. issuers
involve certain risks not ordinarily associated with investments in securities
of domestic issuers. Such risks include fluctuations in foreign exchange rates,
volatile political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions. Since each
series may invest in securities denominated or quoted in currencies other than
the U.S. dollar, changes in foreign currency exchange rates will affect the
value of securities in the portfolio and the unrealized appreciation or
depreciation of investments although the Adviser generally attempts to reduce
such risks through hedging transactions. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which could
adversely affect investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company. Foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Non-U.S. securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S. markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transaction costs on
non-U.S. securities markets are generally higher than in the U.S. There is
generally less government supervision and regulation of exchanges, brokers and
issuers than there is in the U.S. Each series foreign investments may include
both voting and non voting securities, sovereign debt and participations in
foreign government deals. The Fund might have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S. courts
than with respect to domestic issuers in U.S. courts.
Each series of the fund may invest in securities commonly known as
Depository Receipts of non-U.S. issuers which have certain risks, including
trading for a lower price, having less liquidity than their underlying
securities and risks relating to the issuing bank or trust company. Depository
Receipts can be sponsored by the issuing bank or trust company or unsponsored.
Holders of unsponsored Depository Receipts have a greater risk that receipt of
corporate information and proxy disclosure will be untimely, information may be
incomplete and costs may be higher.
Dividend and interest income from non-U.S. securities will generally be
subject to withholding taxes by the country in which the issuer is located,
which may not be recoverable, either directly or indirectly, as a foreign tax
credit or deduction by the Fund or its shareholders. See "Statement of
Additional Information."
Repurchase Agreements and Loans of Securities
Each series may invest up to 10% of its assets in repurchase agreements.
Each series may also loan its portfolio securities in order to realize
additional income. Repurchase and tri-party agreements are generally agreements
under which the series obtains money market instruments subject to resale to the
seller at an agreed upon price and date. Any loans of portfolio securities which
the series may make must be fully collateralized at all times by securities with
a value at least equal to 100% of the current market value of the loaned
securities. The series presently do not anticipate loaning more than 5% of their
respective portfolio securities. There are certain risks associated with such
transactions which are described in the Statement of Additional Information.
Hedging and Income Transactions
The series may utilize various investment strategies as described below to
hedge various market risks (such as interest rates, currency exchange rates, and
broad or specific equity market movements), to manage the effective maturity or
duration of fixed-income securities or for gain. Such strategies are generally
accepted by modern portfolio managers and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
11
<PAGE>
over time as new instruments and strategies are developed or regulatory changes
occur and the Fund will describe any such techniques in its registration
statement before using them. In the course of pursuing these investment
strategies, the series may purchase and sell exchange-listed and
over-the-counter put and call options on securities, equity and fixed-income
indices and other financial instruments, purchase and sell financial futures
contracts and options thereon, and enter into various currency transactions such
as currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all of the above are
called "Hedging Transactions"). Hedging Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a series' portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the series' unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Any
or all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Hedging Transaction is a function of numerous variables including
market conditions. The ability of a series to utilize these Hedging Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Each series generally hedges the foreign currency risk associated
with its investments in foreign securities. European expects to hedge for gain
on market risks including broad movements in markets in addition to the specific
currency risk of its portfolio securities. No more than 5% of the series' assets
will be at risk in such types of instruments entered into for non-hedging
purposes. Hedging Transactions involving financial futures and options thereon
will be purchased, sold or entered into generally for bona fide hedging, risk
management or portfolio management purposes.
Hedging Transactions, whether entered into as a hedge or for gain, have
risks associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Hedging
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a series, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments, increase the cost of holding a security and reduce the returns on
securities or cause a series to hold a security it might otherwise sell. The use
of currency transactions can result in a series incurring losses as a result of
a number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
series might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Hedging Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Hedging
Transactions had not been utilized. The cost of entering into hedging
transactions may also reduce the series' total return to investors.
12
<PAGE>
Fundamental Restrictions
Each series has adopted a number of fundamental investment restrictions,
which may not be changed for a particular series without the approval of that
series' shareholders. These restrictions are set forth in the Statement of
Additional Information. Other than such restrictions, no series has any
investment policies which it considers fundamental.
Among other things, each series may not purchase the securities of any one
issuer, other than the U.S. Government or any of its agencies or
instrumentalities, if immediately after such purchase more than 5% of the value
of its total assets would be invested in such issuer, or such series would own
more than 10% of the outstanding voting securities of such issuer, except that
up to 25% of the value of such series' total assets may be invested without
regard to such 5% and 10% limitations; make loans, except to the extent the
purchase of debt obligations of any type are considered loans and except that
the series may lend portfolio securities to qualified institutional investors in
compliance with requirements established from time to time by the Securities and
Exchange Commission and the securities exchanges on which such securities are
traded; invest more than 25% of the value of its assets in a particular industry
(except that U.S. Government securities are not considered an industry); or
issue securities senior to its stock or borrow money or utilize leverage in
excess of the maximum permitted by the 1940 Act which is currently 33 1/3% of
total assets (plus 5% for emergency or other short-term purposes). Such
borrowing has special risks. The Fund will not engage in investment transactions
when borrowing exceeds 5% of its assets.
While Mutual Shares, Qualified, Beacon, Discovery and European have
identical basic investment restrictions, and Mutual Shares, Qualified, Beacon
and European have identical investment objectives, the Adviser seeks to retain
certain historical differences among the series on an informal basis. Mutual
Shares, Qualified and Beacon have generally invested in larger and medium sized
companies with large share trading volume. Discovery, in comparison to the other
series, has tended to invest proportionately more of its portfolio in smaller
companies (see "Investment Objectives and Policies") and in foreign companies
(see "Non-U.S. Securities"). Qualified was originally intended for purchase by
pension plans, profit sharing plans and other nontaxpaying entities and the
portfolio was able to have greater flexibility due to reduced concerns about the
tax effects on shareholders. Depending on market conditions, and any future
changes in tax laws, the Adviser expects that it will purchase securities for
Qualified which satisfy such a goal, although currently Qualified operates in
the same fashion as Mutual Shares and Beacon. European will utilize the same
investment philosophy but will apply it in the context of European investing.
Allocation of investments among the series will also depend upon, among other
things, the amount of cash in, and relative size of each series' portfolio. In
addition, the factors outlined above are not mutually exclusive and a particular
security may be owned by more than one of the series.
MANAGEMENT OF THE FUND
The management and affairs of the Fund are supervised by the Fund's Board
of Directors.
The Investment Adviser
Heine Securities Corporation (the "Adviser"), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078 serves as each series' investment adviser. The
Adviser manages their investments, provides various administrative services and
supervises their daily business affairs, subject to supervision by the Fund's
Board of Directors. Portfolio Manager Michael F. Price has been responsible for
the day to day management of the Fund for more than five years.
Mr. Michael F. Price, President, Chief Operating Officer, Chairman and sole
shareholder of the Adviser, is director and sole shareholder of Clearwater
Securities Inc. ("Clearwater"), a broker, and is Chairman of the Board and
President of the Fund. Mr. Edward J. Bradley is Treasurer of Clearwater and is
13
<PAGE>
Treasurer and Chief Financial and Accounting Officer of the Adviser and of the
Fund. Mr. Peter A. Langerman is a Research Analyst with the Adviser as well as a
Director and Executive Vice President of the Fund. Ms. Elizabeth N. Cohernour is
General Counsel and Secretary of the Adviser, Clearwater and the Fund. Mr. Eric
Le Goff is Vice President of the Adviser. Messrs. Jeffrey A. Altman, Robert L.
Friedman, Raymond Garea and Lawrence N. Sondike, Research Analysts with the
Adviser, are Vice Presidents of the Fund.
Code of Ethics
The Adviser and the Fund have adopted Codes of Ethics and related internal
procedures (together referred to as the "Code") which govern the personal
investing practices of the Adviser's employees. The Code generally incorporates
the recommendation of the Investment Company Institute contained in the Report
of the Advisory Group on Personal Investing dated May 9, 1994. Specifically,
employees of the Adviser may buy and sell securities for themselves as long as
their trades have been pre-cleared in accordance with the Code. Transactions by
Adviser employees which comply with the substantive and procedural provisions of
the Code are permitted even if the security being purchased is one of limited
availability (such as investments in private placements), and is one in which
any particular series would be financially and legally able to invest.
Investment Advisory Agreements
The Adviser serves as investment adviser to each of Mutual Shares,
Qualified and Beacon pursuant to separate investment advisory agreements which
were approved by the shareholders of each such series at a meeting held on
November 17, 1989. The Board of Directors approved the Advisory Agreement with
Discovery on September 18, 1992. The Board of Directors approved the Advisory
Agreement with European on May 30, 1996. The Advisory Agreement with each series
("the Advisory Agreements" or the "Advisory Agreement" if individually) are
identical in all material respects, except that under each Advisory Agreement
the Adviser is paid a fee at an annual rate of .60% of the average daily net
assets of Mutual Shares, Qualified and Beacon, .80% of the average daily net
assets of Discovery and .80% of the average daily net assets of European, which
accrues daily and is payable on the first business day of the next month for the
number of days the Advisory Agreement was in effect during the preceding month.
The advisory fee paid by Discovery and European are higher than that paid by
most investment companies although the Adviser believes they are comparable to
that paid by similar funds. In addition, the Advisory Agreements provide that
the Adviser is to be reimbursed on a dollar-for-dollar basis for administrative
services as described below.
The Adviser has complete discretion in the investment and management
(including the voting of securities) of each series' assets in accordance with
their respective investment objectives and policies and subject to general
review and direction by the Board of Directors of the Fund. The Adviser is
responsible for administering or arranging for administration of the Fund's
business affairs and operations, including maintenance of all required records,
employment of sufficient personnel, and maintenance of sufficient equipment and
facilities to perform its obligations under the Advisory Agreements. Under these
Agreements each series acknowledges that the Adviser may and does perform
advisory services for others, that officers and employees of the Adviser act as
broker or dealer for others and invest for their own account and that the Fund
does not expect, subject always to the good faith of the Adviser, to obtain the
benefit of investment opportunities developed by the Adviser, or such officers
and employees, but in which the Adviser does not cause such series to invest.
The Fund on behalf of each series pays for the cost of its operations or
reimburses the Adviser for expenses and costs the Adviser incurs on behalf of
the Fund including organizational costs, compensation of directors who are not
interested persons (as defined in the 1940 Act) of the Adviser, reimbursement of
a pro rata portion of the salaries, bonuses, benefits and other employment costs
of all personnel of the Adviser who spend substantial time on series operations,
and all other costs such as rent for office space, costs of equipment and office
supplies, charges of the independent auditors, of legal counsel, of the transfer
14
<PAGE>
and dividend disbursing agent and of the custodian, preparation and maintenance
of the books and records of the series, all direct and indirect costs, charges
and expenses of acquiring and disposing of portfolio securities (including the
placement of orders therefor), interest (if any) on obligations incurred by the
series, costs of share certificates, membership dues in the Investment Company
Institute or any similar organization, preparation and furnishing reports,
prospectuses, proxy statements and other communications to stockholders,
preparation of amendments to the Fund's registration statements and registration
of shares of the Fund under the federal and state securities laws, miscellaneous
expenses and all taxes and fees to federal, state or other governmental agencies
on account of the registration of securities issued by the Fund, filing of
corporate documents or otherwise associated with Fund business excluding costs
related to research or the provision of investment advice (with certain
exceptions related to soft dollars) and marketing of shares of the series.
Expenses which are not directly attributable in full to a particular series will
generally be allocated pro rata among the series according to their relative net
assets.
