Registration Nos. 33-65568
811-7828
As filed with the Securities and Exchange Commission on November 29, 1995
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 4 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 6 X
(Check appropriate box or boxes)
MINERVA FUND, INC.
(Exact name of Registrant as specified in charter)
237 Park Avenue
New York, New York 10017
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 845-8406
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Joan V. Fiore
Secretary
Minerva Fund, Inc.
237 Park Avenue
New York, New York 10017
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(Name and Address of Agent for Service)
with a copy to:
Gary S. Schpero, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
(212) 455-2000
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective: (check appropriate box)
---- immediately upon filing pursuant to paragraph (b)
---- on (date) pursuant to paragraph (b)
X 60 days after filing pursuant to paragraph (a)(1)
---- on (date) pursuant to paragraph (a)(1)
---- 75 days after filing pursuant to
---- paragraph (a)(2) on (date) pursuant to paragraph (a)(2) of
rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has previously filed a declaration of registration of an indefinite number of
shares of Capital Stock, $.001 par value per share, of all series of the
Registrant, now existing or hereafter created. Registrant's 24f-2 Notice for the
fiscal year ended September 30, 1995 will be filed by November 30, 1995.
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CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A Item No. Location
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Part A Prospectus Caption
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Item 1. Cover Page.................................Cover Page
Item 2. Synopsis ..................................Fund Expenses;
Prospectus Summary
Item 3. Condensed Financial
Information................................Financial Highlights
Item 4. General Description of
Registrant.................................Investment Objectives;
Investment Policies; Other
Investment Policies; Special
Risk Considerations;
Investment Limitations;
General Information
Item 5. Management of the Fund.....................Fund Expenses; Investment
Management;
Administrative Services;
General Information
Item 5A. Management's Discussion of.................Not Applicable
Fund Performance
Item 6. Capital Stock and Other
Securities.................................Dividends, Capital Gains
Distributions and Taxes;
General Information
Item 7. Purchase of Securities
Being Offered..............................Purchase of Shares;
Valuation of Shares;
Distributor
Item 8. Redemption or Repurchase...................Redemption of Shares
Item 9. Pending Legal Proceedings..................Not Applicable
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Statement of Additional
Part B Information Caption
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Item 10. Cover Page.................................Cover Page
Item 11. Table of Contents..........................Table of Contents
Item 12. General Information and
History....................................Not Applicable
Item 13. Investment Objectives and
Policies...................................Investment Objectives and
Policies; Foreign
Investments; Futures
Contracts; Options; Options
on Foreign Currencies; Risks
of Options on Futures
Contracts, Forward Contracts
and Options on Foreign
Currencies; Interest Rate
and Currency Swaps; Foreign
Currency Exchange-Related
Securities; Investment
Limitations; General
Information
Item 14. Management of the Fund.....................Officers and Directors of
the Fund (see also the
Prospectus, Directors and
Officers); Investment
Management
Item 15. Control Persons and Principal
Holders of Securities......................Officers and Directors of
the Fund; General
Information
Item 16. Investment Advisory and
Other Services.............................Investment Management;
Distributor for the Fund;
Administration, Custody and
Transfer Agency Services
Item 17. Brokerage Allocation and
Other Practices............................Portfolio Transactions
Item 18. Capital Stock and Other
Securities.................................General Information
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Statement of Additional
Part B Information Caption
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Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered..............................Purchase of Shares;
Redemption of Shares;
Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status.................................Tax Aspects of Options,
Futures, Forward Contracts
and Swap Agreements;
Additional Information
Concerning Taxes;
Shareholder Services;
General Information
Item 21. Underwriters...............................Distributor for the Fund
Item 22. Calculation of Performance
Data.......................................Performance Calculations
Item 23. Financial Statements.......................Report of Independent
Accountants; Financial
Statements
N-1A Item No. Location
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Part C
- ------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
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MINERVA FUND, INC.
237 Park Avenue
New York, New York 10017
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INFORMATION AND CLIENT SERVICES: 1-800-393-9998
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PROSPECTUS--JANUARY , 1996
MINERVA FUND, INC. (the "Fund") is a no load open-end management investment
company consisting of two Portfolios, the Equity Portfolio and the Fixed Income
Portfolio. Each Portfolio operates as a diversified investment company with a
distinct investment objective.
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o EQUITY PORTFOLIO
The Equity Portfolio seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing in a
diversified portfolio of common stocks of companies which are deemed to have
earnings and dividend growth potential above the average of the economy in
general.
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o FIXED INCOME PORTFOLIO
The Fixed Income Portfolio seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Government securities, corporate
bonds, mortgage-backed securities and other fixed-income securities. The Fixed
Income Portfolio may invest up to 20% of its assets in high yield, high risk
securities (commonly referred to as "junk bonds"); therefore, investments in
this Portfolio may not be suitable for all investors. See "Special Risk
Considerations--High Yield Securities" for additional information regarding
below investment grade or "high yield, high risk" securities and certain risks
associated with investment in such securities.
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BALANCED INVESTING OPTION
LTCB-MAS Investment Management, Inc. ("LTCB-MAS") offers a balanced investment
option allowing clients to combine investments in the Portfolios either at a
fully discretionary asset allocation mix determined by LTCB-MAS, or at an asset
allocation mix determined by guidelines specific to a client's investment.
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ABOUT THIS PROSPECTUS
This Prospectus, which should be retained for future reference, concisely sets
forth information that you should know before you invest. A "Statement of
Additional Information" containing additional information about the Fund has
been filed with the Securities and Exchange Commission. Such Statement is dated
January , 1996 and has been incorporated by reference into this Prospectus. A
copy of the Statement may be obtained, without charge, by writing to the Fund or
by calling the Fund at the telephone number shown above. INVESTORS ARE ADVISED
THAT SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED ("LTCB"), LTCB TRUST
COMPANY OR ANY OTHER AFFILIATES OF LTCB, NOR ARE THEY FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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PAGE
----
Fund Expenses ........................................ 3
Prospectus Summary ................................... 4
Financial Highlights ................................. 6
Yield and Total Return ............................... 7
Investment Objectives ................................ 7
Investment Policies .................................. 8
Other Investment Policies ............................ 10
Special Risk Considerations .......................... 17
Investment Suitability ............................... 20
Purchase of Shares ................................... 20
Redemption of Shares ................................. 21
Shareholder Services ................................. 22
Valuation of Shares .................................. 22
Dividends, Capital Gains
Distributions and Taxes ............................ 23
Investment Management ................................ 24
Administrative Services .............................. 25
Distributor .......................................... 26
Investment Limitations ............................... 26
General Information .................................. 26
Directors and Officers ............................... 28
INVESTMENT MANAGER:
LTCB-MAS INVESTMENT MANAGEMENT, INC.
ONE TOWER BRIDGE, SUITE 1000
WEST CONSHOHOCKEN, PENNSYLVANIA 19428
ADMINISTRATOR, TRANSFER AGENT,
DIVIDEND DISBURSING AGENT AND DISTRIBUTOR:
FURMAN SELZ INCORPORATED
230 PARK AVENUE
NEW YORK, NEW YORK 10169
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FUND EXPENSES
The following table illustrates the various expenses and fees that an
investor will incur either directly or indirectly as a shareholder in the Fund.
[To be updated in the January 485(b) filing]
FIXED
EQUITY INCOME
PORTFOLIO PORTFOLIO
--------- ---------
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ...... None None
Sales Load Imposed on Reinvested Dividends ... None None
Redemption Fee ............................... None None
Exchange Fee ................................. None None
Annual Fund Operating Expenses (as a percentage
of average net assets)
Management Fees .............................. .50% .375%
Other Expenses (estimated, after expense
reimbursements)* ....................... .50% .425%
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Total Fund Operating Expenses (estimated,
after expense reimbursements)** 1.00% .80%
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* The amounts set forth for "Other Expenses" are based on amounts incurred
during the most recent fiscal year, restated to give effect to the
voluntary expense reimbursements as described below. Absent voluntary
expense reimbursements in effect during the most recent fiscal year, the
ratio of "Other Expenses" to average net assets would have been 1.35% and
3.03% for the Equity Portfolio and the Fixed Income Portfolio,
respectively. "Other Expenses" include expenses such as fees for
shareholder services, custodial and transfer agency fees, legal and
accounting fees, printing costs and registration fees.
** The amounts set forth for "Total Fund Operating Expenses" are based on
amounts incurred during the most recent fiscal year, restated to reflect
the agreement by LTCB-MAS to reimburse the Equity Portfolio and the Fixed
Income Portfolio for "Total Fund Operating Expenses" in excess of 1.00% and
.80%, respectively, of average net assets for a period of at least one year
from the date of this Prospectus. Absent voluntary expense reimbursements
in effect during the most recent fiscal year, the ratio of "Total Fund
Operating Expenses" to average net assets would have been 1.85% and 3.40%
for the Equity Portfolio and the Fixed Income Portfolio, respectively.
EXAMPLE
The following example illustrates the expenses that an investor would pay on a
$1,000 investment over various time periods based upon payment by the Portfolios
of operating expenses at the levels set forth in the expense table above and
assuming (1) a 5% annual rate of return (2) redemption at the end of each time
period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----- ------- ------- --------
Equity Portfolio ........... $10 $32 $55 $122
Fixed Income Portfolio ..... $ 8 $25 $44 $99
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN ABOVE.
3
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PROSPECTUS SUMMARY
o EQUITY PORTFOLIO--seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in common stocks of companies which are deemed to have earnings and
dividend growth potential above the average of the economy in general.
o FIXED INCOME PORTFOLIO--seeks to achieve above-average total return over
a market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Government securities, corporate
bonds, mortgage-backed securities and other fixed-income securities. The
Portfolio's average weighted maturity will ordinarily exceed five years.
INVESTMENT MANAGEMENT
LTCB-MAS acts as the Fund's investment manager and has overall
responsibility for supervising the investment program of each Portfolio.
LTCB-MAS, a joint subsidiary of LTCB and Miller Anderson & Sherrerd ("MA&S"),
provides investment counselling services to employee benefit plans and other
institutional investors and as of September 30, 1995, had assets under
management in excess of $ million. LTCB, with over $ billion in assets as of
September 30, 1995, is one of the 25 largest banks in the world. MA&S provides
investment counselling services primarily to institutional investors and as of
September 30, 1995, had assets under management in excess of $ billion. The
selection on a day-to-day basis of appropriate investments for each Portfolio is
made by MA&S acting in collaboration with and under the supervision of LTCB-MAS.
As used in this Prospectus, the term "Adviser" refers to LTCB-MAS and MA&S
acting in collaboration in the provision of investment advisory services to the
Fund's Portfolios.
HOW TO INVEST
Shares of each Portfolio are offered directly to investors without a sales
commission at the net asset value of the Portfolio next determined after receipt
of the order. Share purchases may be made by sending investments directly to the
Fund, subject to acceptance by the Fund. The minimum initial investment is $1
million. The minimum for subsequent investments is $100,000. Shares of the
Fund's Portfolios are also sold to corporations or other institutions such as
trusts, foundations or broker-dealers purchasing for the accounts of others
("Shareholder Organizations"). The Fund's officers are authorized to waive the
minimum initial and subsequent investment requirements. See "Purchase of
Shares."
HOW TO REDEEM
Shares of each Portfolio may be redeemed at any time at the net asset
value of the Portfolio next determined after receipt of the redemption request.
The redemption price may be more or less than the purchase price. See
"Redemption of Shares."
INVESTMENT SUITABILITY
The Fund's Portfolios are designed principally for the investments of
tax-exempt fiduciary investors and other institutional clients. Since it is
contemplated that the preponderance of investors in the Portfolios will not be
subject to federal income taxes, securities transactions for the Portfolios will
not be influenced by the different tax treatment of long-term capital gains,
short-term capital gains and dividend income under the Internal Revenue Code of
1986, as amended (the "Code").
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4
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PROSPECTUS SUMMARY--CONTINUED
ADMINISTRATIVE SERVICES
Furman Selz Incorporated ("Furman Selz"), provides the Fund with
administrative, fund accounting, dividend disbursing and transfer agency
services. Furman Selz also acts as the Fund's distributor.
RISK FACTORS
Prospective investors in the Fund should consider the following factors:
(1) Each Portfolio may invest in repurchase agreements, which entail a risk of
loss should the seller default in its obligation to repurchase the security
which is the subject of the transaction; (2) each Portfolio may lend its
investment securities which entails a risk of loss should the borrower fail
financially; (3) the securities held by the Fixed Income Portfolio will be
affected by general changes in interest rates resulting in increases or
decreases in the value of the obligations held by the Portfolio. The value of
the securities held by the Fixed Income Portfolio can be expected to vary
inversely to changes in prevailing interest rates, I.E., as interest rates
decline, market value tends to increase and vice versa; (4) the Fixed Income
Portfolio may purchase securities on a when-issued basis. Securities purchased
on a when-issued basis may decline or appreciate in market value prior to their
actual delivery to the Portfolio; (5) each Portfolio may invest a portion of its
assets in futures contracts, options relating to foreign currencies and options
on futures contracts which entail certain costs and risks including imperfect
correlation between the value of the security being hedged and the value of the
particular derivative instrument, and the risk that a Portfolio could not close
out a futures or option position when it would be most advantageous to do so;
(6) the Fixed Income Portfolio may invest in mortgage-backed securities and
inverse floating rate securities, the value of which may be highly sensitive to
interest rate changes; (7) the Portfolios may invest in the securities of
foreign issuers, which are subject to certain special considerations not
typically associated with investing in the securities of U.S. issuers (such
investments to be limited, in the case of the Equity Portfolio, to 5% of net
assets); and (8) the Fixed Income Portfolio may invest up to 20% of its assets
in securities rated lower than Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard and Poor's Corporation ("Standard & Poor's") or
Fitch Investors Service, Inc. ("Fitch"). Such securities, which are generally
referred to as "high yield, high risk" or "junk" bonds, carry a high degree of
credit risk and are considered speculative by the major rating agencies. See
"Special Risk Considerations" for additional information regarding certain risks
associated with investment in the Portfolios.
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5
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FINANCIAL HIGHLIGHTS
The table below sets forth certain information for the Fund's fiscal
period ended September 30, 19941. The information set forth in the table below
has been audited by Price Waterhouse LLP, the Fund's independent accountants
whose report on the financial statements, including this data, is included in
the Fund's Annual Report and is contained in the Statement of Additional
Information, which is available upon request. This information should be read in
conjunction with the financial statements. [To be updated in the January 485(b)
filing]
EQUITY FIXED INCOME
PORTFOLIO* PORTFOLIO**
---------- ------------
Net Asset Value, Beginning of Period ............ $10.00 $10.00
------ --------
Income from Investment Operations:
Net investment income ......................... 0.16 0.48
Net realized and unrealized appreciation
(depreciation) on investments ............... 0.02 (1.09)
------ --------
Total Increase (decrease) from
Investment Operations ...................... 0.18 (0.61)
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Less Distributions:
Dividends from net investment income .......... (0.15) (0.33)
Return of Capital ............................. (0.02) (0.15)
------ --------
Total Distributions ......................... (0.17) (0.48)
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Net Asset Value, End of Period .................. $10.01 $ 8.91
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Total Return*** ................................. 1.99% (6.18%)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands) ...... 10,227 2,861
Ratio of Net Investment Income to
Average Net Assets+ ......................... 1.56% 5.49%(a)
Ratio of Expenses to Average Net Assets++ ..... 1.00% 0.91%(a)
Portfolio Turnover Rate ....................... 35% 196%
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1 Per share based on the average number of shares outstanding during the
period.
* Commencement of Operations--October 1, 1993.
** Commencement of Operations--November 2, 1993.
*** Total returns are for the period shown and have not been annualized, and
reflect voluntary fee waivers.
+ Ratios of Net Investment Income before effect of waivers and reimbursements
were 0.72% and 2.43%, respectively.
++ Ratios of Expenses before effect of waivers and reimbursements were 1.85%
and 3.40%, respectively.
(a) Annualized.
6
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YIELD AND TOTAL RETURN
From time to time, each Portfolio of the Fund may advertise its yield and
total return. BOTH YIELD AND TOTAL RETURN FIGURES ARE BASED ON HISTORICAL
INFORMATION AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "average
annual" total return shows the average annual percentage change in value of an
investment in a Portfolio from the beginning date of the measuring period to the
end of the measuring period. Such figures reflect changes in the price of a
Portfolio's shares and assume that any income dividends and/or capital gains
distributions made by the Portfolio during the period were reinvested in
additional shares of the Portfolio. Figures will be given for recent one-, five-
and ten-year periods (if applicable), and may be given for other periods as well
(such as from commencement of the Portfolio's operations). When considering
average annual total return figures for periods longer than one year, it is
important to note that the relevant Portfolio's total return for any one year in
the period might have been greater or less than the average annual total return
for the entire period.
In addition to "average annual" total return, a Portfolio may also quote
an "aggregate" total return for various periods representing the cumulative
change in value of an investment in a Portfolio for a specific period (again
reflecting changes in the Portfolio's share price and assuming reinvestment of
dividends and distributions). Aggregate total returns may be shown by means of
schedules, charts or graphs and may include subtotals of the various components
of total return (I.E., change in value of initial investment, income dividends
and capital gains distributions).
The "yield" of a Portfolio is computed by dividing the net investment
income per share (determined in accordance with regulatory requirements) earned
during the 30-day period stated in the advertisement by the closing price per
share on the last day of the period (using the average number of shares entitled
to receive dividends). For the purpose of determining net investment income, the
calculation includes in expenses of the Portfolio all recurring fees that are
charged to all shareholder accounts and any non-recurring charges for the period
stated. The yield formula provides for semi-annual compounding, which assumes
that net investment income is earned and reinvested at a constant rate and
annualized at the end of a six-month period.
The performance of a Portfolio may be compared to data prepared by
independent services which monitor the performance of investment companies, data
reported in financial and industry publications, and various indices, all as
further described in the Statement of Additional Information.
The Fund's annual report to shareholders, which is available without
charge upon request, contains a discussion of the performance of each Portfolio
for the fiscal year ended September 30, 1995.
INVESTMENT OBJECTIVES
Each Portfolio seeks to achieve its investment objective relative to the
universe of securities in which it is authorized to invest and, accordingly, the
total return achieved by a Portfolio may not be as great as that achieved by
another Portfolio that can invest in a broader range of securities. Total return
consists of two separate components: income return, which includes dividend
and/or interest income which is distributed to shareholders; and capital return,
which includes net realized capital gains which are distributed to shareholders,
net realized capital losses which are not distributed to shareholders and the
unrealized appreciation or depreciation of unsold securities which is reflected
in changes in a Portfolio's net asset value per share. Total return for the
Fixed Income Portfolio is dependent upon interest rate movements in addition to
the performance of the particular market sectors and individual securities
selected for investment. Accordingly, the Fixed Income Portfolio may not realize
as great a level of capital appreciation as the Equity Portfolio over long-term
periods of stock market appreciation. Although each Portfolio intends to remain
substantially fully invested, a small percentage of a Portfolio's assets is
generally held in the form of cash equivalents in order to meet redemption
requests and otherwise manage the daily affairs of the Fund. The investment
objective of each of the Portfolios is as follows:
EQUITY PORTFOLIO--seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of common stocks of companies which
are deemed by the Adviser to have earnings and dividend growth potential
that is greater than the economy in general.
FIXED INCOME PORTFOLIO--seeks to achieve above-average total return
over a market cycle of three to five years, consistent with reasonable
risk, by investing in a diversified portfolio of U.S. Government
securities, corporate bonds (including bonds rated below investment grade
commonly referred to as "junk bonds"), foreign fixed-income securities and
mortgage-backed securities of domestic issuers and other fixed-income
securities. See "Special Risk Considerations--High Yield Securities" for a
7
<PAGE>
description of below investment grade or "high yield, high risk"
securities and certain risks associated with investment in such
securities. The Portfolio's average weighted maturity will ordinarily be
greater than five years.
THE INVESTMENT OBJECTIVE OF EACH PORTFOLIO OF THE FUND IS A FUNDAMENTAL
POLICY AND MAY NOT BE CHANGED WITHOUT SHAREHOLDER APPROVAL. THE ACHIEVEMENT OF
THESE OBJECTIVES CANNOT BE ASSURED.
INVESTMENT POLICIES
The investment policies of each of the Fund's Portfolios are described
below.
EQUITY PORTFOLIO
In pursuing its objective, the Equity Portfolio follows an investment
policy which is based on the evaluation by the Adviser of both short-term and
long-term economic trends and their impact on corporate profits. The Adviser
also evaluates long-term and short-term earnings growth prospects for individual
companies within broad sectors of the stock market. While the Portfolio invests
at least 65% of its assets under normal circumstances in common stocks of
companies with favorable long-term earnings growth prospects, certain stocks
which are deemed to have short-term earnings growth potential may be included in
the Portfolio. Individual securities are selected based on fundamental business
and financial factors (earnings growth, financial position, price volatility and
dividend payment records) and the measurement of those factors relative to the
current market price of the security. It is expected that eventually the stock
market will recognize this earnings growth success with higher valuations for
these securities. Over the longer term, companies with earnings growth should be
able to and may raise their dividends. When, in the opinion of the Adviser,
these stocks become fully valued (either because of price appreciation or
reduced earnings growth potential), they will, under most circumstances, be sold
and replaced by stocks which are deemed by the Adviser to have greater potential
for growth. Equity investments will be made primarily in dividend paying stocks
of any size companies depending on their relative attractiveness. The equity
securities in which the Portfolio invests will be traded primarily on the New
York Stock Exchange, the American Stock Exchange or in over-the-counter markets.
Although the Adviser expects that the companies in which the Portfolio invests
will be primarily those with large capitalization's (I.E., in excess of $300
million), the Portfolio is not limited with respect to its ability to invest in
companies with smaller capitalizations. The Adviser expects that the companies
in which the Portfolio invests will be seasoned issuers, although the Portfolio
may invest up to 5% of its total assets in securities of issuers which have
(with predecessors) a record of less than three years' continuous operations.
The Adviser expects the Portfolio's net asset value to exhibit average
fluctuation relative to the stock market in general, as measured by the Standard
& Poor's 500 Index, and, thus, the Portfolio may or may not be suitable for all
investors. The Portfolio is designed for long-term investors who can accept the
risks entailed in these investment policies and is not meant to provide a
vehicle for playing short-term swings in the market.
The Portfolio will not concentrate its investments in any one industry.
Therefore, it will not invest more than 25% of its total assets in any one
industry. In addition, the Equity Portfolio may invest in foreign securities,
but such securities, including American Depository Receipts ("ADRs"), will not
comprise more than 5% of the Portfolio's net assets. ADRs are dollar-denominated
securities which are listed and traded in the United States, but which represent
claims to shares of foreign stocks. ADRs may be either sponsored or unsponsored.
Unsponsored ADR facilities typically provide less information to ADR holders.
The Equity Portfolio will remain substantially invested in equity
securities. The Portfolio may, however, when the Adviser deems that market
conditions are such that a significant decline in stock prices is expected and a
temporary defensive approach is desirable, reduce the Portfolio's equity
holdings and invest in cash equivalents or in fixed-income securities (as
described under the investment policies of the Fixed Income Portfolio and under
"Other Investment Policies--Temporary Investments") without limit. To the extent
the Portfolio invests temporarily in cash equivalents or other fixed-income
securities as a defensive measure, it will not be pursuing its investment
objective during such periods. For a more detailed description of certain risks
associated with investment in foreign securities, see "Special Risk
Considerations--Foreign Securities."
The Equity Portfolio may also lend portfolio securities, enter into
repurchase agreements, trade in futures contracts, options on futures contracts
and options relating to foreign currencies, enter into forward foreign currency
exchange contracts and purchase illiquid securities. See "Other Investment
Policies" below. For a discussion of certain risks associated with certain of
the Portfolio's investments and activities, see "Special Risk Considerations"
below.
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FIXED INCOME PORTFOLIO
The Fixed Income Portfolio seeks to realize its objective by investing in
a diversified portfolio of U.S. Government securities, corporate bonds, and
other fixed-income securities, consisting of mortgage-backed securities, as
described under "Other Investment Policies--Mortgage-Backed Securities," foreign
fixed-income securities, short-term securities described under "Other Investment
Policies--Temporary Investments" and other fixed-income securities described
under "Other Investment Policies." The investment strategy for achieving this
objective has two basic components--maturity management and value investing.
Maturity management decisions are made in the context of an intermediate
maturity orientation. The maturity structure of the Portfolio is adjusted in
anticipation of cyclical interest rate changes. Such adjustments are not made in
an effort to capture short-term, day-to-day movements in the market, but instead
are implemented in anticipation of longer term, secular shifts in the levels of
interest rates. Adjustments made to shorten portfolio maturity are made to limit
capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for the Portfolio's maturity strategy lies in analysis of the U.S.
and global economies, focusing on levels of real interest rates, monetary and
fiscal policy actions, and cyclical indicators.
The second component of investment strategy for the Portfolio is value
investing, whereby the Adviser seeks to identify undervalued securities through
analysis of credit quality, option characteristics and liquidity. Quantitative
models are used in conjunction with judgment and experience to evaluate and
select securities with embedded put or call options which are attractive on a
risk and option adjusted basis. Successful value investing will permit the
Portfolio to benefit from the price appreciation of individual securities during
periods when interest rates are unchanged.
At least 80% of the Portfolio's assets, measured at the time of
investment, will consist of investment grade securities. Such securities will,
at the time of purchase, be rated as "investment grade," or if unrated, be
deemed by MA&S to have comparable ratings. Investment grade bonds are generally
considered to be those bonds having one of the four highest grades assigned by
Moody's (Aaa, Aa, A or Baa) or Standard & Poor's or Fitch (AAA, AA, A or BBB).
Securities rated BBB or Baa represent the lowest of four levels of investment
grade bonds and are regarded as borderline between sound obligations and those
in which the speculative element begins to predominate. In order to satisfy the
foregoing credit quality requirements, the mortgage-backed securities in which
the Portfolio will invest will either (i) be issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or a private issuer of the timely
payment of principal and interest, (ii) benefit from senior entitlements to the
underlying mortgage assets or third party credit enhancement which gives the
mortgage-backed securities an investment grade rating, or (iii) in the case of
unrated securities, be sufficiently seasoned that they are considered by MA&S to
be investment grade quality. The Adviser may retain securities if their rating
falls below investment grade if it deems retention of the security to be in the
best interests of the Portfolio. Guarantees or other credit enhancements with
respect to mortgage-backed securities do not extend to the market value of such
securities or the net asset value per share of the Portfolio.
Up to 20% of the Portfolio's assets, measured at the time of investment,
may be invested in fixed-income securities rated Ba or B by Moody's or BB or B
by Standard & Poor's or Fitch (or which, if unrated, are deemed by MA&S to be of
comparable quality or better), preferred stocks, and convertible securities. In
the case of convertible securities, the conversion privilege may be exercised,
but the common stocks received will be sold. Credit quality in the high-yield
bond market can change suddenly and unexpectedly, and even recently-issued
credit ratings may not fully reflect the actual risks posed by a particular
high-yield security. For these reasons, it is the Portfolio's policy not to rely
primarily on ratings issued by established credit rating agencies, but to
utilize such ratings in conjunction with MA&S's own independent and on-going
review of credit quality. See "Special Risk Considerations--High Yield
Securities" for more information regarding below investment grade or "high
yield, high risk" securities and the risks associated with such investments.