The Adviser and its agents, officers and directors are generally
indemnified under these agreements against liabilities and expenses reasonably
incurred in connection with acts taken while acting in the capacities enumerated
in the Agreement, except no indemnity is provided for willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties of a position. Such
indemnification will be made pursuant to procedures which comply with the
requirements of the 1940 Act and applicable state law.
The Advisory Agreements of Mutual Shares, Qualified, Beacon, Discovery and
European continue in effect until June 30, 1997. The Advisory Agreements may be
terminated at any time, without penalty, by the Fund's Board of Directors, or by
the vote of a majority of the outstanding voting securities of the Fund or by
the Adviser, each on 60 days' written notice to the other. The Advisory
Agreements automatically terminate upon assignment.
The Adviser will reimburse a series for any expenses incurred in excess of
that permitted by the most restrictive jurisdiction in which the Fund is
qualified to sell shares up to the total fee payable to the Adviser as to such
series. Total expenses of each of Mutual Shares, Qualified, Beacon and Discovery
for fiscal 1995 amounted to 0.69%, 0.72%, 0.72% and 0.99%, respectively, of
their average daily net assets during such year.
HOW TO PURCHASE SHARES
Shares of the Fund's existing series are sold in a continuous offering at
the public offering price, which is equal to the net asset value per share of
the series being purchased next determined (see "Net Asset Value") after a
purchase order is received by the Fund or PFPC Inc. ("transfer agent"). For
assistance in completing the application and for additional information about
the shareholder services listed herein, call the Fund at 1-800-448-FUND.
<TABLE>
<CAPTION>
Minimum All Retirement Account
Minimum Initial Subsequent Purchase Minimum Initial
Purchase (for All Accounts) Purchase
-------- ------------------ --------
<S> <C> <C> <C>
Beacon $5,000 $100 $2,000
Discovery $1,000 $50 $1,000
European $1,000 $50 $1,000
Mutual Shares $5,000 $100 $2,000
Qualified $1,000 $50 $1,000
</TABLE>
In exceptional cases the Fund may, in its sole discretion, waive these
amounts.
All orders for shares of a series which are accepted by the Fund will be
priced at the net asset value per share of that series next computed after
receipt of the order by the Fund's transfer agent, or by the Fund, subject to
collection of funds. In order to receive that day's price an order must be
received and accepted prior to the time that the series' net asset value is
15
<PAGE>
calculated which is the earlier of 4:00 p.m. or the close of the New York Stock
Exchange (the "Exchange") on that day. Placement and acceptance of an order
results in the obligation on the part of an investor to pay for the shares.
Monies used to purchase shares of the Fund must be drawn on U.S. banks and be
payable in U.S. dollars. No third party checks will be accepted by the Fund
except with respect to shareholders who are rolling over money to a retirement
account from another retirement account. If for any reason funds for a purchase
are not collectible, the Fund may redeem the shares and hold the investor liable
for any amount by which the purchase price exceeds the net asset value of the
shares redeemed. Shareholders may not receive the proceeds from a redemption of
shares until funds covering such purchases have been collected; however,
shareholders who have existing accounts with a value equal to or greater than
the value of the securities to be redeemed may redeem shares up to the value of
the account at the time the request for redemption is received. Payment made by
certified check or wired funds is considered to be collected upon receipt. (See
"How to Redeem Shares".)
Unless a shareholder includes his taxpayer identification number (social
security number for individuals) on the Fund's Application and certifies that he
is not subject to backup withholding, no new account will be opened. For
existing accounts with no certification the Fund is required to withhold and
remit to the Internal Revenue Service ("IRS") 31% of all taxable distributions
to the shareholder.
The Fund reserves the right, in its sole discretion, to refuse at any time
to accept orders for the purchase of any series (from existing shareholders as
well as new investors) and to suspend the reinvestment of income dividends and
capital gains distributions. Without limiting the foregoing, the Adviser will
consider exercising such refusal right as to a series when it determines that it
cannot effectively invest the available funds on hand in accordance with that
series' investment policies.
Written Subscriptions
Written subscriptions for shares are accepted on any business day at Mutual
Series Fund Inc. All written subscriptions must specify the series to be
purchased, and must be accompanied by payment.
New account applications should be sent to:
Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901.
Existing shareholders should mail additional investments to:
Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8906
Wilmington, DE 19899-8906.
If an overnight delivery service is used, subscriptions should be sent to:
Mutual Series Fund Inc.
c/o PFPC Inc.
400 Bellevue Parkway - Suite 108
Wilmington, DE 19809-3710.
Written subscriptions are also accepted at the Fund's offices at
51 John F. Kennedy Parkway, Short Hills, New Jersey 07078.
16
<PAGE>
Purchase by Telephone
Purchases, except for retirement accounts, may be made orally by Fund
shareholders who telephone the Fund at 1-800-448-FUND prior to the earlier of
4:00 p.m. or the close of the Exchange. Such orders are accepted or rejected in
the sole discretion of the Adviser. Telephone purchases must be for at least
$1,000 and must be made in an account that has an existing balance equal to at
least one half of the telephone purchase.
Automated Transfers:
An Automated Transfers application must be completed
and effective prior to making telephone purchases.
Please call 1-800-553-3014 for an application or,
complete section 6 of the application attached to this
prospectus.
All telephone purchases will be processed through the Automated Transfers
process except for certain institutional investors who have established (via the
Fund's recorded telephone line) the ability to wire such purchase payments to
the Fund.
If for any reason funds are not received in a timely manner and the Fund
redeems the shares, the shareholder will be responsible for any amount by which
the purchase price exceeds the net asset value of the shares on the day the
shares are redeemed. As authorized by the shareholder's purchase application,
such amounts will be deducted from the shareholder's account and PFPC Inc. will
redeem a processing fee of $20 for any transfer not honored by your bank. This
feature will only apply to those persons who have completed an application
containing such authorization.
Brokers and Dealers and Plan Administrators
Purchases and redemptions of any series shares may be effected through
registered broker-dealers. There is no sales or service charge imposed by the
Fund as to any series, but such broker-dealers may charge the investor a
transaction fee. Such transaction fees and services may vary among
broker-dealers, and such broker-dealers may impose higher initial or subsequent
investment requirements than those established by the Fund. Services provided by
broker-dealers may include allowing the investor to establish a margin account
and to borrow on the value of the Fund's shares in that account. If a broker
receives an order prior to pricing on a given day, the broker is required to
forward such order to the Fund on that day prior to pricing. A broker's failure
to timely forward an order may give rise to a claim by the investor against the
broker.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. In such cases the
Fund may pay the third party an annual sub-transfer agency fee that is not
greater than the Fund otherwise would have paid for such services.
Share Certificates
All accounts will be maintained in book entry form; no share certificate
will be issued unless the shareholder specifically requests such issuance in
writing. Upon written request certificates for any number of full shares, except
for shares held in retirement accounts, will be issued and sent to the
shareholder of record. The shareholder may incur an expense in replacing any
lost share certificates. The Fund recommends that its transfer agent retain all
certificates at no cost to the shareholder.
17
<PAGE>
HOW TO REDEEM SHARES
Shareholders may redeem all or a portion of their shares in a series by
executing and mailing a written request for redemption, as described below.
The written request for redemption should be mailed to:
Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901.
If an overnight delivery service is used, redemption requests should be
sent to:
Mutual Series Fund Inc.
c/o PFPC Inc.
400 Bellevue Parkway - Suite 108
Wilmington, DE 19809-3710.
Redemption requests will be executed at the net asset value per share next
computed after receipt of the redemption request, in good order, by the Fund or
by its transfer agent (see "Net Asset Value"). In order to receive that day's
price a redemption request in good order with an original signature must be
received by the earlier of 4:00 p.m. or the close of the Exchange on that day.
Neither the Fund nor the transfer agent will accept redemption requests made by
telephone or by fax. Payment of monies will be made within seven days after
receipt by the transfer agent of the redemption request in good order and
accompanied by the appropriate documents as described below. Mailing of the
proceeds of a redemption may be delayed up to 15 days from the day of a purchase
to allow the purchase to clear. This potential 15 day delay applies to payment
by personal or bank check. If payment is made by certified check or wire,
proceeds from the redemption request will not be subject to this potential 15
day delay. If the shareholder has an existing account, the redemption request
will be satisfied up to the value of collected funds in such account. The Fund
reserves the right to redeem shares in kind although it is not likely to do so.
Conditional, ambiguous or vague requests cannot be honored.
If you have completed item 6 on the enclosed application to authorize
automated transfers to your bank account (retirement accounts have separate
form), and if your bank has authorized such transfers, then you can request that
a redemption be automatically deposited into your bank account. Proceeds will be
calculated at the net asset value next computed after receipt of your redemption
request in good order and will be automatically deposited in your bank account
approximately two business days after receipt of your redemption request. To
request an application for automated transfers for a regular account or a
retirement account, call 1-800-553-3014. Automated transfer capabilities
normally become effective twenty business days after the Fund receives the
completed application.
If the account is in the form of a book entry, or if certificates for the
shares to be redeemed have been retained by the transfer agent for safekeeping,
to be in good order the written redemption request must identify the account
from which shares are to be redeemed, the dollar value or number of shares to be
redeemed, the address the redemption should be mailed to, the shareholder's
daytime phone number and the request must be signed exactly as the account is
registered, with the signature(s) thereon guaranteed by a bank, broker-dealer,
credit union, national securities exchange or a savings association. Guarantee
by a notary public is not acceptable. The authorized officer who guarantees the
signature(s) must sign in official capacity to bind the guarantor and the words
"Signature Guaranteed" must appear with the required stamp. The signature
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guarantee will generally be waived for redemptions of $25,000 or less provided
payment is made to the holder of record and forwarded to the address of record.
However, a signature guarantee will be required for all redemptions where the
address of record has changed within ten days of the redemption request.
If the certificates for the shares to be redeemed are held by any one other
than the transfer agent, to be in good order the redemption request must be
accompanied by such stock certificates, properly endorsed for transfer, or if
not so endorsed, by the stock certificates and appropriate properly endorsed
stock powers, and, in either case, the signatures must be guaranteed in proper
form by a bank, broker dealer, credit union, national securities exchange or a
savings association.
Certain accounts, such as corporate accounts, trust accounts and custodial
accounts, generally require additional documentation in addition to the written
request. Certain institutional accounts may be eligible for redemption
procedures other than as described above. Contact the Fund at 1-800-448-FUND for
the specific documentation required for your account.
If the owner of any IRS recognized retirement account who is at least
59 1/2 years old wants to redeem shares from the account, the written
redemption request must state the account owner's birthdate. If the owner of any
IRS recognized retirement account who is less than 59 1/2 years old wants to
redeem shares from the account, the written redemption request must state: 1)
that the owner is aware of the tax consequences and penalties that may be
associated with the redemption and 2) whether or not the 10% tax is to be
withheld on the redemption. The signature on the letter of instruction must be
guaranteed in the same manner as described above.
If a redemption request is sent to the Fund's office, rather than to the
transfer agent's office, the request will be promptly forwarded by the Fund to
the transfer agent. If the Fund has not collected payment on the purchase of
shares which are to be redeemed, no redemption payment will be made until the
purchase has cleared.
The transfer agent reserves the right to charge a nominal fee of
approximately $7, for the wiring of funds. Your bank may charge you for
accepting the wire transfer. The Fund should be contacted at 1-800-448-FUND for
additional information on how to wire funds. If a shareholder requests delivery
of a redemption check via overnight delivery service, the transfer agent will
charge a nominal fee, currently approximately $15, for the overnight delivery
service.
The net asset value of shares, on redemption, may be more or less than the
investor's cost, depending upon the market value of the series' securities at
the time of redemption. Redemptions of the predecessor funds always were made in
cash and the Fund intends to continue this policy as to the series.