Although the Portfolio may invest in all of the securities included above,
from time to time the emphasis will be on mortgage-backed securities. (For a
more complete discussion of mortgage-backed securities see "Other Investment
Policies--Mortgage-Backed Securities" and "--Stripped Mortgage-Backed
Securities.") At such times it is anticipated that greater than 50% of the
Portfolio's assets may be invested in these types of securities. These include
securities which represent pools of mortgage loans made by lenders such as
commercial banks, savings and loan associations, mortgage bankers and others.
The pools are assembled by various Governmental, Government-related and private
organizations. The Portfolio will invest in securities issued by the Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (FNMA) and private issuers. It is
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expected that the Portfolio's primary emphasis will be in mortgage-backed
securities issued by the various Government-related organizations. However, the
Portfolio may invest in mortgage-backed securities issued by private issuers
when the Adviser deems that the quality of the investment, the quality of the
issuer, and market conditions warrant such investments. Securities issued by
private issuers will be rated investment grade by Moody's, Standard & Poor's or
Fitch or be deemed by MA&S to be of comparable investment quality. It is not
anticipated that greater than 25% of the Portfolio's assets will be invested in
mortgage pools comprised of "private organizations." The Portfolio will not
concentrate its investments in any one industry (exclusive of securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities).
Therefore, it will not invest more than 25% of its total assets in any one
industry.
A portion of the Portfolio may be invested in bonds and other fixed-income
securities denominated in foreign currencies, where, in the opinion of the
Adviser, the combination of current yield and currency value offer attractive
expected returns. These holdings may be in as few as one foreign currency bond
market such as the United Kingdom gilt market, or they may be spread across
several foreign bond markets. When the total return opportunities in a foreign
bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, currency futures,
forwards, options and swaps may be used to hedge the currency risk. See "Special
Risk Considerations--Futures Contracts, Options on Futures Contracts and
Options" and "--Interest Rate and Currency Swaps" for more information and
certain risks regarding these investments and techniques.
The Portfolio may also lend portfolio securities, enter into repurchase
agreements, trade in futures contracts and options on futures contracts and
options relating to foreign currencies, enter into interest rate and currency
swaps, enter into forward foreign currency exchange contracts and purchase
when-issued and illiquid securities. See "Other Investment Policies" below. For
a discussion of certain risks associated with certain of the Portfolio's
investments and activities, see "Special Risk Considerations" below.
OTHER INVESTMENT POLICIES
LENDING OF SECURITIES
Each Portfolio may lend its portfolio securities to qualified brokers,
dealers, banks and other financial institutions for the purpose of realizing
additional income. Loans of securities will be collateralized by cash, letters
of credit, or securities issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the current market value of
the loaned securities. In addition, a Portfolio will not loan out its portfolio
securities to the extent that greater than one-third of its assets, at fair
market value, would be committed to loans at that time. Voting rights may pass
with the lending of portfolio securities; however, the Board of Directors will
be obligated to call loans to vote proxies or otherwise obtain rights to vote if
a material event affecting the investment is to occur. Such loans may involve
risks of delay in receiving additional collateral or in recovering the
securities loaned or even loss of rights in the collateral should the borrower
of the securities fail financially. However, loans will be made only to
borrowers deemed by MA&S to be of good standing and only when, in the judgment
of MA&S, the income to be earned from the loans justifies the attendant risks.
TEMPORARY INVESTMENTS
Each Portfolio may invest in the following instruments for liquidity
purposes or when economic or market conditions are such that the Adviser deems a
temporary defensive position to be appropriate:
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a commercial
bank or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Time deposits maturing in more than seven days will not be
purchased by a Portfolio. Certificates of deposit are negotiable short-term
obligations issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. Variable rate certificates of
deposit are certificates of deposit on which the interest rate is periodically
adjusted prior to their stated maturity based upon a specified market rate. A
bankers' acceptance is a time draft drawn on a commercial bank by a borrower
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods).
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Each Portfolio may invest in obligations of U.S. banks, foreign branches
of U.S. banks (Eurodollars), and U.S. branches of foreign banks (Yankee
dollars). Euro and Yankee dollar investments will involve the same risks of
investing in international securities that are discussed under "Special Risk
Considerations--Foreign Securities." Although the Adviser carefully considers
these factors in evaluating investments, the Portfolios do not limit the amount
of their assets which can be invested in any one type of instrument or in any
foreign country in which a branch of a U.S. bank or the parent of a U.S. branch
is located.
The Portfolios will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of U.S. banks, it is a member of the Federal Deposit Insurance Corporation, and
(iii) in the case of foreign branches of U.S. banks, the security is deemed by
MA&S to be of an investment quality comparable with other debt securities which
may be purchased by the Portfolio;
(2) Commercial paper rated A-1 or A-2 by Standard & Poor's or Prime 1 or
Prime 2 by Moody's or, if not rated, issued by a corporation having an
outstanding unsecured debt issue rated A or better by Moody's or by Standard &
Poor's;
(3) Short-term corporate obligations rated A or better by Moody's or by
Standard & Poor's;
(4) U.S. Government obligations including bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) U.S. Government Agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and federal agencies. These include
securities issued by the Federal Home Loan Banks, Federal Land Bank, Farmers
Home Administration, Farm Credit Banks, Federal Intermediate Credit Bank,
Federal National Mortgage Association, Federal Financing Bank, the Tennessee
Valley Authority, and others;
(6) Repurchase agreements collateralized by securities listed above; and
(7) Shares of other investment companies which are money market funds,
limited in the case of each Portfolio to 10% of the value of its total assets,
subject to the additional limitations of the Investment Company Act of 1940, as
amended (the "1940 Act"), and the investment limitations described in the
Statement of Additional Information.
REPURCHASE AGREEMENTS
Each of the Fund's Portfolios may invest in repurchase agreements
collateralized by U.S. Government securities, certificates of deposit and
certain bankers' acceptances. Repurchase agreements are transactions by which a
Portfolio purchases a security and simultaneously commits to resell that
security to the seller (a bank or securities dealer) at an agreed upon price on
an agreed upon date (usually within seven days of purchase). The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. In
these transactions, the securities purchased by a Portfolio have a total value
in excess of the value of the repurchase agreement and are held by such
Portfolio's custodian bank until repurchased. Such agreements permit the
Portfolio to keep all its assets at work while retaining "overnight" flexibility
in pursuit of investments of a longer term nature. The Fund will continually
monitor the value of the underlying securities to ensure that their value,
including accrued interest, always equals or exceeds the repurchase price.
The Fund's Portfolios may file an application with the Securities and
Exchange Commission (the "SEC") to permit them to pool their daily uninvested
cash balances in order to invest in repurchase agreements on a joint basis. By
entering into repurchase agreements on a joint basis, it is expected that the
Portfolios would incur lower transaction costs and potentially obtain higher
rates of interest on such repurchase agreements. Each Portfolio's participation
in the income from jointly purchased repurchase agreements would be based on
such Portfolio's percentage share in the total repurchase agreement.
REVERSE REPURCHASE AGREEMENTS
Each Portfolio may enter into reverse repurchase agreements to avoid
selling securities during unfavorable market conditions to meet redemptions.
Pursuant to a reverse repurchase agreement, a Portfolio will sell portfolio
securities and simultaneously commit to repurchase them from the buyer at an
agreed upon price on an agreed upon date. Whenever a Portfolio enters into a
reverse repurchase agreement, it will establish a segregated account in which it
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will maintain liquid assets in an amount at least equal to the repurchase price
marked to market daily (including accrued interest), and will subsequently
monitor the account to ensure that such equivalent value is maintained. The
Portfolios will pay interest on amounts obtained pursuant to reverse repurchase
agreements. Reverse repurchase agreements are considered to be borrowings by the
Portfolios under the 1940 Act and are subject to the limitations with respect to
entering reverse repurchase agreements included in investment limitation (e)
under "Investment Limitations" below. The Portfolios have no current intention
to enter into reverse repurchase agreements.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND OPTIONS
In order to assist in achieving its investment objective and policies,
each Portfolio of the Fund may purchase and sell financial futures contracts,
exchange-listed and over-the-counter put and call options on securities,
financial indices, foreign currencies and financial futures contracts. The
Equity Portfolio will only engage in such transactions to the extent that they
relate to equity securities or indices of equity securities (or, if the
Portfolio has invested in securities denominated in foreign currencies, foreign
currency exchange rates). The Fixed Income Portfolio will only engage in such
transactions to the extent that they relate to interest rates (including futures
contracts on debt instruments or indices of debt instruments or, if the
Portfolio has invested in securities denominated in foreign currencies, foreign
currency exchange rates).
Futures contracts provide for the sale by one party and purchase by
another party of a specified amount of the underlying instrument or currency at
a specified future time and price (or, in the case of certain cash-settled
instruments, a net cash amount). Because futures contracts require only a small
initial margin deposit, a Portfolio would then be able to keep a cash reserve
available to meet potential redemptions while at the same time being effectively
fully invested. 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
futures contract fluctuates. An option is a legal contract that gives the holder
the right to buy or sell a specified amount of the underlying instrument or
currency at a fixed or determinable price upon the exercise of the option. A
call option conveys the right to buy and a put option conveys the right to sell
a specified quantity of the underlying instrument or currency. 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 that position. Also, because transaction costs associated with futures
and/or options may be lower than the costs of investing in stocks and bonds
directly, the use of futures and/or options may reduce a Portfolio's overall
transaction costs.
Over-the-counter options may lack a liquid secondary market. Neither
Portfolio will invest more than an aggregate of 15% of its total assets,
determined at the time of investment, in securities for which there are no
readily available markets. Each Portfolio will minimize the risk that it will be
unable to close out a futures and/or options contract by entering only into
futures and/or options transactions traded on national exchanges and for which
there appears to be a liquid secondary market.
A Portfolio will engage in futures and/or options transactions only for
hedging purposes and not for speculative purposes and only if consistent with
its investment objective and investment policies. A Portfolio will not enter
into futures contracts, options on futures contracts or options on securities,
financial indices or foreign currencies to the extent that its aggregate net
outstanding obligations under these instruments would exceed 35% of its total
assets. There are no separate limits on the amount of assets the Portfolios may
invest in put and call options on securities, financial indices or foreign
currencies. A Portfolio will maintain assets sufficient to meet its obligations
under such transactions in a segregated account with the custodian bank.
INTEREST RATE AND CURRENCY SWAPS
The Fixed Income Portfolio may also enter into transactions known as
interest rate and/or currency swaps. An interest rate swap is an agreement to
exchange the interest income generated by one fixed-income instrument for the
interest income generated by another fixed-income instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes fixed interest rates and
prices, interest rate indices, fixed-income indices, stock indices and commodity
indices (as well as amounts derived from arithmetic operations on these
indices). For example, a Portfolio may agree to swap the income stream generated
by a fixed rate instrument which it already owns for the income stream generated
by a variable rate instrument owned by another party. The currency swaps into
which the Fixed Income Portfolio may enter will generally involve an agreement
to pay interest streams calculated by reference to interest income linked to a
specified index in one currency in exchange for interest income linked to a
specified index in another currency. Such swaps may involve initial and/or final
exchanges that correspond to the agreed upon notional amount.
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The interest rate and/or currency swaps in which the Fixed Income
Portfolio may engage also include rate caps, floors and collars under which one
party pays a single or periodic fixed amount (or premium), and the other party
pays periodic amounts based on the movement of a specified index. The Fixed
Income Portfolio will not engage in interest rate or currency swaps to the
extent that the aggregate notional value of the swaps represents more than 5% of
the Portfolio's assets.
The Fixed Income Portfolio 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 Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. The
Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, or high-grade
debt obligations, to avoid any potential leveraging of the Portfolio.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Portfolios may enter into forward foreign currency exchange contracts
in order to protect against uncertainty in the level of future foreign exchange
rates in the purchase and sale of investment securities. The Portfolios may not
enter into such contracts for speculative purposes. A forward foreign currency
exchange contract is an obligation to purchase or sell 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. These
contracts may be bought or sold to protect a Portfolio to a limited extent
against adverse changes in exchange rates between foreign currencies and the
U.S. dollar. Such contracts, which protect the value of a Portfolio's investment
securities against a decline in the value of a currency, do not eliminate
fluctuations caused by changes in the local currency prices of the securities,
but rather, they simply establish an exchange rate at a future date. Also,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of such currency
increase.
There is a risk in creating a synthetic investment position to the extent
that the value of a security denominated in the U.S. dollar or other foreign
currency is not exactly matched with a Portfolio's obligation under the forward
contract. On the date of maturity, a Portfolio may be exposed to some risk of
loss from fluctuations in that currency. Although the Portfolios will attempt to
hold such mismatching to a minimum, there can be no assurance that the
Portfolios will be able to do so.
A Portfolio may maintain a net exposure to foreign currency forward
contracts in excess of the value of the securities or other assets held by the
Portfolio and denominated in that currency, provided that the Portfolio
maintains with its custodian high-grade, liquid debt securities or cash in a
segregated account with a daily value at least equal to the amount of such
excess.
WHEN-ISSUED SECURITIES
The Fixed Income Portfolio may purchase securities on a "when-issued"
basis. In buying "when issued" securities, the Portfolio commits to buy
securities at a certain price even though the securities may not be delivered
for up to 90 days. Securities purchased on a when-issued basis are recorded as
an asset and are subject to changes in value based upon changes in market
conditions. No payment or delivery is made by the Portfolio in a "when-issued"
transaction until the Portfolio receives payment or delivery from the other
party to the transaction. Although the Portfolio receives no income from the
above described securities prior to delivery, the market value of such
securities is still subject to change. As a consequence, it is possible that the
market price of the securities at the time of delivery may be higher or lower
than the purchase price.
ILLIQUID INVESTMENTS
Each of the Portfolios may invest up to 15% of its net assets in
securities that are illiquid by virtue of the absence of a readily available
market, or because of legal or contractual restrictions on resale. This policy
does not limit the acquisition of restricted securities (i) eligible for resale
to qualified institutional buyers pursuant to Rule 144A under the Securities Act
of 1933, as amended, or (ii) commercial paper issued pursuant to Section 4(2)
under the Securities Act of 1933 that are determined to be liquid in accordance
with guidelines established by the Fund's Board of Directors. There may be
delays in selling these securities and sales may be made at less favorable
prices.
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MORTGAGE-BACKED SECURITIES
ABOUT MORTGAGE-BACKED SECURITIES: The Fixed Income Portfolio may invest in
mortgage-backed securities, which represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed through" to investors such
as the Portfolio. Most issuers or poolers provide guarantees of payments (but
not the market value of the securities themselves), regardless of whether the
mortgagor actually makes the payment. The guarantees made by issuers or poolers
are supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer. Any guarantee of the securities in which the Fixed Income Portfolio
invests runs only to principal and interest payments on the securities and not
to the market value of such securities or the principal and interest payments on
the underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the Fixed Income Portfolio and not to the purchase of shares
of the Portfolio. The pools are assembled by various Governmental,
Government-related and private organizations. The Fixed Income Portfolio may
invest in securities issued by the Governmental National Mortgage Association
(GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA) and private issuers. There can be no assurance that
the private insurers or credit enhancers of mortgage-backed securities can meet
their obligations under the relevant policies or other forms of credit
enhancement. Mortgage-backed securities issued by private issuers, whether or
not such securities are subject to guarantees, may entail greater risk. If there
is no guarantee provided by the issuer, mortgage-backed securities purchased by
the Fixed Income Portfolio will be those rated investment grade by Moody's,
Standard & Poor's or Fitch, or, if unrated, deemed by MA&S to be of investment
grade quality. The ratings of such securities could be subject to reduction in
the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected. It is not anticipated that
greater than 25% of the Fixed Income Portfolio's assets will be invested in
mortgage pools comprised of "private organizations." Early repayment of
principal on mortgage-backed securities (arising from prepayments of principal
due to sale of the underlying property, refinancing, or foreclosure, net of fees
and costs which may be incurred) may expose the Fixed Income Portfolio to a
lower rate of return upon reinvestment of principal. Also, if a security subject
to prepayment has been purchased at a premium, in the event of prepayment the
value of the premium would be lost. When interest rates rise, the value of a
mortgage-backed security generally will decline more than would be the case with
other fixed-income securities; however, when interest rates decline, the value
of mortgage-backed securities with prepayment features may not increase as much
as other fixed-income securities.
Derivative mortgage-backed securities, such as stripped mortgage-backed
securities described below, and certain types of mortgage pass-through
securities, including those whose interest rates fluctuate based on multiples of
a stated index, are designed to be highly sensitive to changes in prepayment and
interest rates and can subject the holders thereof to extreme reductions of
yield and possibly loss of principal.
A mortgage-backed bond is a collateralized debt security issued by a
thrift or financial institution. The bondholder has a first priority perfected
security interest in collateral consisting usually of agency mortgage
pass-through securities, although other assets including U.S. Treasuries
(including Zero Coupon Treasury Bonds), agencies, cash equivalent securities,
whole loans and corporate bonds may qualify. The amount of collateral must be
continuously maintained at levels from 115% to 150% of the principal amount of
the bonds issued, depending on the specific issue structure and collateral type.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fixed Income Portfolio may also
invest in stripped mortgage-backed securities, which are derivative multiclass
mortgage-backed securities. Stripped mortgage-backed securities may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing. Stripped mortgage-backed securities are usually structured
with two classes that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. A common type of stripped
mortgage-backed security will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
IO class), while the other class will receive all of the principal (the
principal-only or PO class). See "Special Risk Considerations--Stripped
Mortgage-Backed Securities."
GENERAL DESCRIPTION OF CMOS AND ASSET-BACKED SECURITIES: CMOs are
securities which are collateralized by mortgage pass-through securities. Cash
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flows from the mortgage pass-through are allocated to various tranches in a
predetermined, specified order. Each tranche has a "stated maturity"--the latest
date by which the tranche can be completely repaid, assuming no prepayments--and
has an "average life"--the average of the time to receipt of a principal payment
weighted by the size of the principal payment. The average life is typically
used as a proxy for maturity because the debt is amortized, rather than being
paid off entirely at maturity, as would be the case in a straight debt
instrument. As market conditions change, and particularly during periods of
rapid or unanticipated changes in market interest rates, the attractiveness of
the CMO tranches and the ability of the structure to provide the anticipated
investment characteristics may be significantly reduced. Such changes can result
in volatility in the market value, and in some instances reduced liquidity, of
the CMO tranche. To the extent a particular CMO is issued by an investment
company, the Fixed Income Portfolio's ability to invest in such CMOs will be
limited. See "Investment Limitations" in the Statement of Additional
Information.
Asset-backed securities are collateralized by shorter term loans such as
automobile loans, home equity loans, computer leases, or credit card
receivables. The payments from the collateral are passed through to the security
holder. The collateral behind asset-backed securities tends to have prepayment
rates that do not vary with interest rates. In addition, the short-term nature
of the loans reduces the impact of any change in prepayment level. Due to
amortization, the average life for these securities is also the conventional
proxy for maturity.
For a discussion of certain risks associated with mortgage-backed
securities, CMOs and asset-backed securities, see "Special Risk
Considerations--Mortgage-Backed Securities."
BRADY BONDS
A portion of the Fixed Income Portfolio may be invested in certain debt
obligations customarily referred to as "Brady Bonds," which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market. Dollar-denominated,
collaterized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collaterized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the case of floating rate bonds, initially is typically equal to
between 12 and 18 months of rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter. In
the event of a default with respect to collateralized Brady Bonds as a result of
which the payment obligations of the issuer are accelerated, the U.S. Treasury
zero coupon obligations held as collateral for the payment of principal will not
be distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. Based upon current market conditions, the Fixed Income Portfolio
would not intend to purchase Brady Bonds which, at the time of investment, are
in default as to payments. However, in light of the residual risk of the Brady
Bonds and, among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing the
Brady Bonds, investments in Brady Bonds are to be viewed as speculative. For
further information on these securities, see the Appendix to the Statement of
Additional Information.
FLOATING AND VARIABLE RATE OBLIGATIONS
Certain of the obligations that the Fixed Income Portfolio may purchase
have a floating or variable rate of interest, I.E., the rate of interest varies
with changes in specified market rates or indices, such as the prime rate, and
at specified intervals. Certain of the floating or variable rate obligations
that may be purchased by the Fixed Income Portfolio may carry a demand feature
that would permit the holder to tender them back to the issuer of the underlying
instrument, or to a third party, at par value prior to maturity. The demand
features of certain floating or variable rate obligations may permit the holder
to tender the obligations to foreign banks, in which case the ability to receive
payment under the demand feature will be subject to certain of the risks
discussed under "Special Risk Considerations--Foreign Securities."
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INVERSE FLOATING RATE OBLIGATIONS
The Fixed Income Portfolio may invest in inverse floating rate
obligations, or "inverse floaters." Inverse floaters have coupon rates that vary
inversely at a multiple of a designated floating rate (which typically is
determined by reference to an index rate, but may also be determined through a
dutch auction or a remarketing agent) (the "reference rate"). Inverse floaters
may constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Inter-Bank Offered Rate) or COFI (Cost
of Funds Index). Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate. In addition, like most other fixed-income securities, the value
of inverse floaters will generally decrease as interest rates increase. For a
discussion of certain risks associated with inverse floating rate obligations,
see "Special Risk Considerations--Inverse Floating Rate Obligations."
ZERO COUPON OBLIGATIONS
The Fixed Income Portfolio may invest in zero coupon obligations, which
are fixed-income securities that do not pay regular interest payments. Instead,
zero coupon obligations are sold at substantial discounts from their "face
value"--what they will be worth at maturity. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until maturity.
Zero coupon obligations may offer investors the opportunity to earn higher
yields than those available on ordinary interest-paying obligations of similar
credit quality and maturity. However, zero coupon obligation prices may also
exhibit greater price volatility than ordinary fixed-income securities because
of the manner in which their principal and interest is returned to the investor.
In the event the Fixed Income Portfolio invests to a significant degree in zero
coupon obligations, it may be required to sell securities at a time that may be
considered disadvantageous in order to generate cash to satisfy certain
distribution requirements imposed by the Code.
EXCEPT AS SPECIFIED ABOVE AND AS DESCRIBED UNDER "INVESTMENT LIMITATIONS,"
THE FOREGOING INVESTMENT POLICIES ARE NOT FUNDAMENTAL AND THE BOARD OF DIRECTORS
MAY CHANGE SUCH POLICIES WITHOUT AN AFFIRMATIVE VOTE OF A "MAJORITY OF THE
APPLICABLE PORTFOLIO'S OUTSTANDING VOTING SECURITIES," AS DEFINED IN THE 1940
ACT.
PORTFOLIO TURNOVER
The Portfolios are managed without regard generally to restrictions on
portfolio turnover, except those imposed by provisions of the federal tax laws
regarding short-term trading. Generally, the Portfolios will not trade for
short-term profits, but when circumstances warrant, investments may be sold
without regard to the length of time held. It is expected that the Equity
Portfolio's annual portfolio turnover rate will not exceed 100%. A 100% rate of
turnover would occur, for example, if all of a portfolio's securities are
replaced within a one year period. With respect to the Fixed Income Portfolio,
the annual portfolio turnover rate may exceed 100% due to changes in portfolio
duration, yield curve strategy, sector shifts or commitments to forward delivery
mortgage-backed securities. However, it is expected that the annual turnover
rate for the Fixed Income Portfolio will not exceed 250%. For the fiscal period
ended September 30, 1995, the portfolio turnover rate for the Equity Portfolio
and the Fixed Income Portfolio was % and %, respectively.
High rates of portfolio turnover necessarily result in correspondingly
heavier brokerage and portfolio trading costs which are paid by a Portfolio.
Trading in fixed-income securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. In addition
to portfolio trading costs, higher rates of portfolio turnover may result in the
realization of capital gains. As a general rule, net short-term capital gains
are distributed to shareholders and, in the case of shareholders subject to
federal income taxation, will be taxable at ordinary income tax rates for
federal income tax purposes regardless of a shareholder's holding period in
portfolio shares. See "Dividends, Capital Gains Distributions and Taxes" for
more information on taxation.
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SPECIAL RISK CONSIDERATIONS
HIGH YIELD SECURITIES
The Fixed Income Portfolio may invest up to 20% of its assets in high
yield securities. High yield securities are exposed to a substantial degree of
credit risk and lower-rated bonds are considered speculative by traditional
investment standards. High yield securities may be issued as a consequence of
corporate restructurings or similar events. Also, high yield securities are
often issued by smaller, less creditworthy companies, or by highly leveraged
(indebted) firms, which are generally less able than more established or less
leveraged firms to make scheduled payments of interest and principal. The risks
posed by securities issued under such circumstances (including bonds rated below
investment grade, commonly referred to as "junk" or "high yield, high risk"
bonds) are substantial.
Another consideration is the fact that the market for high yield
securities is relatively new. Because of this, a long-term track record for bond
default rates does not exist for the high yield securities market. In addition,
the secondary market for high yield securities is generally less liquid than
that of investment grade corporate securities. This lower liquidity might have
an effect on the Portfolio's ability to value or dispose of such securities.
These factors add to the risks associated with investing in high yield
securities.
The share price of the Fixed Income Portfolio will be influenced not only
by changing interest rates, but also by the bond market's perception of credit
quality and the outlook for economic growth. When economic conditions appear to
be deteriorating, low-rated and medium-rated bonds may decline in market value
due to investors' heightened concern over credit quality, regardless of
prevailing interest rates. Credit quality in the high-yield bond market can
change suddenly and unexpectedly and even recently issued credit ratings may not
fully reflect the actual risks posed by a particular high-yield security.
In periods of reduced market liquidity, high yield bond prices may become
more volatile, and both the high yield market and the Fixed Income Portfolio may
experience sudden and substantial price declines. Also, there may be significant
disparities in the prices quoted for high yield securities by various dealers.
Under such conditions, the Fixed Income Portfolio may find it difficult to value
its securities accurately. The Portfolio may also be forced to sell securities
at a significant loss in order to meet shareholder redemptions.
High yield bonds may also present risks based on payment expectations. For
example, high yield bonds may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, the Fixed
Income Portfolio would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market.
Certain types of high yield bonds are non-income producing securities. For
example, zero coupon bonds pays interest only at maturity and payment-in-kind
bonds pays interest in the form of additional securities. Payment in the form of
additional securities, or interest income recognized through discount
amortization, will, however, be treated as ordinary income which will be
distributed to shareholders even though the Fixed Income Portfolio does not
receive periodic cash flow from these same investments.
In an effort to minimize these risks, the Fixed Income Portfolio
diversifies its holdings among many issuers. In addition, securities are sought
whose return potential offers attractive compensation relative to the degree of
risk involved.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities differ from other fixed-income securities in
their exposure to prepayment risk. Prepayment risk is the possibility that,
during periods of declining interest rates, mortgage prepayments will accelerate
on mortgage-backed securities, especially on those with high stated interest
rates ("coupons"). Prepayment risk has two important effects. First, like
fixed-income securities in general, when interest rates rise, the value and
liquidity of mortgage-backed securities may decline sharply and generally will
decline more than would be the case with other fixed-income securities. However,
when interest rates fall, mortgage-backed securities may not enjoy as large a
gain in market value as a comparable fixed-income security due to prepayment
risk. Second, when interest rates fall and additional mortgage prepayments must
be reinvested at lower rates, the income from the reinvested securities will be
reduced. In part to compensate for these risks, mortgage-backed securities will
generally offer higher yields than other fixed-income securities of comparable
credit quality and maturities.