The Fund reserves the right, upon 30 days' prior notice, to redeem shares
in any account if the total value of the shares in the account is less than a
specified minimum (currently $300, or $100 for IRA accounts), which minimum may
be lowered from time to time by the Board of Directors but will not be raised.
An account will be subject to involuntary redemption if the account value
becomes less than the specified minimum because of a stockholder redemption and
not from market action. The Fund further reserves the right upon 30 days prior
notice and Board approval to redeem the account of any shareholder who has
failed to furnish a certified social security or tax identification number to
the Fund.
SHAREHOLDER SERVICES
Mutual Series Fund Inc.
c/o PFPC Inc.
P.O. Box 8901
Wilmington, DE 19899-8901.
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A. Reinvestment of Distributions. Shareholders may elect to (a) have all capital
gain distributions and income dividends on a series' shares held by them
automatically reinvested in additional shares of the series, or (b) have all
capital gain distributions automatically reinvested, but receive all income
dividends in cash, or (c) receive all capital gains distributions and income
dividends in cash. Unless an election is made, dividends and distributions will
be automatically reinvested in additional shares or fractions thereof of the
same series by the transfer agent at the net asset value in effect at the close
of the New York Stock Exchange on the date of distribution. If one of the cash
options above is selected, money can be automatically transferred to the
shareholder's bank account on the payable date by completing an Automated
Transfers application. Please call 1-800-532-3014 for an application or complete
item 6 on the application attached to this prospectus.
B. Automatic Investment Plan. The Automatic Investing Plan permits an investor
to automatically purchase shares of the Fund on a monthly basis through an
arrangement with the investor's bank and the transfer agent. The transfer agent
will arrange for a predetermined amount of money, selected by the investor (the
minimum per month for Mutual Shares and Beacon is $100 and is $50 for Qualified,
Discovery and European), to be deducted on various dates of the month from the
investor's bank account to purchase shares of the designated series. The
investor will receive a confirmation from the transfer agent and his bank
account will reflect the amount charged. An investor may utilize this service by
completing an Automated Transfer application with the transfer agent. Please
call 1-800-553-3014 to request an application. The investor's bank must be a
member of Automated Clearing House (ACH). The Automatic Investment Plan normally
becomes effective 20 business days after the application is received.
C. Individual Retirement Account Plan. All persons eligible may establish an
Individual Retirement Account ("IRA") to invest in the Fund. Mutual Shares and
Beacon require a $2,000 minimum initial deposit to an IRA. Qualified, Discovery
and European have a minimum initial deposit of $1,000. All dividends and
distributions on shares held in IRAs are reinvested in additional shares of the
Fund and are not taxed until withdrawn. Please call the Fund at 1-800-553-3014
for an IRA application. Please consult your tax advisor regarding the tax
treatment of IRAs under the Internal Revenue Code of 1986 as amended (the
"Code").
D. Qualified Retirement Plans. The Fund offers four qualified retirement plans:
the Simplified Standardized Profit Sharing Plan, the Simplified Standardized
Money Purchase Plan, the Standardized Profit Sharing Plan and the Standardized
Money Purchase Plan. For copies of the plan documents, plan administrators guide
and summary plan description booklets call 1-800-553-3014. PNC Bank acts as
trustee/custodian, but neither PNC Bank nor the Fund administers the qualified
retirement plans and therefore no assurance can be given that a particular
qualified retirement plan is properly administered. Please consult your employer
or tax advisor if you have any questions.
E. SEP-IRA. Eligible individuals may establish a SEP-IRA with their employers.
An application form may be obtained from the Fund by calling 1-800-553-3014. If
the SEP-IRA is properly established and administered by the employer,
contributions will be tax deductible and income and capital gain will be tax
deferred. PNC Bank acts as trustee/custodian, but neither PNC Bank nor the Fund
administers the SEP-IRA and therefore no assurance can be given that a
particular SEP-IRA is properly administered. Please consult your employer or tax
advisor if you have any questions.
F. Section 403(b)(7) Retirement Plan. Persons who are full or part-time
employees of non-profit tax-exempt organizations or public educational
organizations, such as hospitals, educational institutions, and other religious,
charitable, scientific or literary organizations, are eligible to establish a
retirement plan under Section 403(b)(7) of the Code. An investor's employer may
make direct contributions to the investor's 403(b)(7) Plan account or
contributions may be made pursuant to the investor's agreement to take a
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reduction in salary or to forego an increase in salary. Such contributions will
be excluded from the investor's gross income for Federal income tax purposes up
to specified limits provided they do not exceed the investor's "excludable
amount" for the taxable year.
Shareholders may call the Fund at 1-800-553-3014 to request an application
and a model 403(b)(7) Plan. The 403(b)(7) Plan was submitted to the IRS National
Office on behalf of a participant and it ruled to the effect that (i) amounts
contributed by an employer (whether or not under a salary reduction agreement)
will be excludible from the participant's gross income to the extent of his
"exclusion allowance" (as defined in Section 403(b) of the Code) and (ii) the
dividends and other income and gains on such account will be tax-exempt until
distribution to the participant and/or his beneficiary. While this ruling may
not be used as precedent by other participants, it indicates that the form of
the 403(b)(7) Plan satisfies the requirements of Section 403(b) of the Code.
Participants who desire the assurance of a favorable ruling should similarly
file a request for a ruling.
G. Systematic Withdrawal Plan. A shareholder owning or purchasing Fund shares
with a current account value of at least $10,000 may open a Systematic
Withdrawal Plan (a "Plan") under which a specified dollar amount (not less than
$50) will be paid to the shareholder from the shareholder's Fund account on a
monthly, quarterly or annual basis on various dates of that month. Systematic
Withdrawal Plan payments can be made automatically into the shareholder's bank
account by completing an Automated Transfers application. Please call
1-800-553-3014 for an application, and specify if you want an automated transfer
application for a regular or retirement account. A shareholder may open a
Systematic Withdrawal Plan by filing with the transfer agent an application,
together with any certificates for series shares held by the shareholder. Please
call the Fund at 1-800-553-3014 to request a Systematic Withdrawal Plan
application. The Plan will normally become active within 20 business days after
the application is received. Systematic withdrawals are expected to result in a
decrease in aggregate value of the investment.
H. Fees. As of January 1996 PNC Bank has agreed to waive its annual maintenance
fee (for all or any portion of a year) of $9 per shareholder account for IRA,
Qualified Retirement Plan, SEP-IRA and 403(b)(7) Plans. The fee and its waiver
are subject to adjustment by PNC Bank as trustee/custodian for the Plans.
I. Transfer of Shares. A shareholder may transfer shares of any series to
another person by writing to the Fund's transfer agent. The shareholder should
clearly identify the series, the account and the number of shares to be
transferred, and include the signature of all registered owners, and all stock
certificates, if any, which are the subject of transfer. The signature on the
letter of instructions, the stock certificates or any stock power must be
guaranteed in the same manner as described under "How to Redeem Shares." As in
the case of redemptions, the written request must be received in good order
before any transfer can be made.
NET ASSET VALUE
For purposes of pricing purchases and redemptions, the net asset value of
each series of the Fund is separately determined by State Street Bank and Trust
Company, the Fund's custodian ("State Street") as of the earlier of 4:00 p.m. or
the close of regular trading on the New York Stock Exchange on each day that the
Exchange is open for business but in no event less often than once each week.
Net asset value per share of each series of the Fund is calculated by adding the
value of all securities and other assets of such series, subtracting all of the
liabilities of such series and dividing the remainder by the number of shares of
such series outstanding at the time the determination is made.
Securities, including options, and futures traded on an exchange or on
NASDAQ or in the over the counter market are valued at the last reported sales
price on the day of valuation, but if there are no sales on that day, or if the
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Adviser determines that the last sale fails to reflect the current market value,
such securities are valued at the mean between the closing bid and asked prices.
Other securities and assets, including restricted and illiquid securities, are
valued at their fair value as determined in good faith under procedures
determined by the Board of Directors. To the extent consistent with the
foregoing fair value standard, securities which are traded for which market
quotations are not readily available are valued at the mean of the bid and asked
prices quoted to the Fund by the principal market makers of such security. All
foreign securities are valued on the date net asset value is calculated as of
the close of each country's respective exchanges. Foreign currencies are priced
at New York market closing prices. Temporary investments in short-term debt
securities are valued at market, or at amortized cost, which approximates market
value.
The net asset value per share of each series appears daily in the The Wall
Street Journal and other newspapers. Shareholders may also call the Fund's
Automated Telephone Inquiry System at 1-800-858-3013 to receive the most recent
net asset value information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each series of the Fund intends to qualify for treatment under Subchapter M
of the Code. Since each series intends to continue to so qualify and to
distribute all of its net investment income and capital gain to shareholders at
least annually, it is expected that each series will not be required to pay any
Federal income taxes. Shareholders generally will have to pay Federal income
taxes on the dividends and distributions they receive from a series and on gains
realized upon redemption of their shares.
Following each calendar year, each shareholder will receive information for
tax purposes on the dividends and capital gain distributions received during the
previous year. The Fund may make distributions from net investment income or
capital gain and may also make distributions in kind. Dividends from net
investment income and any net short-term capital gain will be taxable as
ordinary income whether received in cash or in kind. Any distributions
designated as realized net capital gain (the excess of net long-term capital
gain over net short-term capital loss) will be taxable as long-term capital
gain, regardless of the holding period of the shareholder's shares of such
series. All or a portion of any dividends paid by the Fund to corporate
shareholders may, under certain circumstances, be eligible for the dividends
received deduction. Credit for foreign taxes paid by the Fund have generally not
been available to shareholders.
Dividends or distributions have the effect of reducing the per share value
of shares owned by the shareholder by the per share amount of the dividends or
distributions. Furthermore, such dividends and distributions paid shortly after
the purchase of shares by an investor, although in effect a return of capital,
are subject to income taxes. The Board presently intends to declare such
dividends and distributions from net investment income semi-annually.
The IRS requires backup withholding of Federal income tax of 31% of the
gross amount of dividends, capital gain distributions, and redemption proceeds
paid or credited to shareholders who do not furnish a valid social security or
taxpayer identification number. Shareholders using the Fund as a medium for tax
qualified retirement plans may be subject to a 20% mandatory withholding upon
withdrawal under certain circumstances.
Redemptions of shares of a series will be taxable transactions for Federal
income tax purposes. Generally, gain or loss will be recognized in an amount
equal to the difference between the shareholder's basis in his shares and the
amount received. Assuming that such shares are held as a capital asset, such
gain or loss will be a capital gain or loss and will be a long-term capital gain
or loss if the shareholder has held his shares for a period of more than one
year. If a shareholder redeems shares of any series at a loss and makes an
additional investment in the same series 30 days before or after such
redemption, the loss may be disallowed under the wash sale rules.
Income received by European from sources outside the United States may be
subject to withholding and other foreign taxes. As long as more than 50% of the
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value of European's assets at the close of any taxable year consists of stocks
or securities of foreign corporations, European intends to elect to treat any
foreign income taxes paid by the series as if it were paid by shareholders.
Accordingly, the amount of foreign income taxes paid by European will be
included in the income of its shareholders and the European shareholders will be
entitled to credit their portions of those amounts against their United States
federal income taxes, if any, or to deduct such portions from their taxable
income. No deduction for foreign taxes may be claimed by a shareholder who does
not itemize deductions. In addition, certain individual shareholders may be
subject to rules that limit or reduce their ability to deduct fully their pro
rata share of foreign taxes. Shortly after any year for which it makes such an
election, European will report to its shareholders, in writing, the amount per
share of any foreign tax that must be included in each shareholder's gross
income and the amount that will be available for deduction or credit.