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Mortgage-backed securities also differ from other fixed-income securities
in that interest and principal payments are made more frequently on
mortgage-backed securities, usually monthly, and that principal may be prepaid
at any time because the underlying mortgage loans generally may be prepaid at
any time. As a result, if these securities are purchased at a premium, faster
than expected prepayments will reduce yield to maturity, while slower than
expected prepayments will increase yield to maturity. Conversely, if these
securities are purchased at a discount, faster than expected prepayments will
increase yield to maturity, while slower than expected prepayments will reduce
yield to maturity. Accelerated prepayments on securities purchased at a premium
also impose a risk of loss of principal because the premium may not have been
fully amortized at the time the principal is prepaid in full.
Certain market conditions may result in greater than expected volatility
in the prices of mortgage-backed securities. For example, in periods of supply
and demand imbalances in the market for such securities and/or in periods of
sharp interest rate movements, the prices of mortgage-backed securities may
fluctuate to a greater extent than would be expected from interest rate
movements alone.
With respect to CMOs and asset-backed securities, due to the possibility
that prepayments (on home mortgages, automobile loans and other collateral) will
alter the cash flow on CMOs and asset-backed securities, it is not possible to
determine in advance the actual final maturity date or average life of the
instruments. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have on
the price of the security. In selecting these securities, the Adviser will look
for those securities that offer a higher yield to compensate for any variation
in average maturity.
STRIPPED MORTGAGE-BACKED SECURITIES
The yield to maturity on stripped mortgage-backed securities is extremely
sensitive not only to changes in prevailing interest rates but also to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Fixed Income Portfolio's yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fixed Income Portfolio may fail to fully recoup its initial investment in
these securities, even if the security is in one of the highest rating
categories. POs may generate taxable income from the current accrual of original
issue discount, with a corresponding distribution of cash to the Fixed Income
Portfolio. See "Additional Information Concerning Taxes" in the Statement of
Additional Information.
Stripped mortgage-backed securities have greater volatility than other
types of mortgage securities. Although stripped mortgage-backed securities are
purchased and sold by institutional investors through several investment banking
firms acting as brokers or dealers, the market for such securities has not been
fully developed. Accordingly, stripped mortgage-backed securities are generally
illiquid and subject to the Fixed Income Portfolio's limitations on investments
in illiquid securities.
INVERSE FLOATING RATE OBLIGATIONS
Inverse floaters exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some inverse
floater CMOs exhibit extreme sensitivity to changes in prepayments. As a result,
the yield to maturity of an inverse floater CMO is sensitive not only to changes
in interest rates but also to changes in prepayment rates on the related
underlying mortgage assets.
FOREIGN SECURITIES
The Fixed Income Portfolio may invest without limit in foreign securities.
The Equity Portfolio may invest in foreign securities, but such securities
(including ADR's) will not comprise more than 5% of its net assets. Although the
Portfolios expect their investments in foreign securities to be primarily
securities of issuers located in developed countries, on occasion the Portfolios
may invest in securities of issuers located in lesser-developed or other
countries, subject to satisfying any applicable credit quality standards of the
Portfolios described herein. Investors should recognize that investing in the
securities of foreign issuers involves certain special considerations which are
not typically associated with investing in the securities of U.S. issuers. Since
the securities of foreign issuers are frequently denominated in foreign
currencies, and since a Portfolio may temporarily hold uninvested reserves in
bank deposits in foreign currencies, a Portfolio may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connection with conversions between various currencies.
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As non-U.S. issuers are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to U.S. issuers, there may be less publicly available information
about certain foreign issuers than about U.S. issuers. Securities of some
non-U.S. issuers may be less liquid and more volatile than securities of
comparable U.S. issuers. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the U.S.
With respect to developing countries and certain other foreign countries, there
is the possibility of expropriation or confiscatory taxation, currency
blockages, withholding of dividends or interest payments at the source,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries. Additionally, there may be difficulty in
obtaining and enforcing judgments against foreign issuers.
Although a Portfolio will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of a Portfolio's foreign securities will be somewhat greater than
the expenses for the custodial arrangements for handling U.S. securities of
equal value. Certain foreign governments levy withholding taxes against dividend
and interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a Portfolio receives from the companies comprising a Portfolio's
investments.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND OPTIONS
The primary risks associated with the use of futures and/or options are
(i) imperfect correlation between the change in market value of the securities
held by a Portfolio and the prices of futures and/or options purchased or sold
by a Portfolio; and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a futures position which
could have an adverse impact on a Portfolio's ability to hedge. In the opinion
of the Board of Directors, the risk that a Portfolio will be unable to close out
a futures and/or options contract will be minimized by entering only into
futures and/or options transactions traded on national exchanges and for which
there appears to be a liquid secondary market. Additional risks associated with
options transactions are (i) the risk that an option will expire worthless; (ii)
the risk that the issuer of an over-the-counter option will be unable to fulfill
its obligation to the Portfolio due to bankruptcy or related circumstances;
(iii) the risk that options may exhibit a greater short-term price volatility
than the underlying security; and (iv) the risk that a Portfolio may be forced
to forego participation in the appreciation of the value of underlying
securities or currency due to the writing of a covered call option.
INTEREST RATE AND CURRENCY SWAPS
The Fixed Income Portfolio may enter into transactions known as interest
rate and/or currency swaps. Interest rate swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate swaps is limited to the net amount of interest
payments that the Portfolio is contractually obligated to make. If the other
party to an interest rate swap defaults, the Portfolio's risk of loss consists
of the net amount of interest payments that the Portfolio is contractually
entitled to receive. In contrast, currency swaps usually involve the delivery of
the entire principal value of one designated currency in exchange for the other
designated currency. Therefore, the entire principal value of a currency swap is
subject to the risk that the other party to the swap will default on its
contractual delivery obligations. If there is a default by the counterparty, the
Portfolio 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 banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The use of interest rate and currency swaps is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the Adviser is
incorrect in its forecasts of market values, interest rates, and currency
exchange rates, the investment performance of the Fixed Income Portfolio would
be less favorable than it would have been if this investment technique were not
used.
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INVESTMENT SUITABILITY
The Fund's Portfolios are designed principally for the investments of
tax-exempt fiduciary investors and other institutional clients. Since it is
contemplated that the preponderance of investors in the Portfolios will not be
subject to federal income taxes, securities transactions for the Portfolios will
not be influenced by the different tax treatment of long-term capital gains,
short-term capital gains and dividend income under the Code. While the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), does not prohibit
a fiduciary of an employee benefit plan from investing in any specific type of
asset, it imposes certain duties on fiduciaries of such plans which are subject
to its provisions. These requirements are more fully discussed in the Statement
of Additional Information.
PURCHASE OF SHARES
Shares of each Portfolio may be purchased at the net asset value per share
next determined after receipt of the purchase order. See "Valuation of Shares."
INITIAL INVESTMENTS BY WIRE
Subject to acceptance by the Fund, shares of each Portfolio may also be
purchased by wiring Federal Funds ($1 million minimum) to the Fund's Custodian
Bank, LTCB Trust Company, 165 Broadway, New York, New York 10006 (see
instructions below). A completed Account Registration Form should be forwarded
to the Fund at the address noted below under "Initial Investments by Mail" in
advance of the wire. For each Portfolio, notification must be given to the Fund
at 1-800-393-9998 prior to 4:15 p.m., New York time, of the wire date. (Prior
notification must also be received from investors with existing accounts.) Funds
should be wired through the Federal Reserve Bank of New York to:
LTCB Trust Company
165 Broadway
New York, New York 10006
ABA # 026002040
F/B/O Minerva Fund, Inc.
AC # 140573221
Ref. (Portfolio name)
Federal Funds purchases will be accepted only on a day on which the
relevant Portfolio and the Custodian Bank are open for business.
INITIAL INVESTMENTS BY MAIL
Subject to acceptance by the Fund, an account may be opened by completing
and signing an Account Registration Form (provided at the end of the
Prospectus), and mailing it to the Fund at the address noted below, together
with a check ($1 million minimum) payable to the Minerva Fund, Inc.:
Minerva Fund, Inc.
P.O. Box 4490
New York, New York 10163
The Portfolio(s) to be purchased should be designated on the Account
Registration Form. Subject to acceptance by the Fund, payment for the purchase
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<PAGE>
of shares received by mail will be credited to your account at the net asset
value per share of the Portfolio next determined after receipt. Such payment
need not be converted into Federal Funds (monies credited to the Fund's
Custodian Bank by a Federal Reserve Bank) before acceptance by the Fund. Please
note that purchases made by check in any Portfolio are not permitted to be
redeemed until payment of the purchase has been collected, which may take up to
eight business days after purchase.
ADDITIONAL INVESTMENTS
Additional purchases of shares at net asset value may be made at any time
(minimum investment $100,000) by mailing a check to the Fund at the address
noted under "Initial Investments by Mail" (payable to Minerva Fund, Inc.) or by
wiring monies to the Custodian Bank as outlined above under "Initial Investments
by Wire." For each Portfolio, notification must be given to the Fund at
1-800-393-9998 prior to 4:15 p.m., New York time, of the wire date.
OTHER PURCHASE INFORMATION
The Fund reserves the right, in its sole discretion, to suspend the
offering of shares of its Portfolios or to reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interests of
the Fund.
Under certain circumstances, shares of a Portfolio may be purchased in
exchange for securities which are eligible for acquisition by the Portfolio. A
gain or loss for federal income tax purposes may be realized by taxable
investors making in-kind purchases upon the exchange depending upon the cost of
the securities exchanged. Investors interested in such exchanges should contact
LTCB-MAS. In-kind purchases are described more fully in the Statement of
Additional Information.
Purchases of a Portfolio's shares will be made in full and fractional
shares of the Portfolio calculated to three decimal places. In the interest of
economy and convenience, certificates for shares will not be issued except at
the written request of the shareholder. Certificates for fractional shares,
however, will not be issued.
LTCB-MAS or one of its affiliates may have a pre-existing fiduciary
relationship with certain employee benefit plan investors. Prior to purchasing
shares of the Fund's Portfolios, an independent fiduciary of such an investor
must authorize such purchase by completing and signing an Employee Benefit Plan
Fiduciary Authorization Form (provided with the Prospectus) and mailing it to
the Fund at the address noted above.
Shares of the Fund's Portfolios may also be sold to corporations or other
institutions such as trusts, foundations or broker-dealers purchasing for the
accounts of others ("Shareholder Organizations"). Investors purchasing and
redeeming shares of the Portfolios through a Shareholder Organization may be
charged a transaction-based fee or other fee for the services of such
organization. Each Shareholder Organization is responsible for transmitting to
its customers a schedule of any such fees and information regarding any
additional or different conditions regarding purchases and redemptions.
Customers of Shareholder Organizations should read this Prospectus in light of
the terms governing accounts with their organization. The Fund does not pay to
or receive compensation from Shareholder Organizations for the sale of Fund
shares. The Fund's officers are authorized to waive the minimum initial and
subsequent investment requirements.
REDEMPTION OF SHARES
Shares of each Portfolio of the Fund may be redeemed by mail, or, if
authorized, by telephone. No charge is made for redemptions. The value of shares
redeemed may be more or less than the purchase price, depending on the market
value of the investment securities held by the Portfolio.
BY MAIL
Each Portfolio will redeem its shares at the net asset value next
determined after the request is received in "good order." The net asset values
per share of the Fund's Portfolios are determined as of 4:15 p.m., New York
time, on each day that the New York Stock Exchange, Inc. (the "NYSE") and the
Portfolio are open for business. Requests should be addressed to Minerva Fund,
Inc., P.O. Box 4490, New York, New York 10163.
Requests in "good order" must include the following documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment
specifying the number of shares or dollar amount to be redeemed, signed by
all registered owners of the shares in the exact names in which they are
registered;
(c) Any required signature guarantees (see "Signature Guarantees"
below); and
(d) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
SIGNATURE GUARANTEES. To protect shareholder accounts, the Fund and its
transfer agent from fraud, signature guarantees are required to enable the Fund
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<PAGE>
to verify the identity of the person who has authorized a redemption from an
account. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareowner(s) and
the registered address, and (2) share transfer requests. Shareholders may
contact the Fund at 1-800-393-9998 for further details.
BY TELEPHONE
Provided the Telephone Redemption Option has been authorized, a redemption
of shares may be requested by calling the Fund at 1-800-393-9998 and requesting
that the redemption proceeds be mailed to the primary registration address or
wired per the authorized instructions. Shares cannot be redeemed by telephone if
share certificates are held for those shares. If the Telephone Redemption Option
or the Telephone Exchange Option (as described below) is authorized, the Fund
and its transfer agent may act on telephone instructions from any person
representing himself or herself to be a shareholder and believed by the Fund or
its transfer agent to be genuine. The transfer agent's records of such
instructions are binding and shareholders, not the Fund or its transfer agent,
bear the risk of loss in the event of unauthorized instructions reasonably
believed by the Fund or its transfer agent to be genuine. The Fund will employ
reasonable procedures to confirm that instructions communicated are genuine and,
if it does not, it may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures employed by the Fund in connection with
transactions initiated by telephone include tape recording of telephone
instructions and requiring some form of personal identification prior to acting
upon instructions received by telephone.
FURTHER REDEMPTION INFORMATION
Redemption proceeds for shares of the Fund recently purchased by check may
not be distributed until payment for the purchase has been collected, which may
take up to eight business days. Such funds are invested and earn dividends
during this holding period. Shareholders can avoid this delay by utilizing the
wire purchase option.
Payment of the redemption proceeds will ordinarily be made within seven
days after receipt of an order for a redemption. The Fund may suspend the right
of redemption or postpone the date at times when the NYSE or the bond market is
closed or under any emergency circumstances as determined by the SEC.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay the redemption proceeds in whole or in part
by a distribution in-kind of readily marketable securities held by a Portfolio
in lieu of cash in conformity with applicable rules of the SEC. Investors may
incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Each Portfolio's shares may be exchanged for shares of the Fund's other
Portfolio based on the respective net asset values of the shares involved. The
exchange privilege is only available, however, with respect to Portfolios that
are registered for sale in a shareholder's state of residence. There are no
exchange fees. Exchange requests should be sent to Minerva Fund, Inc., P.O. Box
4490, New York, New York 10163 or, if the Telephone Exchange Option has been
authorized, by calling the Fund at 1-800-393-9998. See "Redemption of Shares--By
Telephone" above. Shareholders should note that an exchange between Portfolios
is considered a sale and purchase of shares for tax purposes.
TRANSFER OF REGISTRATION
The registration of Fund shares may be transferred by writing to Minerva
Fund, Inc., P.O. Box 4490, New York, New York 10163. As in the case of
redemptions, the written request must be received in good order as defined
above.
VALUATION OF SHARES
EQUITY PORTFOLIO
Net asset value per share is determined by dividing the total market value
of the Equity Portfolio's investments and other assets, less any liabilities, by
the total outstanding shares of the Portfolio. Net asset value per share is
determined as of 4:15 p.m., New York time, on each day that the NYSE and the
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Portfolio are open for business. Securities listed on a U.S. securities exchange
or NASDAQ for which market quotations are available are valued at the last
quoted sale price on the day the valuation is made. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a foreign exchange are valued at the latest quoted sales
price available on the exchange where they are primarily traded before the time
when assets are valued. For purposes of net asset value per share, all assets
and liabilities initially expressed in foreign currencies are converted into
U.S. dollars at the bid price of such currencies against U.S. dollars last
quoted by any major bank. Unlisted securities and listed U.S. securities not
traded on the valuation date for which market quotations are readily available
are valued at the mean of the most recent quoted bid and asked price. The value
of other assets and securities for which no quotations are readily available
(including restricted securities) is determined in good faith at fair value
using methods approved by the Board of Directors.
FIXED INCOME PORTFOLIO
Net asset value per share is computed by dividing the total value of the
investments and other assets of the Portfolio, less any liabilities, by the
total outstanding shares of the Portfolio. The net asset value per share is
determined as of 4:15 p.m., New York time, on each day that the NYSE and the
Portfolio are open for business. Securities listed on a foreign exchange are
valued at the latest quoted sales price available before the time when assets
are valued. For purposes of net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars at the bid price of such currencies against U.S. dollars last
quoted by any major bank.
Net asset value includes interest on fixed-income securities which is
accrued daily. Securities which are traded over-the-counter and on a stock
exchange will be valued according to the broadest and most representative
market, and it is expected that for bonds and other fixed-income securities this
ordinarily will be the over-the-counter market.
However, bonds and other fixed-income securities may be valued on the
basis of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by a
pricing service are determined without regard to bid or last sale prices but
take into account institutional size trading in similar groups of securities and
any developments related to specific securities. Securities not priced in this
manner are valued at the most recent quoted bid price, or when stock exchange
valuations are used, at the latest quoted sale price on the day of valuation. If
there is no such reported sale, the latest quoted bid price will be used.
Securities with remaining maturities of 60 days or less are valued at amortized
cost unless the Board of Directors determines that amortized cost does not
reflect fair value. In the event that amortized cost does not approximate
market, market prices as determined above will be used. Other assets and
securities, for which no quotations are readily available, will be valued in
good faith at fair value using methods approved by the Board of Directors.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends are generally paid to shareholders on a quarterly basis. If any
net capital gains are realized from the sale of underlying securities, the
Portfolios normally distribute such gains with the last dividend for the
calendar year. All dividends and capital gains distributions are automatically
paid in additional shares of the Portfolio unless the shareholder elects
otherwise. Such election must be made in writing to the Fund.
In each Portfolio, undistributed net investment income is included in the
Portfolio's net assets for the purpose of calculating net asset value per share.
Therefore, on the "ex-dividend" date, the net asset value per share excludes the
dividend (I.E., is reduced by the per share amount of the dividend). Dividends
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable as ordinary income.
With respect to the Fixed Income Portfolio, certain mortgage-backed
securities may provide for periodic or unscheduled payments of principal and
interest as the mortgages underlying the securities are paid or prepaid.
However, such principal payments (not otherwise characterized as ordinary
discount income or bond premium expense) will not normally be considered as
income to the Portfolio and therefore will not be distributed as dividends.
Rather, these payments on mortgage-backed securities will be reinvested on
behalf of the shareholders by the Portfolio in accordance with its investment
objective and policies.
23
<PAGE>
FEDERAL TAXES
Each Portfolio of the Fund intends to qualify for taxation as a "regulated
investment company" under the Code. If so qualified, each Portfolio will not be
subject to federal income taxes with respect to net investment income and net
realized long-term capital gains, if any, that are distributed to its
shareholders, provided that the Portfolio distributes each taxable year (i) at
least 90% of its investment company taxable income (as that term is defined in
the Code, without regard to the deduction for dividends paid), and (ii) at least
90% of the excess of its tax-exempt interest income net of certain deductions
allocable to such income. Each Portfolio of the Fund will be treated as a
separate entity for federal income tax purposes, and thus the provisions of the
Code applicable to regulated investment companies generally will be applied to
each Portfolio separately, rather than to the Fund as a whole. In addition, net
realized long-term capital gains, investment company taxable income and
operating expenses will be determined separately for each Portfolio.
Dividends, either in cash or reinvested in shares, paid by a Portfolio
from net investment income will be taxable to shareholders as ordinary income.
In the case of the Equity Portfolio, for owners of shares that are corporations,
such distributions may be eligible for the dividends-received deduction, but the
portion of the dividends so qualified depends on the aggregate taxable
qualifying dividend income received by the Portfolio from domestic (U.S.)
sources. The Fund will send each shareholder a statement each year indicating
the amount of the dividend income which qualifies for such treatment.
Whether paid in cash or additional shares of a Portfolio, and regardless
of the length of time the shares in such Portfolio have been owned by the
shareholder, distributions from long-term capital gains are taxable to
shareholders as such, and are not eligible for the dividends received deduction
for corporations. Shareholders are notified annually by the Fund as to federal
tax status of dividends and distributions paid by a Portfolio. Such dividends
and distributions may also be subject to state and local taxes.
Exchanges and redemptions of shares in a Portfolio are generally taxable
events for federal income tax purposes. Individual shareholders may also be
subject to state and municipal taxes on such exchanges and redemptions.
Each Portfolio intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of a nondeductible 4% federal excise
tax. To do so, each Portfolio intends to distribute an amount at least equal to
(i) 98% of its calendar year ordinary income, (ii) 98% of its capital gains net
income (the excess of short and long-term capital gain over short and long-term
capital loss) for the one-year period ending October 31st and (iii) 100% of any
undistributed ordinary or capital gain net income from the prior calendar year.
Although dividends generally will be treated as distributed when paid, dividends
declared in October, November or December, payable to shareholders of record on
a specified date in one of those months and paid during the following January
will be treated as having been distributed by a Portfolio (and received by the
shareholders) on December 31 of the year declared.
INVESTMENT MANAGEMENT
LTCB-MAS acts as the Fund's investment manager and has overall
responsibility for supervising the investment program of each Portfolio.
LTCB-MAS, a joint subsidiary of LTCB and MA&S, is registered under the
Investment Advisers Act of 1940 and provides investment counselling services to
employee benefit plans and other institutional investors. As of September 30,
1995, LTCB-MAS had assets under management in excess of $ million. LTCB, with
over $ billion in assets as of September 30, 1995, is one of the 25 largest
banks in the world. MA&S provides investment counselling services primarily to
institutional investors and as of September 30, 1995, had assets under
management in excess of $ billion. The selection on a day-to-day basis of
appropriate investments for each Portfolio is made by MA&S acting in
collaboration with and under the supervision of LTCB-MAS.
Pursuant to an investment management agreement (the "Investment Management
Agreement") with the Fund, LTCB-MAS has responsibility for the investment and
reinvestment of the assets of each Portfolio and will supervise the investment
program of each Portfolio in accordance with the stated investment objective and
policies of each Portfolio. The activities of LTCB-MAS as investment manager
shall remain under the control and supervision of the Fund's Board of Directors.
LTCB-MAS shall advise and consult with MA&S regarding each Portfolio's overall
24
<PAGE>
investment strategy and consult with MA&S on at least a weekly basis regarding
specific decisions concerning the purchase, sale or holding of particular
securities. As compensation for the services rendered by LTCB-MAS under the
Investment Management Agreement, each Portfolio will pay LTCB-MAS an investment
management fee calculated and accrued daily and paid monthly, based on the
following annual percentage rates, to the Portfolio's average daily net assets
for the month:
RATE
-----
Equity Portfolio ............................ .50%
Fixed Income Portfolio ...................... .375%
Pursuant to an investment services agreement (the "Investment Services
Agreement") between LTCB-MAS and MA&S, MA&S, acting in collaboration with and
under the supervision of LTCB-MAS, is responsible on a day-to-day basis for
selecting investments for each Portfolio in conformity with the stated
investment objective and policies of each Portfolio. MA&S will place purchase
and sale orders for each Portfolio's portfolio securities. MA&S receives no fee
pursuant to the Investment Services Agreement for the services it provides.
Sixty percent of the outstanding capital stock of LTCB-MAS is owned by
LTCB Capital Markets, Inc. ("LCM") which, in turn, is wholly owned by LTCB.
Forty percent of the outstanding capital stock of LTCB-MAS is owned by MA&S. LCM
owns a non-voting limited partnership interest in MA&S equal to approximately
eighteen percent of the total equity of MA&S. The principal offices of LTCB-MAS
are located at One Tower Bridge, Suite 1000, West Conshohocken, Pennsylvania
19428. The principal offices of MA&S are located at One Tower Bridge, Suite
1150, West Conshohocken, Pennsylvania 19428.
MA&S has entered into an agreement to be acquired by Morgan Stanley Group
Inc. In connection with that transaction, the 40% of the outstanding capital
stock of LTCB-MAS currently held by MA&S will also be acquired by one or more
affiliates of Morgan Stanley Group Inc. Each of LTCB-MAS and MA&S will retain
its name and remain at its current location. Consummation of the transaction
with Morgan Stanley Group Inc. will cause a termination of the current
investment management agreement between the Fund and LTCB-MAS and the current
investment services agreement between LTCB-MAS and MA&S. At a special meeting
held on September 29, 1995, the Fund's shareholders voted to approve a new
investment management agreement with LTCB-MAS and a new investment services
agreement between LTCB-MAS and MA&S, which agreements will take effect upon the
consummation of the transaction. The new investment management and investment
services agreements are substantially identical to the Investment Management
Agreement and Investment Services Agreement, respectively.
In cases where a shareholder of either of the Portfolios has an investment
counselling relationship with LTCB-MAS, LTCB-MAS may reduce the investment
counselling fees paid by the client directly to LTCB-MAS. This procedure will be
utilized with clients having contractual relationships based on total assets
managed by LTCB-MAS to avoid situations where excess investment management fees
might be paid to LTCB-MAS. In no event will a client pay higher total investment
management fees as a result of the client's investment in the Fund.
Mr. Hideo Ueki, Equity Portfolio Manager of LTCB-MAS, has primary
responsibility for supervision of the Equity Portfolio's investment program, and
Mr. Akihito Sakata, Fixed Income Portfolio Manager of LTCB-MAS, has primary
responsibility for supervision of the Fixed Income Portfolio's investment
program. Mr. Ueki has been Equity Portfolio Manager of LTCB-MAS since 1993, was
a Fund Manager of LTCB Investment Management Company, Ltd. from 1990 to 1993,
and prior thereto was a Loan Officer of LTCB. Mr. Sakata has been Vice President
and Fixed Income Portfolio Manager of LTCB-MAS since 1992. He was employed by
LTCB Investment Management Co., Ltd. as Fund Manager of the Quantitative
Investment Management Division from 1990 to 1992 and an Equity Analyst from 1988
to 1990. Messrs. John D. Connolly, Gary G. Schlarbaum and A. Morris Williams,
Jr., each a Partner of MA&S, are primarily responsible for the day-to-day
management of the Equity Portfolio in consultation with and under the
supervision of Mr. Ueki. Messrs. Thomas L. Bennett, Kenneth B. Dunn, James L.
Kichline and Richard B. Worley, each a Partner of MA&S, are primarily
responsible for the day-to-day management of the Fixed Income Portfolio, in
consultation with and under the supervision of Mr. Sakata. Each of the
aforementioned Partners of MA&S has been affiliated with MA&S for at least the
past five years, except that Mr. Connolly was with Dean Witter Reynolds from
1984 through 1990, most recently as a Senior Vice President and the Chief
Investment Strategist.
ADMINISTRATIVE SERVICES
Furman Selz provides the Fund with administrative and fund accounting
services pursuant to a fund administration agreement (the "Fund Administration
Agreement"). The services under the Fund Administration Agreement are subject to
the supervision of the Fund's Board of Directors and officers, and include
day-to-day administration of matters related to the corporate existence of the
Fund, maintenance of its records, preparation of reports, supervision of the
Fund's arrangements with its custodians, and assistance in the preparation of
25
<PAGE>
the Fund's Registration Statements under federal and state laws. Pursuant to the
Fund Administration Agreement, the Fund will pay Furman Selz a monthly fee for
its services which on an annualized basis will not exceed .15% of the average
daily net assets of the Fund plus an annual fee of $30,000 per Portfolio for
fund accounting services.