In general, a credit for foreign taxes may not exceed the United States
shareholder's United States federal income tax attributable to its foreign
source taxable income. If European elects to treat foreign taxes paid by the
series as paid by the shareholders as described in the preceding paragraph, the
source of European's income will flow through to its shareholders for purposes
of calculating the limitation on foreign tax credits. Dividends and interest
received by the Fund in respect of non-U.S. securities will give rise to foreign
source income to shareholders. Fund shareholders are advised to consult their
tax advisers with respect to the federal, state, local or foreign tax
consequences of the pass-through of foreign tax credits described above.
The foregoing summary of Federal income tax consequences is included herein
for general informational purposes only. It does not address the tax
consequences to all investors and does not address the tax consequences under
state, local, foreign and other tax laws. Prospective investors are urged to
consult their own tax advisors with respect to the tax consequences of an
investment in a series of the Fund.
FUND OPERATIONS
Portfolio Transactions
The Adviser effects portfolio transactions through brokers and dealers who
in its judgment will provide the Fund with the best combination of price
(including brokerage commissions, if any) and execution. The Adviser may also
give consideration to research services in its selection of brokers and may
cause the series to pay higher commissions than might be charged by some other
broker who does not furnish research services if the Adviser determines in good
faith that the commissions being paid are reasonable in relation to the value of
the brokerage and research services provided. Research services provided by
brokers who execute Fund portfolio brokerage transactions for a series may be
utilized by the Adviser for the benefit of the other series or clients advised
by it, just as research services provided by brokers who execute brokerage
transactions for such other series (or clients) advised by the Adviser may be
utilized for the benefit of the other series (and clients). The Adviser does not
know of any way of determining the value of brokerage and research services
provided by such brokers, except to the extent such services have a determined
market value. To the extent such services are used by the Adviser in advising
the Fund, they tend to reduce the Adviser's expenses. The Adviser may
occasionally also take into account sale of Fund shares when allocating
brokerage.
The Adviser generally effects transactions in exchange traded securities
through members of the exchange although it may also effect such transactions
privately or in the so-called "third market." Transactions in over-the-counter
securities will be executed on a principal basis with market makers unless, in
the judgment of the Adviser, the best combination of price and execution is
available by other arrangements including dealing with a market maker on an
agency basis and paying a brokerage commission. Transactions in unregistered
securities are effectuated with broker-dealers on a principal or agency basis or
directly with the issuers or holders of such securities.
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The Adviser will effect portfolio transactions for a series through a
broker which is an affiliated person of the Fund or the Adviser only if in the
Adviser's judgment such broker is able to obtain the best combination of price
and execution. Currently the only broker affiliated with the Fund or the Adviser
is Clearwater Securities Inc. ("Clearwater"). Although an affiliated broker such
as Clearwater is entitled to and is paid a commission for executing brokerage
transactions for the Fund, Clearwater does not act as a principal for its own
account in any portfolio transactions with the Fund.
The Adviser makes its portfolio decisions for each series based on its
judgment as to the best interests of such series, taking into account factors
such as relative size, cash position, investment restrictions and tax
consequences to the client. Securities considered for purchase or sale by a
series are often also appropriate for purchase or sale by the other series
advised by the Adviser. When more than one of such series is purchasing or
selling the same securities at or about the same time, the transactions are
averaged as to price.
The 1995 portfolio turnover rate for Mutual Shares, Qualified, Beacon and
Discovery was 79.32%, 75.59%, 73.18% and 73.23%, respectively.
SHARES OF THE FUND
The Fund has an authorized capital of 1.3 billion shares of stock, par
value $.001 per share, 200 million of which have been allocated to the Mutual
Shares Fund, 200 million of which have been allocated to the Mutual Qualified
Fund, 200 million of which have been allocated to the Mutual Beacon Fund, 300
million of which have been allocated to Mutual Discovery Fund and 400 million of
which have been allocated to Mutual European Fund. Pursuant to Maryland law and
the Fund's charter, the Board of Directors may increase the authorized capital
and reclassify unissued shares of any class (series) to create additional
classes of stock with specified rights, preferences and limitations. Each share
is entitled to one vote per share on all matters subject to shareholder vote.
Shares of all classes vote together as a single class except that where a matter
being voted on affects only a particular class it will be voted on only by that
class and where a matter affects a particular class differently from other
classes, that class will vote separately on such matter. The Fund is not
required to hold annual meetings and does not expect to hold meetings of
shareholders as long as two-thirds of the directors then in office have been
elected by the shareholders. Section 16(c) of the 1940 Act provides certain
rights to shareholders which the Fund will honor regarding the ability to call
meetings of shareholders and to communicate with shareholders. If less than a
majority of the directors have been elected by shareholders, a meeting of
shareholders will be held within sixty days to fill any existing vacancies.
Directors may be removed only for cause by a vote of sixty-seven percent of the
outstanding shares of the Fund. A meeting of shareholders shall be called if the
record holders of ten percent of the shares of the Fund so request in writing.
Each share is entitled to participate equally in dividends and distributions
declared by the Directors with respect to shares of the same class, and in the
net distributable assets allocated to such class on liquidation. When issued,
the shares are fully paid and nonassessable, and have no preemptive, conversion
or exchange rights. Shareholders are entitled to require the Fund to redeem
their shares. The shares are transferable without restriction.
COUNSEL AND INDEPENDENT AUDITORS
Skadden, Arps, Slate, Meagher and Flom, New York, New York are counsel to
the Fund. Wolf, Block, Schorr and Solis-Cohen of Philadelphia, Pennsylvania are
special counsel to the directors who are not interested persons of the Adviser
or the Fund. Miles & Stockbridge, Baltimore, Maryland are special counsel to the
Fund and pass upon the legality of the shares. Ernst & Young LLP, Boston,
Massachusetts, are the independent auditors of the Fund.
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ADDITIONAL INFORMATION
Custodian, Transfer and Dividend Disbursing Agent. State Street Bank and
Trust Company, Atlantic Division, 225 Franklin Street, Boston, MA 02110 is the
principal custodian for the assets of all the series of the Fund. The transfer
and dividend disbursing agent of the Fund is PFPC Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809-3710. PNC Bank, Wilmington, Delaware acts as the
trustee/custodian for all Fund sponsored retirement accounts.
Shareholder Inquiries. Shareholder inquiries should be directed to the Fund
at the telephone number or address set forth on the cover page of this
Prospectus.
Reports. The Fund will issue to its shareholders semiannual reports
containing unaudited financial statements and annual reports containing
financial statements examined by auditors which have been approved by the
shareholders.
Information. This Prospectus does not contain all the information included
in the Registration Statement filed with the Securities and Exchange Commission
under the Securities Act of 1933 with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Registration
Statement including the exhibits filed therewith may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, each such statement being qualified in all respects by such reference.
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New Account Application - Mutual Series Fund Inc.
PLEASE FOLLOW INSTRUCTIONS FOR THIS APPLICATION LOCATED ON BACK PAGE.
If you have any questions on how to complete this application, please call: 1-800-448-FUND
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1 Investment and Establishing Your Account
- ------------------------------------------------------------------------------------------------------------------------------------
Check Series in which you are investing:
|_| 076 Mutual Beacon ($5,000 minimum) $_________ |_| 077 Mutual Discovery ($1,000 minimum) $_________
|_| 078 Mutual European ($1,000 minimum) $_________ |_| 075 Mutual Qualified ($1,000 minimum) $_________
|_| 074 Mutual Shares ($5,000 minimum) $_________
Enclosed is a check made payable to MUTUAL SERIES FUND INC. for the total amount of $__________________
- ------------------------------------------------------------------------------------------------------------------------------------
2 Your Account Registration
- ------------------------------------------------------------------------------------------------------------------------------------
Individual ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
First Name Middle Initial Last Name
- ------- ------ -----------------
Social Security Number (Required to open your account)
and (if any) Joint Tenant (will be rights of survivorship unless otherwise indicated)
- ------------------------------------------------------------------------------------------------------------------------------------
First Name Middle Initial Last Name
Gift/Transfer To A Minor ----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- ---------------------------------------
Custodian's Name (Only one permitted) Minor's Birthdate
- ------------------------------------------------------------------------------ under the
Minor's Name (Only one permitted)
Uniform Gifts/Transfers to Minors Act. _______________ ______________________________________________________________
(Minor's State) Minor's Social Security Number (Required to open your account)
Trust -----------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Trust
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Trust (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Second Trustee (if any)
- -------------------------- ----------------------------------------------
Date of Trust Agreement Taxpayer Identification Number |_| Tax Identification Number
You must provide a Trust Date to qualify as a legal trust. |_| Social Security Number
Corporation, Partnership Or Other Entity ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Corporation or Other Entity
- ------------------------------------------------------------------------------------------------------------------------------------
Authorized Officer
- -------- --------------------------------------------------
Taxpayer Identification Number (required to open your account)
- ------------------------------------------------------------------------------------------------------------------------------------
3 Your Mailing Address
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Street Address
- ------------------------------------------------------------------------------------------------------------------------------------
City State Zip Code
____________ __________________________ If US citizen living abroad, please indicate state of residence _________
Area Code Daytime Phone Number State
- ------------------------------------------------------------------------------------------------------------------------------------
4 Receiving Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
All income, dividends and capital gain distributions will be reinvested in your Mutual Series account unless you select another
option in item 6 of this application.
- ------------------------------------------------------------------------------------------------------------------------------------
5 Your Signatures
- ------------------------------------------------------------------------------------------------------------------------------------
Please be sure you have signed this form. Your signature and social security or tax identification number are required to
establish your account.
This application cannot be used for an IRA or other MUTUAL SERIES FUND Retirement Plans
Under the Federal Income Tax Law, you are subject to certain penalties as well as withholding of tax at a 31 percent rate if you do
not complete the following section.
Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number; 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 Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or
dividends or (c) the IRS has notified me that I am no longer subject to backup withholding (does not apply to real estate
transactions, mortgage interest paid, the acquisition or abandonment of secured property, contributions to an individual
retirement arrangement (IRA), and payments other than interest and dividends).
Instructions- You must cross out item (2) above if you have been notified by IRS that you are currently subject to backup
withholding because of underreporting interest or dividends on your tax return.
To the extent that this investment represents pension plan assets, I verify that this is an appropriate investment under the
plan.
I (we) have full right, power, authority, and legal capacity and am (are) of legal age in my state of residence to purchase
shares of the Fund. I (we) affirm that I (we) have received and read the current prospectus of the Fund and agree to its terms. I
(we) understand and agree that if I (we) hereafter order any additional shares and do not pay for such shares in a timely manner as
described in the Prospectus, the Fund may cancel the order and deduct any losses to the Fund incurred as a result of such
cancellation from dividends or redemptions of our remaining shares.
- ------------------------------------------------------------------------------------------------------------------------------------
Signature (as registered) Date
Check one: |_| Owner |_| Trustee |_| Custodian |_| Authorized Signatory |_| Other
- ------------------------------------------------------------------------------------------------------------------------------------
Signature (as registered) Joint Owner, Trustee, etc. Date
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<S> <C>
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6 Automated Transfer
- ------------------------------------------------------------------------------------------------------------------------------------
Please complete this section to authorize convenient transfers between your bank account and your Mutual Series Account via
Automated Clearing House (ACH). Attach a voided, unsigned, personal check, or savings deposit slip for the bank account you will be
using for transfers. The Fund cannot require your bank to accept this service, but we will work with your bank to establish this
service. Please complete an application for each of your Mutual Series Fund accounts that you wish to have this transfer capability.
Telephone Purchases -- You must complete this section if you wish to make telephone purchases. Telephone purchases must be for at
least $1,000, and the existing account balance has to equal at least half the amount of the telephone purchase. Telephone
Purchases
can not be made on retirement accounts.