From time to time, subject to review by the Board of Directors, Furman
Selz may make certain adjustments to the fees it is entitled to receive from the
Fund pursuant to its Fund Administration Agreement.
DISTRIBUTOR
Shares of the Fund are distributed through Furman Selz pursuant to a
distribution agreement (the "Distribution Agreement"). Under the Distribution
Agreement, Furman Selz does not receive any fee or other compensation for
distributing shares of the Fund. The principal offices of Furman Selz are
located at 230 Park Avenue, New York, New York 10169.
INVESTMENT LIMITATIONS
Each Portfolio has adopted certain limitations designed to reduce its
exposure to specific situations. If a percentage limitation on investment or
utilization of assets as set forth herein is adhered to at the time an
investment is made, a later change in percentage resulting from changes in the
value or total cost of the Portfolio's assets will not be considered a violation
of the restriction. As a matter of fundamental policy, neither Portfolio will:
(a) with respect to 75% of its assets, purchase securities of any
issuer if, as a result, more than 5% of the Portfolio's total assets,
taken at market value at the time of such investment, would be invested in
securities of such issuer except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(b) with respect to 75% of its assets, purchase a security if, as a
result, it would hold more than 10% (taken at the time of such investment)
of the outstanding voting securities of any issuer;
(c) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the Portfolio's
total assets would be invested in securities of companies within such
industry; provided, however, that there shall be no limitation on the
purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, or instruments issued by U.S. banks when
any such Portfolio adopts a temporary defensive position;
(d) make loans except (i) by purchasing debt securities in accordance
with its investment objective and policies, or entering into repurchase
agreements, subject to the applicable limitations of its investment
policies and (ii) by lending its portfolio securities; and
(e) borrow money, except (i) as a temporary measure for extraordinary
or emergency purposes or (ii) in connection with reverse repurchase
agreements provided that (i) and (ii) in combination do not exceed 33-1/3%
of the Portfolio's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings), provided, however, that trading in
futures contracts, options on futures contracts and options and entering
into swap transactions shall not be deemed to involve a "borrowing" for
purposes of this limitation, and provided further that additional
portfolio securities may not be purchased by a Portfolio while borrowings
and reverse repurchase agreements exceed 5% of the Portfolio's total
assets;
The foregoing investment limitations and certain of the limitations
described in the Statement of Additional Information are fundamental policies
and may be changed only with the approval of the holders of a "majority of the
shares" of the applicable Portfolio of the Fund, as defined in the 1940 Act.
GENERAL INFORMATION
ORGANIZATION AND CAPITAL STOCK
The Fund was incorporated in Maryland on June 28, 1993. The authorized
capital stock of the Fund consists of 200,000,000 shares having a par value of
$.001 per share. The Fund's Articles of Incorporation authorize the issuance of
two classes of shares corresponding to shares in the Equity Portfolio and the
Fixed Income Portfolio. The Fund's Board of Directors may, in the future,
authorize the issuance of additional classes of capital stock representing
shares in the same or additional investment portfolios.
26
<PAGE>
All shares of the Fund have equal voting rights and will be voted in the
aggregate and not by class, except where voting by class is required by law or
where the matter involved affects only one class. Under the corporate law of
Maryland, the Fund's state of incorporation, and the Fund's By-Laws (except as
required under the 1940 Act), the Fund is not required and does not currently
intend to hold annual meetings of shareholders for the election of directors.
Shareholders, however, do have the right to call for a meeting to consider the
removal of one or more of the Fund's Directors if such a request is made, in
writing, by the holders of at least 10% of the Fund's outstanding voting
securities. In such cases, the Fund will assist in calling the meeting
(including effecting any necessary shareholder communications) as required under
the 1940 Act. A more complete statement of the voting rights of shareholders is
contained in the Statement of Additional Information.
All shares of the Fund, when issued, will be fully paid and nonassessable.
The business and affairs of the Portfolios are managed under the general
direction and supervision of the Fund's Board of Directors. The day-to-day
operations of the Portfolios are handled by the Fund's officers.
CUSTODIAN
LTCB Trust Company, 165 Broadway, New York, New York 10006, acts as
Custodian for each Portfolio.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Furman Selz Incorporated, 230 Park Avenue, New York, New York 10169, acts
as Transfer Agent and Dividend Disbursing Agent for the Fund.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York, serves as counsel to the Fund.
REPORTS
Shareholders will receive semi-annual and annual financial statements.
Annual financial statements are audited by Price Waterhouse LLP, independent
accountants, whose selection is ratified by shareholders. Price Waterhouse LLP
is located at 1177 Avenue of the Americas, New York, New York 10036.
CLOSED HOLIDAYS
Currently, the days on which the NYSE and/or the Fund are closed for
business are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition,
the Fixed Income Portfolio will be closed on Columbus Day, Veteran's Day and New
Year's Eve.
EXPENSES OF THE FUND
The Fund bears all of its own costs and expenses, including: services of
its independent accountants, its administrator and dividend disbursing and
transfer agent, legal counsel, taxes, insurance premiums, costs incidental to
meetings of its shareholders and Board of Directors, the cost of filing its
registration statements under federal and state securities laws, reports to
shareholders and custodian fees. These Fund expenses are, in turn, allocated to
each Portfolio based on such Portfolio's relative net assets. Each Portfolio
bears its own advisory fees and brokerage commissions and transfer taxes in
connection with the acquisition and disposition of its investment securities.
LTCB-MAS has agreed to reimburse the Equity Portfolio and the Fixed Income
Portfolio for total annual operating expenses in excess of 1.00% and .80%,
respectively, of average net assets for a period of at least one year from the
date of this Prospectus.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as
currently interpreted by the Board of Governors of the Federal Reserve System,
prohibit a bank holding company registered under the Bank Holding Company Act of
1956, as amended, or any affiliate thereof from sponsoring, organizing,
controlling, or distributing the shares of a registered, open-end investment
27
<PAGE>
company continuously engaged in the issuance of its shares, and prohibit banks
generally from issuing, underwriting, selling or distributing securities, but do
not prohibit such bank holding company or affiliate from acting as investment
adviser or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of a customer. LTCB and the Fund
believe that LTCB-MAS and LTCB Trust Company, or any other duly authorized
affiliate of LTCB, may perform the investment advisory and custody services,
respectively, for the Fund, as described in this Prospectus, and that LTCB Trust
Company or any other affiliate of LTCB, subject to such banking laws and
regulations, may act as a Shareholder Organization as contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent LTCB-MAS, LTCB Trust Company or any other affiliate
of LTCB from continuing to perform investment advisory or custody services for
the Fund, as the case may be, or require LTCB Trust Company or any other
affiliate of LTCB to discontinue acting as a Shareholder Organization.
If LTCB-MAS, LTCB Trust Company or any other affiliate of LTCB were
prohibited from performing investment advisory or custody services for the Fund,
as the case may be, it is expected that the Fund's Board of Directors would
recommend to the Fund's shareholders that they approve new agreements with
another entity or entities qualified to perform such services and selected by
the Board of Directors. If LTCB Trust Company or any other affiliate of LTCB
were required to discontinue acting as a Shareholder Organization, its customers
would be permitted to remain the beneficial owners of Portfolio shares and
alternative means for continuing the servicing of such customers would be
sought. The Fund does not anticipate that investors would suffer any adverse
financial consequences as a result of these occurrences.
DIRECTORS AND OFFICERS
The following is a list of the Directors and principal executive officers
of the Fund and a brief statement of their present positions and principal
occupations during the past five years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------- ---------------- -------------------------------------------
<S> <C> <C>
*James D. Schmid Director and Partner, Miller Anderson & Sherrerd (since
Miller Anderson & Sherrerd Chairman of the Board 1989); President, MAS Funds; Director, MAS
One Tower Bridge Funds Distributor, Inc.; formerly Vice President,
West Conshohocken, PA 19428 Chase Manhattan Bank.
Age: 45 years
Carl T. Hagberg Director Chairman, Carl T. Hagberg & Associates
6 South Lakeview Drive (since 1992); formerly Senior Vice President,
Jackson, NJ 08527 Chemical Bank.
Age: 53 years
Raymond F. Miller Director Partner, Cronus Partners, Inc. (since 1990);
Cronus Partners, Inc. formerly Managing Director, Bankers Trust Co.
540 Madison Avenue
New York, NY 10022
Age: 54 years
Charles A. Parker Director Director, T.C.W. Convertible Fund, Inc.;
59 Huckleberry Lane formerly Executive Vice President, Director
New Canaan, CT 06840 and Chief Investment Officer, Continental
Age: 61 years Corporation.
</TABLE>
- ----------------
* Director is deemed to be an "interested person" of the Fund as that term is
defined in the 1940 Act.
28
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------- ---------------- -------------------------------
<S> <C> <C>
John J. Pileggi President and Senior Managing Director,
230 Park Avenue Treasurer Furman Selz Incorporated
New York, NY 10169
Age: 36 years
Joan V. Fiore Secretary Managing Director and Counsel,
230 Park Avenue Furman Selz Incorporated (since 1991);
New York, NY 10169 formerly Attorney with the
Age: 39 years Securities and Exchange Commission (1986-1991).
Sheryl Hirschfeld Assistant Director, Corporate Secretary Services,
230 Park Avenue Secretary Furman Selz Incorporated (since November 1994);
New York, NY 10169 formerly Assistant to the Corporate Secretary
Age: 35 years and General Counsel at The Dreyfus Corporation.
Donald Brostrom Assistant Director, Fund Services, Furman Selz
230 Park Avenue Treasurer Incorporated (since 1986).
New York, NY 10169
Age: 37 years
</TABLE>
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director an annual fee plus a fee and reimbursement for
travel and other expenses in connection with attending Board meetings. The
Fund's officers are paid by Furman Selz.
29
<PAGE>
MINERVA FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY , 1996
Minerva Fund, Inc. (the "Fund") is a no load open-end management investment
company consisting of two portfolios offering a variety of investment
alternatives. This Statement of Additional Information sets forth information
about the Fund applicable to each of the two portfolios.
This Statement is not a Prospectus but should be read in conjunction
with the Fund's Prospectus dated January , 1996. To obtain the Prospectus,
please call the Fund at the telephone number indicated below.
INFORMATION AND CLIENT SERVICES 1-800-393-9998
TABLE OF CONTENTS
Page
Investment Objectives and Policies .........................................B-2
Foreign Investments.........................................................B-4
Futures Contracts ..........................................................B-5
Options ....................................................................B-8
Options on Foreign Currencies ..............................................B-8
Risks of Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies........................................B-10
Interest Rate and Currency Swaps ..........................................B-12
Tax Aspects of Options, Futures,
Forward Contracts and Swap Agreements ...................................B-13
Foreign Currency Exchange-Related Securities ..............................B-14
Rule 144A Securities ......................................................B-17
Additional Information Concerning Taxes ...................................B-18
Investment Suitability.....................................................B-22
Purchase of Shares.........................................................B-23
Redemption of Shares.......................................................B-24
Determination of Net Asset Value...........................................B-25
Shareholder Services.......................................................B-26
Investment Limitations.....................................................B-27
Officers and Directors of the Fund.........................................B-30
Investment Management......................................................B-31
Distributor for the Fund...................................................B-33
Portfolio Transactions.....................................................B-33
Administration, Custody and Transfer
Agency Services...........................................................B-34
General Information .......................................................B-36
Performance Calculations ..................................................B-39
Comparative Indices .......................................................B-41
Appendix -- Description of Securities and Ratings...........................A-1
<PAGE>
-2-
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The following policies supplement the investment objectives and
policies set forth in the Fund's Prospectus:
REPURCHASE AGREEMENTS
Each of the Fund's Portfolios may invest in repurchase agreements
collateralized by U.S. Government securities, certificates of deposit and
certain bankers' acceptances. Repurchase agreements are transactions by which a
Portfolio purchases a security and simultaneously commits to resell that
security to the seller (a bank or securities dealer) at an agreed upon price on
an agreed upon date (usually within seven days of purchase). The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. In
these transactions, the securities purchased by a Portfolio have a total value
in excess of the value of the repurchase agreement and are held by such
Portfolio's custodian bank until repurchased. Such agreements permit the
Portfolio to keep all its assets at work while retaining "overnight" flexibility
in pursuit of investments of a longer term nature. The Fund will continually
monitor the value of the underlying securities to ensure that their value,
including accrued interest, always equals or exceeds the repurchase price.
The use of repurchase agreements involves certain risks. For example,
if the seller of the agreements defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
the Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Portfolio may not be able to substantiate its interest in the
underlying securities. While the Fund's management acknowledges these risks, it
is expected that they can be controlled through stringent security selection
criteria and careful monitoring procedures.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
<PAGE>
-3-
securities, a Portfolio attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Portfolio. Each Portfolio may lend its investment securities to qualified
brokers, dealers, domestic and foreign banks or other financial institutions, so
long as the terms, the structure and the aggregate amount of such loans are not
inconsistent with the Investment Company Act of 1940, as amended (the "1940
Act"), or the rules and regulations or interpretations of the Securities and
Exchange Commission (the "SEC") thereunder, which currently require that (a) the
borrower pledge and maintain with the Portfolio collateral consisting of cash,
an irrevocable letter of credit issued by a domestic U.S. bank, or securities
issued or guaranteed by the U.S. Government having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Portfolio at any time, and (d) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distribution on
the loaned securities and any increase in their market value. All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Directors. Such loans may
involve risks of delay in receiving additional collateral or in recovering the
securities loaned or even loss of rights in the collateral should the borrower
of the securities fail financially. However, loans will be made only to
borrowers deemed by Miller Anderson & Sherrerd ("MA&S") to be of good standing
and only when, in the judgment of MA&S, the income to be earned from the loans
justifies the attendant risks.