Automatic Investment Plan -- Convenient automatic transfer into your fund account. This transfer will occur on or about one of the
following days
(Please check only one): |_| 1st |_| 10th |_| 15th |_| 20th |_| 25th
A minimum of $100 for Mutual Beacon and Mutual Shares, $50 for Mutual Discovery, Mutual European and Mutual Qualified.
I wish to make: |_| MONTHLY investments of $_________ or |_| QUARTERLY investments of $_________ with the first payment made
in the month of __________________.
Distributions -- All income, dividends and capital gains distributions will be reinvested in your Mutual Series account unless you
select one of the following options.
|_| Deposit all income and capital gains in my bank account. |_| Deposit income in my bank account and reinvest all capital
gains.
Written Redemptions -- Redemption proceeds will be automatically deposited into your bank account approximately two business days
after your written request is received in good order. Proceeds will be calculated at the net asset value next computed after
receipt of your redemption request. Please refer to the Funds' Prospectus for redemption procedures.
Systematic Withdrawal Plan -- Convenient automatic transfers into your bank account. This transfer will occur on or about the
(Please check only one): |_| 10th or |_| 25th of the month.
Available for accounts with a value of at least $10,000. Please refer to the Fund's prospectus for the redemption procedures.
Retirement accounts require a different application for this service. Call 1-800-553-3014 for the correct withdrawal form.
I wish to make (Minimum of $50): |_| MONTHLY withdrawals of $_________ or |_| QUARTERLY withdrawals of $__________
with the first withdrawal made in the month of _________________.
Bank Information: _______________________________________________
ABA Routing Number
- -------------------------------------------------------------------------- Note: This routing number can usually be found
Name and Address of Bank at the bottom, on the left hand side of your
personal check.
Note: To participate in this kind of transfer, your bank must be a member of the
Automated Clearing House (ACH). Please contact your bank to make sure that your _______________________________________________
bank is a member of ACH before you complete this application. Bank Account Number
____ |_| checking ____ |_| savings
- --------------------------------------------------------
Account Name
Note: One common name must appear on both your Mutual Series Fund account registration and bank registration.
Please Note: Automated transfers with respect to Telephone Purchases and written Redemptions normally become effective 20 business
days after we receive this completed application. Automated Transfers with respect to Distributions, Automatic
Investment Plans and Systematic Withdrawal Plans normally become effective on the processing cycle that follows the 20
business day activation period. The one bank account identified above will be utilized for all automated transactions
to or from this Mutual Series Account. Please refer to the Funds' prospectus for more details.
By completing this section of the application I request and authorize credits/debits to/from the above referenced bank account in
conjunction with this service. This authority is to remain in effect until you receive written notice to the contrary from me. I
agree that if a transfer from my bank account to Mutual Series is not honored by my banking institution, PFPC Inc. (the Funds'
transfer agent) will not be held responsible for items not honored and PFPC is authorized to redeem a $20 processing fee from this
Mutual Series account. If your account is charged the processing fee, Mutual Series will discontinue transfers via ACH from that
bank account until we receive further written instructions from you.
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7 Duplicate Statements
- ------------------------------------------------------------------------------------------------------------------------------------
A. Please send a duplicate account statement to
- ------------------------------------------------------------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------------------------------------------------------------
Street Address City State Zip Code
____________ __________________________
Area Code Daytime Phone Number
B. If the person identified in this section has a Fund assigned adviser number, that number is _______________________.
- ------------------------------------------------------------------------------------------------------------------------------------
8 New Account Application Instructions
- ------------------------------------------------------------------------------------------------------------------------------------
1. Investment and Establishing Your Account. You may not use this application to
open an IRA or other MSF Retirement Account. Please call toll-free 1-800
553-3014 if you need an IRA or other Retirement Plan application. Your check(s)
should be made payable to Mutual Series Fund Inc. Be sure to enclose your check
with this application.
2. Your Account Registration
An account can be registered only as one of the following:
o individual
o joint tenants
o custodial account under the Uniform Gifts or Transfers to Minors Act
o a trust
o a corporation, partnership, organization, fiduciary, etc.
Please complete the section that corresponds with the type of account you are
opening and fill in the required information exactly as you wish it to appear on
the account registration.
Supply the Social Security number of the registered account owner who will be
responsible for tax related matters.
Supply the Employer Identification Number of the legal entity or organization.
If you are opening a trust, please supply the name(s) of the trustee(s) that
have authority to act for the trust.
If you are opening an account for a corporation, partnership, organization, etc.
please supply the name of an authorized officer who has the authority to act for
the account.
It is the sole responsibility of the account owners to inform the Fund of any
changes in trustees, or authorized officers. Documentation will be required to
make any changes. Please call for information.
3. Your Mailing Address Provide your complete address at which you wish to
receive mail.
4. Receiving Distributions Unless marked otherwise, all income, dividends and
capital gain distributions will be automatically reinvested.
5. Your Signature(s) Please make sure to sign this application. If the account
is registered in the name of:.
o an individual, the individual should sign;
o joint tenants, both should sign;
o a custodian for a minor, the custodian should sign;
o a trustee or other fiduciary, the fiduciary or fiduciaries should sign (please
indicate capacity);
o a corporation or other organization, an officer should sign (please indicate
corporate office or title)
6. The Automated Transfers Section of this application must be completed before
we can accept any transfers to or from your bank account and before you request
a telephone purchase.
7. Existing Accounts If you have additional accounts within the same fund with
identical mailing addresses, and you would like us to consolidate your
informational mailings, (Annual and Semi-annual reports), please provide us with
the account numbers, and indicate the primary account which will receive our
mailings.
8. Duplicate Statements Please complete this section is you wish a dealer,
investment adviser or other interested party to receive duplicate statements for
this account. If the person identified in this section has multiple Fund
advisory clients, the adviser can have all client activity reports coordinated
into one mailing by calling 1-800-448-FUND to arrange for an adviser number.
- --------------------------------------------------------------------------------
If you have any questions on how to complete this application, please call
1-800-448-FUND
Mail your completed application and check to
Mutual Series Fund Inc.
c/o PFPC Inc.,
PO Box 8901
Wilmington, DE 19899-8901
All mail sent by an overnight carrier or priority mail, should be addressed to:
Mutual Series Fund Inc.
c/o PFPC Inc.,
400 Bellevue Parkway -- Suite 108
Wilmington, DE 19899-3710
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
================================================================================
This Prospectus omits certain information contained in the registration
statement on file with the Securities and Exchange Commission. Information
omitted may be obtained from such Commission in Washington, D.C., upon payment
of the fee prescribed by the rules and regulations of the Commission.
----------
Contents Page
Series Annual Expense Tables .............................................. 2
Performance Information ................................................... 3
Condensed Financial Information ........................................... 4
The Fund .................................................................. 8
Management of the Fund .................................................... 13
How to Purchase Shares .................................................... 15
How to Redeem Shares ...................................................... 18
Shareholder Services ...................................................... 19
Net Asset Value ........................................................... 21
Dividends, Distributions and Taxes ........................................ 22
Fund Operations ........................................................... 23
Shares of the Fund ........................................................ 24
Counsel and Independent Auditors .......................................... 24
Additional Information .................................................... 25
----------
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer made by this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy by the Fund in any jurisdiction in which such
offer to sell or solicitation of an offer to buy may not lawfully be made.
================================================================================
================================================================================
MUTUAL
SERIES
FUND
INC.
An Investment Company Organized in Diversified
Series
----------
Investment Adviser
HEINE SECURITIES CORPORATION
MICHAEL F. PRICE
President
Portfolio Manager
----------
[LOGO]
----------
PROSPECTUS
June 25, 1996
================================================================================
<PAGE>
MUTUAL SERIES FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
June 25, 1996
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Mutual Series Fund Inc. (the "Fund")
dated June 25, 1996. Copies of the Prospectus and the most recent Annual Report
of each series of the Fund can be obtained without charge by calling the Fund at
1-800-553-3014 or by writing to Mutual Series Fund Inc., 51 John F. Kennedy
Parkway, Short Hills, NJ 07078, Attention: Shareholder Services.
TABLE OF CONTENTS
Page
Investment Objectives and Policies .................................... B-2
Restrictions and Limitations .......................................... B-11
Management of the Fund ................................................ B-13
Investment Adviser .................................................... B-15
Redemption of Shares .................................................. B-16
Investment Advisory Agreements ........................................ B-16
Portfolio Brokerage ................................................... B-16
Taxes ................................................................. B-18
Calculation of Performance Data ....................................... B-20
Custodian and Transfer Agent .......................................... B-21
Financial Information ................................................. B-21
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
As described in the Prospectus, the general investment policy of the Fund
for its series is to invest in securities if, in the opinion of Heine Securities
Corporation, the series' investment adviser (the "Adviser"), they are available
at prices less than their intrinsic value, as determined by the Adviser after
careful analysis and research, taking into account, among other factors, the
relationship of book value to market value of the securities, cash flow, and
multiples of earnings of comparable securities. The Fund reserves freedom of
action for each series to invest in common stock, preferred stock, debt
securities and other securities in such proportions as the management deems
advisable, but, without committing any fixed portion of any series' assets, the
management typically maintains a portion of the assets of each series invested
in debt securities and preferred stocks (which may be convertible). In addition,
the series may also invest in restricted debt and equity securities, in foreign
securities, and in other investment company securities.
Repurchase Agreements and Loans of Securities
Each series may invest in repurchase agreements with domestic banks,
brokers or dealers. Repurchase agreements are considered loans by the series
collateralized by the underlying securities. As with loans of portfolio
securities which the series may make, these transactions must be fully
collateralized at all times. The adviser will monitor the creditworthiness of
the other party and will monitor the value of the collateral by marking to
market daily in order to confirm that its value is at least 100% of the agreed
upon sum to be paid to the series.
Repurchase agreements and lending of portfolio securities involve some
credit risk to the series. If the other party defaults on its obligations, the
series could be delayed or prevented from receiving payment or recovering its
collateral. Even if the series recovers the collateral in such a situation, the
series may receive less than its purchase price upon resale.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the seller of the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange-listed options and
over-the-counter options ("OTC options"). Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
B-2
<PAGE>
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the- money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting option transactions.
The Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms. The hours of trading for
listed options may not coincide with the hours during which the underlying
financial instruments are traded. To the extent that the option markets close
before the markets for the underlying financial instruments, significant price
and rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty" collectively
"Counterparties") through direct bilateral agreement with the Counter party. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Fund will only sell OTC options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require the Counter party to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counter party fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counter party or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank of
New York as "primary dealers" or broker dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligations of which have received) a short-term credit rating of "A-l" from
Standard & Poor's Corporation ("S&P") or "P-l" from Moody's Investor Services
("Moody's"), an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or which the Adviser determines is of comparable
credit quality. The staff of the SEC currently takes the position that OTC
options purchased by the Fund, and portfolio securities "covering" the amount of
B-3
<PAGE>
the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any,) are illiquid, and are subject
to the Fund's limitations on investments in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio) and
on securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell
put and call options on such futures as a hedge against anticipated interest
rate, currency or equity market changes, for duration management and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for a bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets ("initial margin") which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract, it will be obligated to
B-4
<PAGE>
post initial margin (and potential subsequent variation margin) for the
resulting futures positions just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of the Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
Currency Transactions
The Fund may engage in currency transactions with Counterparties in order
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value. Currency transactions include forward
currency contracts, exchange-listed currency futures, exchange-listed and OTC
options on currencies, and currency swaps. A forward currency contract involves
a privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
on a notional amount of two or more currencies based on the relative value
differential among them. The Fund will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps are entered into for good faith hedging purposes, the Adviser and the Fund
believe such obligations do not constitute senior securities under the 1940 Act
and, accordingly, will not treat them as being subject to its borrowing
restrictions. The Fund may enter into currency transactions with Counterparties
which have received (or the guarantors of the obligations of such Counterparties
have received) a credit rating of A-l or P-l by S&P or Moody's, respectively, or
that have an equivalent rating from an NRSRO or (except for OTC currency
options) are determined to be of equivalent credit quality by the Adviser. If
there is a default by the Counter party, the Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
B-5
<PAGE>
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to either specific transactions or portfolio positions. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or whose value is based upon foreign
currency or currently convertible into such currency other than with respect to
proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers the Austrian schilling is
linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present during the particular time that the Fund is engaging in proxy
hedging. If the Fund enters into a currency hedging transaction, the Fund will
comply with the asset segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
B-6
<PAGE>
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and any combination of futures, options
and currency transactions ("component" transactions), instead of a single
Hedging Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Risks of Hedging Transactions Outside the United States
When conducted outside the United States, Hedging Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii)lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
Use of Segregated and Other Special Accounts
Many Hedging Transactions, in addition to other requirements, require that
the Fund segregate liquid high grade assets with its custodian to the extent
Fund obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid, high grade
assets equal to the exercise price.
A currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade assets equal to the amount of the Fund's obligation.
However, the segregation requirement does not apply to currency contracts which
are entered in order to in effect "lock in" the purchase or sale price of a
trade in a security denominated in a foreign currency pending settlement within
the time customary for such securities.
B-7
<PAGE>
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange-listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging Transactions may also be offset in combinations. If
the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Depository Receipts
Each series of the Fund may invest in securities commonly known as
American Depository Receipts ("ADRs"), and in European Depository Receipts
("EDRs") or other securities convertible into securities of foreign issuers.
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. EDRs are receipts issued in
Europe generally by a non-U.S. bank or trust company that evidence ownership of
non-U.S. or domestic securities. Generally, ADRs are in registered form and EDRs
are in bearer form. There are no fees imposed on the purchase or sale of ADRs or
EDRs although the issuing bank or trust company may impose charges for the
collection of dividends and the conversion of ADRs and EDRs into the underlying
securities. Investment in ADRs has certain advantages over direct investment in
the underlying non-U.S. securities, since: (i) ADRs are U.S. dollar denominated
investments which are easily transferable and for which market quotations are
readily available and (ii) issuers whose securities are represented by ADRs are
subject to the same auditing, accounting and financial reporting standards as
domestic issuers. EDRs are not necessarily denominated in the currency of the
underlying security.
Medium and Lower Rated Corporate Debt Securities
Each series may invest in securities that are rated in the medium to
lowest rating categories by S&P and Moody's, some of which may be so-called
"junk bonds." The series have historically invested in securities of distressed
B-8
<PAGE>
issuers when the intrinsic values of such securities have, in the opinion of the
Adviser, warranted such investment. Corporate debt securities rated Baa are
regarded by Moody's as being neither highly protected nor poorly secured.
Interest payments and principal security appears adequate to Moody's for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such securities are
regarded by Moody's as lacking outstanding investment characteristics and having
speculative charactertistics. Corporate debt securities rated BBB are regarded
by S&P as having adequate capacity to pay interest and repay principal. Such
securities are regarded by S&P as normally exhibiting adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for securities in this rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's view,
assurance of interest and principal payments or of maintenance of other terms of
the security over any long period of time may be small. Corporate debt
securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In S&P's view,
although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as indicating the
two lowest degrees of speculation in this group of ratings. Securities rated D
by S&P or C by Moody's are in default and are not currently performing. The Fund
will rely on the Adviser's judgment, analysis and experience in evaluating such
debt securities. In this evaluation, the Adviser will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters as well as the price of the security.
The Adviser may also consider, although it does not rely primarily on, the
credit ratings of Moody's and S&P in evaluating lower rated corporate debt
securities. Such ratings evaluate only the safety of principal and interest
payments, not market value risk. Additionally, because the creditworthiness of
an issuer may change more rapidly than is able to be timely reflected in changes
in credit ratings, the Adviser monitors the issuers of corporate debt securities
held in the Fund's portfolio. The credit rating assigned to a security is a
factor considered by the Adviser in selecting a security for a series, but the
intrinsic value in light of market conditions and the Adviser's analysis of the
fundamental values underlying the issuer are of at least equal significance.
Because of the nature of medium and lower rated corporate debt securities,
achievement by each series of its investment objective when investing in such
securities is dependent on the credit analysis of the Adviser. If the series
purchased primarily higher rated debt securities such risks would be
substantially reduced.
A general economic downturn or a significant increase in interest rates
could severely disrupt the market for medium and lower grade corporate debt
securities and adversely affect the market value of such securities. Securities
in default are relatively unaffected by such events or by changes in prevailing
interest rates. In addition, in such circumstances, the ability of issuers of
medium and lower grade corporate debt securities to repay principal and to pay
interest, to meet projected business goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
corporate debt securities in the Fund's portfolio. The secondary market prices
of medium and lower grade corporate debt securities are less sensitive to
changes in interest rates than are higher rated debt securities, but are more
sensitive to adverse economic changes or individual corporate developments.
Adverse publicity and investor perceptions, whether or not based on rational
analysis, may also affect the value and liquidity of medium and lower grade
corporate debt securities, although such factors also present investment
opportunities when prices fall below intrinsic values. Yields on debt securities
in the series portfolios that are interest rate sensitive can be expected to
fluctuate over time. In addition, periods of economic uncertainty and changes in
interest rates can be expected to result in increased volatility of market price
of any medium to lower grade corporate debt securities in the series portfolio
and thus could have an effect on the net asset value of the Fund if other types
B-9
<PAGE>
of securities did not show offsetting changes in values. The secondary market
value of corporate debt securities structured as zero coupon securities or
payment in kind securities may be more volatile in response to changes in
interest rates than debt securities which pay interest periodically in cash.
Because such securities do not pay current interest, but rather, income is
accreted, to the extent that a series does not have available cash to meet
distribution requirements with respect to such income, it could be required to
dispose of portfolio securities that it otherwise would not. Such disposition
could be at a disadvantageous price. Failure to satisfy distribution
requirements could result in the series failing to qualify as a pass- through
entity under the Internal Revenue Code. Investment in such securities also
involves certain other tax considerations.
The Adviser values the series' investments pursuant to guidelines adopted
and periodically reviewed by the Board of Directors. See "Determination of Net
Asset Value" in the Prospectus. To the extent that there is no established
retail market for some of the medium or low grade corporate debt securities in
which the series may invest, there may be thin or no trading in such securities
and the ability of the Adviser to accurately value such securities may be
adversely affected. Further, it may be more difficult for a series to sell such
securities in a timely manner and at their stated value than would be the case
for securities for which an established retail market did exist. The effects of
adverse publicity and investor perceptions may be more pronounced for securities
for which no established retail market exists as compared with the effects on
securities for which such a market does exist. During periods of reduced market
liquidity and in the absence of readily available market quotations for medium
and lower grade corporate debt securities held in the Fund's portfolio, the
responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the valuation of
the Fund's securities due to a reduced availability of reliable objective data.
To the extent that the Fund purchases illiquid corporate debt securities or
securities which are restricted as to resale, the Fund may incur additional
risks and costs. Illiquid and restricted securities may be particularly
difficult to value and their disposition may require greater effort and expense
than more liquid securities. Further, a series may be required to incur costs in
connection with the registration of restricted securities in order to dispose of
such securities, although under Rule 144A under the Securities Act of 1933
certain securities may be determined to be liquid pursuant to procedures adopted
by the Fund's Board of Directors under applicable guidelines.
Short Sales
Each series may make short sales of securities. A short sale is a
transaction in which the series sells a security it does not own in anticipation
that the market price of that security will decline. Each series expects to make
short sales as a form of hedging to offset potential declines in long positions
in similar securities, in order to maintain portfolio flexibility and for
profit.
When a series makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The series may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The series' obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
series will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current market value
of the security sold short.
B-10
<PAGE>
If the price of the security sold short increases between the time of the
short sale and the time the series replaces the borrowed security, the series
will incur a loss; conversely, if the price declines, the series will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the series' gain is limited to the price at
which it sold the security short, its potential loss is theoretically unlimited.
The series will not make a short sale if, after giving effect to such
sale, the market value of all securities sold short exceeds 5% of the value of
its total assets or the series' aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The series
may also make short sales "against the box" without respect to such limitations.
In this type of short sale, at the time of the sale, the series owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
RESTRICTIONS AND LIMITATIONS
Mutual Shares, Qualified, Beacon, Discovery and European Fundamental Policies
Each of Mutual Shares, Qualified, Beacon, Discovery and European has
adopted the following fundamental investment restrictions which may not be
changed without the affirmative vote of the holders of a majority of the
outstanding voting securities of such series, which means the lesser of (1) the
holders of more than 50% of the outstanding shares of voting stock of such
securities or (2) 67% of the shares if more than 50% of the shares are present
at a meeting of shareholders in person or by proxy. Unless otherwise noted, all
percentage restrictions are as of the time of investment after giving effect to
the transaction. Pursuant to such restrictions each series may not:
1. Purchase or sell commodities, commodity contracts (except in conformity
with regulations of the Commodities Futures Trading Commission such that the
series would not be considered a commodity pool), or oil and gas interests or
real estate. Securities or other instruments backed by commodities are not
considered commodities or commodity contracts for purposes of this restriction.
Debt or equity securities issued by companies engaged in the oil, gas, or real
estate businesses are not considered oil or gas interests or real estate for
purposes of this restriction. First Mortgage loans and other direct obligations
secured by real estate are not considered real estate for purposes of this
restriction.
2. Make loans, except to the extent the purchase of debt obligations of
any type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with requirements
established from time to time by the Securities and Exchange Commission and the
securities exchanges on which such securities are traded.
3. Issue securities senior to its stock or borrow money or utilize
leverage in excess of the maximum permitted by the Investment Company Act of
1940 which is currently 33 1/3% of total assets (plus 5% for emergency or other
short-term purposes) from banks on a temporary basis from time to time to
provide greater liquidity for redemptions or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular
industry (except that U.S. Government securities are not considered an
industry).
5. Act as an underwriter except to the extent the series may be deemed to
be an underwriter when disposing of securities it owns or when selling its own
shares.
B-11
<PAGE>
6. Purchase the securities of any one issuer, other than the U.S.
Government or any of its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of its total assets would be invested in
such issuer, or such series would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such series'
total assets may be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the prospectus, engage in short sales,
purchase securities on margin or maintain a net short position.
Non Fundamental Policies, all Series
As a matter of policy that is not fundamental, the Fund has determined
that no series will invest more than 5% of its assets in warrants, and that no
more than 2% of such assets may be invested in warrants which are not listed on
the New York or American Stock Exchanges. Also, as a matter of policy, the
series will not purchase securities for purposes of short term trading and will
not invest more than 5% of their assets in securities of issuers (together with
any predecessors) in existence for less than three years, provided that the
aggregate percentage of assets invested in such issuers combined with illiquid
investments does not exceed 15%. The series will not invest in the securities of
other registered open-end investment companies or purchase the securities of any
affiliated investment company and will not purchase the securities of any issuer
of which any officer or director of the Fund owns more than 1/2 of 1% of the
outstanding securities or in which the officers and directors in the aggregate
own more than 5%. The series do not borrow for leveraging purposes.
The Fund has registered some or all of the shares intended to be sold
pursuant to the Fund's Prospectus and this Statement of Additional Information
under the securities laws of all states. Some states, as conditions of
registration, among other things, require that the Fund limit its investments in
or abstain from investing in certain kinds or classes of securities.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interests of a particular series and its shareholders, the Fund will revoke the
commitment by terminating sales of such series' shares in the state involved.
The Adviser has agreed to reimburse the Fund annually for the amount, not
to exceed the fee payable to the Adviser for the period of reimbursement, by
which any series' aggregate annual expenses (excluding interest, taxes,
brokerage commissions and extraordinary items) exceed the most restrictive limit
to which such series may be subject. The most restrictive limit currently
applicable to the Fund is 2.5% of the first $30 million of average net assets,
2% the next $70 million and 1.5% of any excess above $100 million. (See
"Investment Advisory Agreements.")
B-12
<PAGE>
MANAGEMENT OF THE FUND
The executive officers and directors of the Fund, their positions with the
Fund and their principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
Names and Address with Registrant Principal Occupation(s) During Past 5 Years
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael F. Price* Chairman of the Board President, Chief Operating Officer, and director
51 John F. Kennedy Pkwy. and President of the Adviser.
Short Hills, NJ 07078
Peter A. Langerman* Director and Executive Financial Analyst with the Adviser. Director of
51 John F. Kennedy Pkwy. Vice President Sunbeam Oster since 1990, Lancer Industries
Short Hills, NJ 07078 since 1994 and N.M.M. S.p.A. since 1995. Manager
(Director) of MB Motori, L.L.C. since 1994 and
MWCR, L.L.C. since 1995.
Jeffrey A. Altman* Vice President Analyst and trader with the Adviser. Manager
51 John F. Kennedy Pkwy. (Director) MB Metropolis, L.L.C. since 1994.
Short Hills, NJ 07078 Since 1995 Manager (Director) of MB Motori,
L.L.C., MWCR, L.L.C. and S. H. Mortgage.
Trustee of Resurgence Properties Inc.
and Chairman of the Board of Trustees, Value
Property Trust.
Robert L. Friedman* Vice President Research analyst with the Adviser.
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Raymond Garea* Vice President Research analyst with the Adviser since March
51 John F. Kennedy Pkwy. 1991. Prior thereto he was a Vice President and
Short Hills, NJ 07078 analyst with Donaldson, Lufkin & Jenrette.
Manager (Director) MB Metropolis, L.L.C. and
S. H. Mortgage.
Lawrence N. Sondike* Vice President Research Analyst with the Adviser.
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Elizabeth N. Cohernour* General Counsel and Secretary of the Fund and Adviser. General
51 John F. Kennedy Pkwy. Secretary Counsel of the Fund and the Adviser since May
Short Hills, NJ 07078 1988.
Edward J. Bradley* Treasurer and Chief Treasurer and Chief Financial and Accounting
51 John F. Kennedy Pkwy. Financial and Accounting Officer of the Adviser and the Fund.
Short Hills, NJ 07078 Officer
</TABLE>
- ------------
* Interested persons within the meaning of the Investment Company Act of 1940.
B-13
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held
Names and Address with Registrant Principal Occupation(s) During Past 5 Years
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Edward I. Altman, Ph D. Director Max L. Heine Professor of Financing and Vice
New York University Director of the NYU Salomon Center, Stern
44 West 4th Street School of Business, New York University. Editor
New York, NY 10012 and author of numerous financial publications;
financial consultant.
Richard L. Chasse, M.D. Director Retired physician.
4 Highland Drive
RT #1, Box 2085
Waterville, ME 04901
Ann Torre Grant Director Executive Vice President and Chief Financial
1225 Eye St., N.W. Officer, NHP Incorporated (owner and manager
Washington, DC 20005 of multifamily housing); prior to March 1995 she
was Vice President and Treasurer, U.S. Air, Inc.
Bruce A. MacPherson Director President of A.A. MacPherson, Inc. Boston, Mass.
1 Pequot Way (representative for electrical manufacturers).
Canton, MA02021
Barry F. Schwartz Director Executive Vice President and General Counsel,
35 East 62nd Street MacAndrews & Forbes Holdings, Inc. (a diversified
New York, NY 10021 holding company).
Vaughn R. Sturtevant, M.D. Director Practicing physician.
6 Noyes Avenue
Waterville, ME 04901
Robert E. Wade Director Practicing attorney.
225 Hardwick Street
Belvidere, NJ 07823
</TABLE>
The Fund's independent directors have standing audit, pension, nominating
and directors' compensation and performance committees. The audit committee is
composed of Ms. Grant and Messrs. Altman and Wade. The pension committee is
composed of Messrs. Altman, Schwartz and Sturtevant. The nominating committee is
responsible to nominate candidates for independent director positions and is
composed of Messrs. Chasse, MacPherson and Schwartz. The directors' compensation
and performance committee is composed of Ms. Grant and Messrs. Wade and
Sturtevant.
As of June 14, 1996, all officers and directors of the Fund as a group
owned beneficially 392,997,575 shares of the series of the Fund (less than 1% of
the outstanding shares on such date). No shareholder is known by the Fund to own
5% or more of any series' shares.
B-14
<PAGE>
Remuneration of Officers and Directors
During the twelve month period ended December 31, 1995, the Fund paid its
officers and directors as a group, including reimbursement to the Adviser for
the expenses of personnel who spend a substantial portion of their time on Fund
operations, aggregate compensation of $839,366. All Fund officers are also
affiliated with the Adviser. (See "Investment Adviser," below.)
During 1995 independent directors of the Fund received the following
compensation:
<TABLE>
<CAPTION>
Aggregate Pension Annual
Compensation Retirement Benefits Total
Name of Person, Position from Fund Accrued Retirement Compensation
---------------------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Edward I. Altman, Ph.D. Director $20,750 0 $7,500 $20,750
Richard L. Chasse, M.D. Director 18,750 0 7,500 18,750
Ann Torre Grant* Director 20,750 0 7,500 20,750
Bruce A. MacPherson Director 18,750 0 7,500 18,750
Barry F. Schwartz* Director 18,750 0 7,500 18,750
Vaughn R. Sturtevant, M.D. Director 18,750 0 7,500 18,750
Robert E. Wade* Director 25,750 0 7,500 25,750
-------- ----- ------ --------
142,250 0 52,500 142,250
======== ===== ====== ========
</TABLE>
- --------------
* Not vested in retirement plan.
INVESTMENT ADVISER
Heine Securities Corporation (the "Adviser"), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078 serves as each series' investment adviser. All the
outstanding shares of the capital stock of the Adviser are owned by Michael F.
Price. The Adviser manages each series' investments, provides various
administrative services and supervises their daily business affairs, subject to
supervision by the Fund's Board of Directors.
Mr. Michael F. Price, President, Chief Operating Officer and Chairman of
the Adviser, is Chairman of the Board and President of the Fund and principal
executive officer and majority owner of Compliance Solutions, Inc. ("Compliance
Solutions"), a developer of compliance monitoring software for money managers.
The Fund is not charged for the use of software designed by this company.
Additionally, Mr. Price is the sole director and owner of Clearwater Securities
Inc. ("Clearwater"), a registered securities dealer through which some Fund
portfolio securities transactions are effected. Mr. Edward J. Bradley is
Treasurer and Chief Financial and Accounting Officer of the Adviser and the Fund
and is Treasurer of Compliance Solutions and Clearwater. Ms. Elizabeth N.
Cohernour is the Secretary and General Counsel of the Adviser, the Fund,
Compliance Solutions and Clearwater. Mr. Peter A. Langerman is a Research
Analyst with the Adviser and a director and Executive Vice President of the
Fund. Messrs. Jeffrey A. Altman, Robert L. Friedman, Raymond Garea and Lawrence
N. Sondike, Research Analysts with the Adviser, are Vice Presidents of the Fund.
Mr. Eric LeGoff is Vice President of the Adviser and Compliance Solutions.
B-15
<PAGE>
REDEMPTION OF SHARES
The Fund reserves the right to suspend the right of redemption and to
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed (other than weekend and holiday closings) or
trading on the New York Stock Exchange is restricted or during which (as
determined by the SEC by rule or regulation) an emergency exists as a result of
which disposal or evaluation of the Fund's portfolio securities is not
reasonably practicable, or for such other periods as the SEC by order permits.
The Fund will use its best efforts to pay in cash for all shares redeemed,
but under abnormal conditions which make payment in cash impractical or unwise,
the Fund may make payment wholly or partly in portfolio securities at their then
market value which, when added to any cash payment, equals the redemption price.
In such cases an investor may incur brokerage costs in converting such
securities to cash.
Net asset value per share will not be calculated on days the New York
Stock Exchange is not open, currently including the holidays of New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
INVESTMENT ADVISORY AGREEMENTS
The Adviser serves as investment adviser to each of the series pursuant to
a separate investment advisory agreement. The Agreements may be terminated at
any time, without penalty, by the Fund's Board of Directors or by the vote of a
majority of the outstanding voting securities of the Fund, or by the Adviser,
each on not more than 60 days' written notice to the other. The Agreements
automatically terminate upon assignment.
Under the Agreements, the Adviser manages the series' investments and
directs and supervises all the Fund's operations. Each series pays its pro rata
portion of all the expenses of such operations. During the fiscal year ended
December 31, 1995, an aggregate of $1,392,294 of administrative expenses was
incurred by the Mutual Shares Fund, $720,315 by the Mutual Qualified Fund,
$886,843 by the Mutual Beacon Fund and $412,166 by the Mutual Discovery Fund.
All promotional expenses of the Fund, including the costs of mailing
prospectuses to potential investors and distribution expenses, are borne by the
Adviser.
During the calendar year 1995, the Adviser's fee was not reduced due to
any state restrictions on compensation by the Fund. The Adviser's net fee for
the fiscal years ended December 31, 1995, 1994 and 1993, was $27,500,952,
$21,795,512 and $19,507,048 respectively for Mutual Shares Fund, $14,607,723,
$9,766,052 and $8,434,525 for Mutual Qualified Fund, $17,720,127, $9,511,199 and
$4,848,218 respectively for Mutual Beacon Fund, $7,930,967, $5,737,128 and
$2,294,912 for Mutual Discovery Fund.
PORTFOLIO BROKERAGE
Placement of Portfolio Brokerage. As a general matter, purchases and sales
of portfolio securities of the Fund are placed by the Adviser with brokers and
dealers who in its opinion will provide the Fund with the best combination of
price (inclusive of brokerage commissions) and execution for its orders.
However, pursuant to the Fund's Advisory Agreement, consideration may be given
in the selection of broker-dealers to research provided and payment may be made
of a commission higher than that charged by another broker-dealer which does not
furnish research services or which furnishes 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 (the "1934 Act") 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
B-16
<PAGE>
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."
Currently, it is not possible to determine the extent to which commissions
that reflect an element of value for research services might exceed commissions
that would be payable for execution services alone, nor generally can the value
of research services to the Fund be measured, except to the extent such services
have a readily ascertainable market value. Research services furnished might be
useful and of value to the Adviser in serving other clients as well as the Fund,
but on the other hand any research service obtained by the Adviser from the
placement of portfolio brokerage of other clients might be useful and of value
to the Adviser in carrying out its obligation to the Fund.
"Soft dollar" arrangements. The Fund receives research services from
persons who act as brokers or dealers for the Fund. The discussion below relates
in general to these brokers or dealers who pursuant to various arrangements pay
for certain computer hardware and software and other research and brokerage
services to the Adviser and/or the Fund for transactions effected by it for the
Fund. Commission "soft dollars" may be used only for "brokerage and research
services" provided by brokers to whom commissions are paid and under no
circumstances will cash payments be made by any such broker to the Adviser. To
the extent that commission "soft dollars" do not result in the provision of any
"brokerage and research services" by brokers to whom such commissions are paid,
the commissions, nevertheless, are the property of such broker. Although,
potentially, the Adviser could be influenced to place Fund brokerage
transactions with a broker in order to generate "soft dollars" for the Adviser's
benefit, the Adviser believes that the requirement that it achieve best
execution on Fund portfolio transactions, and the Fund's negotiated commission
structure with brokers, mitigate these concerns as the cost of transactions
effected through brokers, before consideration of any "soft dollar" benefits
that may be received, generally will be comparable to that available elsewhere.
During fiscal 1995, 1994 and 1993 the Fund paid brokerage commissions of
$3,355,180, $2,267,683 and $1,640,278, respectively, to brokers who provided
research services. This amount represented 14.90%, 19.45% and 17.75%,
respectively, of total commissions paid for the periods.
As stated in the Prospectus, the Fund generally executes purchases and
sales of non-U.S. securities through market makers acting as principals or
through brokers on the exchanges or in markets in which they are principally
traded. Over-the-counter purchases and sales are normally made with principal
market makers except where, in the opinion of the Adviser, the best executions
are available elsewhere.
The Fund from time to time allocates brokerage commissions to firms which
furnish research and statistical information to the Adviser. The supplementary
research supplied by such firms is useful in varying degrees and is of
indeterminable value. Such research may, among other things, include advice
regarding economic factors and trends, advice as to occasional transactions in
specific securities, and similar information relating to securities.
The Adviser will effect portfolio transactions through a broker which is
an affiliated person of the Fund or the Adviser only if in the Adviser's
judgment such broker is able to obtain the best combination of price and
execution. Although an affiliated broker is entitled to be paid a commission for
executing brokerage transactions for the Fund, the 1940 Act prohibits any such
broker from acting as a principal for its own account in any portfolio
transaction with the Fund without prior approval from the SEC.
A portion of the Fund's brokerage commissions are paid with respect to
agency over-the-counter securities transactions. The Fund effects
over-the-counter securities transactions on either a principal or agency basis.
B-17
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All transactions effected on a principal basis include a mark-up but no
commission. In fiscal 1995 total brokerage commissions of $8,028,205,
$5,182,736, $6,269,829 and $3,040,751 were paid by Mutual Shares, Qualified,
Beacon and Discovery, respectively.
Clearwater Securities Inc. ("Clearwater"), a newly formed affiliate of the
Adviser, is a registered securities dealer and a member of the National
Association of Securities Dealers ("NASD"). Transactions in some Fund portfolio
securities (particularly transactions involving floor brokers) are effected
through Clearwater. During 1995, Mutual Shares paid brokerage commissions to
Clearwater Securities of $1,192,230; Mutual Qualified paid $640,588; Mutual
Beacon paid $764,323 and Mutual Discovery paid $217,609. The transactions
constituted for Mutual Shares 13.2%; Mutual Qualified 14.1%; Mutual Beacon 14.5%
and Mutual Discovery 7.7% of the aggregate dollar amount of brokerage
transactions effected during 1995. These commissions constituted for Mutual
Shares 14.9%, for Mutual Qualified 12.4%, for Mutual Beacon 12.2% and for Mutual
Discovery 7.2% of the total commissions paid in 1995.
TAXES
The Fund intends that each of its series will meet the requirements for
qualification as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). Because each series intends to
qualify and to distribute all of its net investment income and capital gain to
shareholders, it is expected that each series will not be required to pay
Federal income taxes.
A series normally will distribute substantially all of its net investment
income and net realized capital gain, if any, to shareholders in the form of
dividends to be paid from time to time as determined by the Board of Directors.
Such dividends are taxable whether paid in cash or additional shares of such
series. The Board presently intends to declare such dividends and distributions
from earnings semi-annually.
Dividends or distributions have the effect of reducing the per share value
of the shares owned by the investor by the per share amount of the dividends or
distributions. Furthermore, such dividends and distributions paid shortly after
the purchase of shares by an investor, although in effect a return of capital,
are subject to income taxes.
In the event that total distributions (including distributed or designated
net capital gain) for a taxable year exceed its investment company taxable
income and net capital gain, a portion of each distribution generally will be
treated as a return of capital. Distributions treated as a return of capital
reduce a shareholder's basis in its shares and could result in a capital gain
tax either when a distribution is in excess of basis or, more likely, when a
shareholder redeems its shares.
Shareholders of a series will be notified annually by the Fund as to the
Federal tax treatment of dividends and distributions paid during the calendar
year. Dividends and distributions may also be subject to state and local taxes.
State and local tax treatment may vary according to applicable laws.
Shareholders can elect to receive distributions in cash or in additional shares
of such series. The price of the additional shares is determined as of the date
for the dividend payment. (See "Shareholder Services -- Reinvestment of
Distributions," in Prospectus.)
To maintain qualification as a RIC under the Code, each series of the Fund
must limit gains from the sale or other disposition of its portfolio securities
(including options, futures and forward contracts) held for less than three
months to less than 30% of its annual gross income. Generally, gains on foreign
currencies (and gains on options, futures, or forward contracts with respect to
foreign currencies) are not subject to this 30% short- short rule if directly
related to regular investments by a series in equity or debt securities.
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<PAGE>
Each series intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of a 4% Federal excise tax. To do so,
each series expects to distribute during the calendar year an amount at least
equal to (i) 98% of its calendar year net investment income, (ii) 98% of its
realized capital gain (the excess of short and long-term capital gain over short
and long-term capital loss) for each one-year period ending October 31, and
(iii) 100% of any undistributed net investment income or realized capital gain
from the prior calendar year which has not been distributed by such series.
Dividends declared in October, November, or December and made payable to
shareholders of record in such a month would be deemed paid by the Series and
taxable to its shareholders on December31 of such year provided that such
dividends are actually paid during January of the following year. A series may
make a deemed distribution with respect to its net capital gain by paying the
tax with respect to the net capital gain and then designating, but not
distributing, all or a portion of such gain as a capital gain dividend. Such
series' shareholders will treat such designated amounts as a capital gain on
their income tax returns, but they will receive a credit or refund equal to
Federal income taxes paid by such series with respect to such capital gain. In
addition, shareholders will increase their basis in the series' shares by 65% of
the amount subject to tax. If a capital gain dividend is paid with respect to
any shares of a series which are sold at a loss after being held for less than
six months, any loss realized upon the sale of such shares will be treated as a
long-term capital loss to the extent of such capital gain dividend. There are
special rules for determining holding periods for the purpose of the preceding
sentence.
Dividends distributed by a series will only be eligible for the
dividends-received deduction available to corporate shareholders to the extent
of the portion of a series' gross income which consists of dividends received on
equity securities issued by domestic corporations with respect to which such
series meets the same holding period, risk of loss, and borrowing limitations
applicable to the series' shareholders. Section 246 of the Code permits the
dividends-received deduction to corporate shareholders only if the shares with
respect to which the dividends were paid have been held for more than 45 days.
If the holding period is not satisfied, the dividends-received deduction is
disallowed, regardless of whether the shares with respect to which the dividends
were paid have been sold or otherwise disposed of. The holding period
requirements are separately applicable to each block of shares acquired,
including each block of shares received in payment of the Fund's dividends. For
purposes of determining whether this holding period requirement has been met,
the day of acquisition and any day after the first 45 days after the date on
which such shares become ex-dividend must be disregarded. In addition, the
holding period is suspended during periods in which the stock is subject to
diminished risk of loss including, for example, because the holder has acquired
a put option or sold a call option (other than certain covered call options
where the exercise price is not substantially below the selling price) or
otherwise hedged his position.
The dividends-received deduction will also be reduced, for shareholders
who incur indebtedness in order to purchase shares of a series of the Fund, by
the percentage of the cost of such series' shares that is debt- financed.
Generally, this limitation applies only if the debt is directly attributable to
the purchase of shares. Whether debt is directly attributable to the purchase of
shares depends on the particular facts and circumstances of each situation and
accordingly shareholders are urged to consult their tax advisors.
Under section 1059 of the Code, a corporation which receives an
"extraordinary dividend" and disposes of the stock with respect to which such
dividend was paid, provided generally that such stock has not been held for at
least two years prior to the date of declaration, announcement or agreement
about the extraordinary dividend, is required to reduce its basis in such stock
(but not below zero) by the amount of the dividend which was not taxed because
of the dividends-received deduction with such basis reduction generally being
treated as having occurred immediately before the sale or disposition of such
stock. To the extent such untaxed amount exceeds the shareholder's basis, such
excess will be taxed as gain upon a sale or disposition of such stock. An
extraordinary dividend generally is any dividend that equals or exceeds 10% of
the shareholder's basis in the stock (5% in the case of preferred stock). For
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<PAGE>
this purpose, generally, all dividends within any 85-day period and if such
dividends total more than 20% of the shareholder's basis in its stock, all
dividends within one year, must be aggregated for purposes of determining
whether such dividends constitute extraordinary dividends.The shareholder may
elect to determine the status of extraordinary dividends by reference to the
fair market value of the stock as of the date before the ex-dividend date,
rather than by reference to the adjusted basis of such stock (provided the
shareholder establishes the fair market value to the satisfaction of the
Commissioner of the IRS). In determining whether the above-mentioned two-year
holding period has been met, the same rules apply as are applicable to the
45-day holding period requirement for the dividends received deduction.
Corporations should note that 75 percent of the untaxed portion of the
Fund's dividends could be taken into account for purposes of the alternative
minimum tax imposed on corporations.
A series may in the future engage in various defensive hedging
transactions. Under various Code provisions such transactions might change the
character of recognized gains and losses, accelerate the recognition of certain
gains and losses, and defer the recognition of certain losses or deductions.
If more than 50% of the assets of a series of the Fund at the close of any
taxable year consists of stocks or securities of foreign corporations, the Fund
may elect to treat any foreign income taxes, such as withholding taxes on
interest or dividends, that are paid by the Fund with respect to the series as
paid by the shareholders of such series. If the Fund makes this election with
respect to a series, the series shareholders will be entitled to credit their
pro rata share of the foreign taxes paid by the series against their United
States federal income tax liability, or to deduct such amounts from their United
States taxable income. No deduction for foreign taxes may be claimed by a
shareholder who does not itemize deductions. In addition, certain individual
shareholders may be subject to rules that limit or reduce their ability to
deduct fully their pro rata share of foreign taxes paid by the Fund. Since the
Fund anticipates that more than 50% of the value of the total assets of European
will consist of non-U.S. equity and debt securities, European shareholders are
expected to be eligible for a pass through of the foreign taxes paid by the
Fund. Shareholders of Shares, Qualified, Beacon and Discovery are not expected
to be eligible for a pass through of the foreign taxes paid by the Fund.
Treasury regulations provide that the dividends paid deduction
attributable to an in-kind distribution of property is equal to the adjusted
basis of such property.
CALCULATION OF PERFORMANCE DATA
The Fund's average annual total return is computed according to the
following formula:
P(1+T)^n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the
1, 5, or 10 year periods at the end of
the 1, 5, or 10 year periods.
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<PAGE>
In making the computation described above, the Fund will assume that all
dividends and distributions by the Fund are reinvested at the Fund's net asset
value per share on the reinvestment date. The computation will also reflect any
charges made to all shareholder accounts, if any, during the computation period.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, Atlantic Division, 225 Franklin
Street, Boston, MA 02110, is the principal custodian for the assets of all the
series of the Fund. PFPC Inc.,400 Bellevue Parkway, Wilmington, DE 19809-3710 is
the transfer agent for all of the series of the Fund.
FINANCIAL INFORMATION
The Annual Reports to Shareholders contain the following financial
information which is incorporated herein by reference:
Audited Financial Statements as of and for the year
ended December 31, 1995 for Mutual Shares Fund;
Audited Financial Statements as of and for the year
ended December 31, 1995 for Mutual Qualified Fund;
Audited Financial Statements as of and for the year
ended December 31, 1995 for Mutual Beacon Fund;
Audited Financial Statements as of and for the year
ended December 31, 1995 for Mutual Discovery Fund.
B-21