At the present time, the staff of the SEC does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
<PAGE>
-4-
- --------------------------------------------------------------------------------
FOREIGN INVESTMENTS
- --------------------------------------------------------------------------------
Investors should recognize that investing in the securities of foreign
issuers involves certain special considerations which are not typically
associated with investing in the securities of U.S issuers. Since the securities
of foreign issuers are frequently denominated in foreign currencies, and since a
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, a Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies. The investment policy of
each of the Portfolios permits it to enter into forward foreign currency
exchange contracts in order to hedge the Portfolio's holdings and commitments
against changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date, at a price
set at the time of the contract.
As foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic issuers, there may be less publicly available information
about certain foreign issuers than about domestic issuers. Securities of some
foreign issuers may be less liquid and more volatile than securities of
comparable domestic issuers. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the United
States. With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Although a Portfolio will endeavor to achieve the most favorable
execution costs in its portfolio transactions in foreign securities, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses for
custodial arrangements of a Portfolio's foreign securities will be somewhat
greater than the expenses for the custodial arrangements for handling U.S.
securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a Portfolio receives from the companies comprising such Portfolio's
investments. These foreign withholding taxes, however, are not expected to have
a significant impact on a Portfolio.
<PAGE>
-5-
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FUTURES CONTRACTS
- --------------------------------------------------------------------------------
In order to further its investment objective and policies, each
Portfolio of the Fund may purchase and sell financial futures contracts and
options on financial futures contracts. The Equity Portfolio will only engage in
such transactions to the extent that they relate to equity securities or indices
of equity securities (or, if the Portfolio has invested in securities
denominated in foreign currencies, foreign currency exchange rates). The Fixed
Income Portfolio will only engage in such transactions to the extent that they
relate to interest rates (including futures contracts on debt instruments or
indices of debt instruments or, if the Portfolio has invested in securities
denominated in foreign currencies, foreign currency exchange rates).
Futures contracts provide for the sale by one party and purchase by
another party of a specified amount of the underlying instrument or currency at
a specified future time and price (or, in the case of certain cash-settled
instruments, a net cash amount). Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (the "CFTC"), a U.S.
Government Agency.
Although most futures contracts by their terms call for actual delivery
or acceptance of the underlying instrument or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures traders are required to make a good faith margin deposit in
cash or acceptable securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
securities) if it is not terminated prior to the specified delivery date.
Minimal initial margin requirements are established by the futures exchange and
may be changed. Brokers may establish deposit requirements which are higher than
the exchange minimums. Futures contracts are customarily purchased and sold on
the basis of margin deposits that may range between 1% and 10% of the value of
<PAGE>
-6-
the contract being traded. A Portfolio's margin deposits, consisting of cash,
U.S. Government securities and other liquid, high grade debt obligations, will
be placed in a segregated account maintained by the Fund's custodian.
After a futures contract position is opened, the value of the contract
is marked to market daily. If the futures contract price changes, to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the value of the underlying securities. The Portfolios intend to use futures
contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions or, to the extent
that the Fund's futures and options positions are for other purposes, that the
aggregate initial margins and premiums required to establish such non-hedging
positions not exceed 5% of the liquidation value of the Portfolio. The
Portfolios will only sell futures contracts to protect securities owned by them
against price declines or purchase contracts to protect against an increase in
the price of securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures contracts
purchased will be "completed;" that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Trading in futures contracts and options on futures contracts involves
unique risks, including those summarized in the following paragraphs.
Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. There can be no assurance,
however, that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
<PAGE>
-7-
position. In the event of adverse price movements, a Portfolio would continue to
be required to make daily cash payments to maintain its required margin. In such
situations, if the Portfolio has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, a Portfolio may be required to make
delivery of the instruments underlying the interest rate futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on a Portfolio's ability to effectively hedge. A Portfolio will
minimize the risk that it will be unable to close out a futures contract by only
entering into futures contracts which are traded on national futures exchanges
and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit before any deduction for the transaction costs,
if the account were then closed out. A 15% decrease would result in a loss equal
to 150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. However, because the futures strategies of the
Fund are engaged in primarily for hedging purposes, the Adviser (as defined
below) does not believe that the Fund's Portfolios are subject to the risks of
loss frequently associated with futures transactions. A Portfolio would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Utilization of futures transactions by a Portfolio involves the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom such Portfolio has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
<PAGE>
-8-
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
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OPTIONS
- --------------------------------------------------------------------------------
Investments in options involve some of the same considerations that are
involved in connection with investments in futures contracts (e.g., the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying security or
contract will not be fully reflected in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
upon which it is based, or upon the price of the securities being hedged, an
option may or may not be less risky than ownership of the futures contract or
actual securities. In general, the market prices of options can be expected to
be more volatile than the market prices on the underlying futures contract or
securities.
Although certain risks are involved in options, the Adviser believes
that the futures and options strategies to be utilized by the Fund will not
subject its Portfolios to the same risks associated with speculative use of
futures and options transactions.
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OPTIONS ON FOREIGN CURRENCIES
- --------------------------------------------------------------------------------
Each Portfolio may purchase and write options on foreign currencies for
hedging purposes in a manner similar to that in which futures contracts on
foreign currencies, or forward contracts will be utilized. For example, a
decline in the dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
diminution in the value of portfolio securities, a Portfolio may purchase put
options on the foreign currency. If the value of the currency does decline, a
Portfolio will have the right to sell such currency for a fixed amount in
<PAGE>
-9-
dollars and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to a Portfolio derived from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, a Portfolio could sustain losses on transactions
in foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Each Portfolio may write options on foreign currencies for the same
types of hedging purposes. For example, where a Portfolio anticipates a decline
in the dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, it could, instead of purchasing a put option,
write a call option on the relevant currency. If the anticipated decline occurs,
the option will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a
Portfolio could write a put option on the relevant currency which, if exchange
rates move in the manner projected, will expire unexercised and allow a
Portfolio to hedge such increased cost up to the amount of the premium. As in
the case of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium, and
only if exchange rates move in the expected direction. If this does not occur,
the option may be exercised and a Portfolio would be required to purchase or
sell the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, a Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
Each Portfolio intends to write covered call options on foreign
currencies. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by the Fund's custodian) upon conversion or exchange of
<PAGE>
-10-
other foreign currency held in its portfolio. A call option is also covered if a
Portfolio (a) maintains in a segregated account cash, U.S. Government securities
or other high-grade liquid debt securities in an amount not less than the value
of the underlying foreign currency in U.S. dollars marked-to-market daily or (b)
owns a call on the same foreign currency and in the same principal amount as the
call written where the exercise price of the call held (i) is equal to or less
than the exercise price of the call written or (ii) is greater than the exercise
price of the call written if the difference is maintained by the Portfolio in
cash, U.S. Government securities or other high grade liquid debt securities in a
segregated account with the Fund's custodian.
Each Portfolio also intends to write call options on foreign currencies
for cross-hedging purposes. A call option on a foreign currency is considered to
be used for cross-hedging purposes if it is designed to provide a hedge against
a decline in the U.S. dollar value of a security which the Portfolio owns or has
the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, a
Portfolio will collateralize the option by maintaining in a segregated account
with the Fund's custodian, cash or U.S. Government securities or other high
grade liquid debt securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked to market daily.
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RISKS OF OPTIONS ON FUTURES CONTRACTS,
FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
- --------------------------------------------------------------------------------
Options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchase of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moveover, the option writer and a trader of forward contracts could lose amounts
<PAGE>
-11-
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Furthermore, a liquid
secondary market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options of foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing members, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in a Portfolio'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) lesser trading volume.
<PAGE>
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INTEREST RATE AND CURRENCY SWAPS
- --------------------------------------------------------------------------------
The Fixed Income Portfolio may enter into transactions known as
interest rate and/or currency swaps. An interest rate swap is an agreement to
exchange the interest income generated by one fixed-income instrument for the
interest income generated by another fixed-income instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes fixed interest rates and
prices, interest rate indices, fixed-income indices, stock indices and commodity
indices (as well as amounts derived from arithmetic operations on these
indices). For example, a Portfolio may agree to swap the income stream generated
by a fixed rate instrument which it already owns for the income stream generated
by a variable rate instrument owned by another party. The currency swaps in
which the Fixed Income Portfolio may engage will generally involve an agreement
to pay interest streams calculated by reference to interest income linked to a
specified index in one currency in exchange for a specified index in another
currency. Such swaps may involve initial and/or final exchanges that correspond
to the agreed upon notional amount.
The swaps in which the Fixed Income Portfolio may engage also include
rate caps, floors and collars under which one party pays a single or periodic
fixed amount (or premium), and the other party pays periodic amounts based on
the movement of a specified index.
The Fixed Income Portfolio 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 Portfolio receiving
or paying, as the case may be, only the net amount of the two payments. The
Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, or high grade
debt obligations, to avoid any potential leveraging of the Portfolio. Inasmuch
as these swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Fund does not believe such obligations constitute "senior
securities" under the 1940 Act and, accordingly, will not treat them as being
subject to its borrowing restrictions.
Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
<PAGE>
-13-
interest rate swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Portfolio 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 banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
The use of interest rate and currency swaps is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the forecasts of
market values, interest rates and currency exchange rates which form the basis
for the Fixed Income Portfolio's interest rate and currency swaps are incorrect,
the investment performance of a Portfolio would be less favorable than it would
have been if this investment technique were not used.
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TAX ASPECTS OF OPTIONS, FUTURES,
FORWARD CONTRACTS AND SWAP AGREEMENTS
- --------------------------------------------------------------------------------
Some of the options, futures contracts, forward contracts and swap
agreements entered into by a Portfolio may be "Section 1256 contracts." Section
1256 contracts held by a Portfolio at the end of its taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the
Internal Revenue Code of 1986, as amended (the "Code"), are "marked to market"
with unrealized gains or losses treated as though they were realized. Any gains
or losses, including "marked to market" gains or losses, on Section 1256
contracts other than forward contracts are generally 60% long-term and 40%
short-term capital gains or losses although certain foreign currency gains and
losses from such contracts may be treated as ordinary in character.
<PAGE>
-14-
Generally, hedging transactions and certain other transactions in
options, futures, forward contracts and swap agreements undertaken by a
Portfolio, may result in "straddles" for U.S. federal income tax purposes. The
straddle rules may affect the character of gain or loss realized by a Portfolio.
In addition, losses realized by a Portfolio on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken into
account in calculating the taxable income for the taxable year in which such
losses are realized. Because only a few regulations implementing the straddle
rules have been promulgated, the tax consequences of transactions in options,
futures, forward contracts and swap agreements to a Portfolio are not entirely
clear. The transactions may increase the amount of short-term capital gain
realized by a Portfolio. Short-term capital gain is taxed as ordinary income
when distributed to shareholders.
A Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If a Portfolio makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Portfolio that did not engage in such hedging transactions.
Certain requirements of the Code, such as the 30% limitation on gains
from the disposition of certain options, futures, forward contracts and swap
agreements held less than three months, and the qualifying income and
diversification requirements applicable to a Portfolio's assets may limit the
extent to which a Portfolio will be able to engage in these transactions.
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FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
- --------------------------------------------------------------------------------
The following discussion relates to certain foreign currency
exchange-related securities in which the Fixed Income Portfolio may invest.
<PAGE>
-15-
FOREIGN CURRENCY WARRANTS
Foreign currency warrants are warrants which entitle the holder to
receive from their issuer an amount of cash (generally, for warrants issued in
the United States, in U.S. dollars) which is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the OCC. Unlike foreign
currency options issued by the OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions
affecting exchange rates or in the event of the imposition of other regulatory
controls affecting the international currency markets. The initial public
<PAGE>
-16-
offering price of foreign currency warrants is generally considerably in excess
of the price that a commercial user of foreign currencies might pay in the
interbank market for a comparable option involving significantly larger amounts
of foreign currencies. Foreign currency warrants are subject to complex
political or economic factors.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES
Principal exchange rate linked securities are debt obligations the
principal on which is payable at maturity in an amount that may vary based on
the exchange rate between the U.S. dollar and a particular foreign currency at
or about that time. The return on "standard" principal exchange rate linked
securities is enhanced if the foreign currency to which the security is linked
appreciates against the U.S. dollar, and is adversely affected by increases in
the foreign exchange value of the U.S. dollar; "reverse" principal exchange rate
linked securities are like the "standard" securities, except that their return
is enhanced by increases in the value of the U.S. dollar and adversely impacted
by increases in the value of foreign currency. Interest payments on the
securities are generally made in U.S. dollars at rates that reflect the degree
of foreign currency risk assumed or given up by the purchaser of the notes
(i.e., at relatively higher interest rates if the purchaser has assumed some of
the foreign exchange risk, or relatively lower interest rates if the issuer has
assumed some of the foreign exchange risk, based on the expectations of the
current market). Principal exchange rate linked securities may in limited cases
be subject to acceleration of maturity (generally, not without the consent of
the holders of the securities), which may have an adverse impact on the value of
the principal payment to be made at maturity.
PERFORMANCE INDEXED PAPER
Performance indexed paper is U.S. dollar-denominated commercial paper
the yield of which is linked to certain foreign exchange rate movements. The
yield to the investor on performance indexed paper is between the U.S. dollar
and a designated currency as of or about that time (generally, the index
maturity two days prior to maturity). The yield to the investor will be within a
range stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of
return that is above, market yields on U.S. dollar-denominated commercial paper,
with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
<PAGE>
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RULE 144A SECURITIES
As indicated in the Prospectus, each of the Portfolios may purchase
certain restricted securities ("Rule 144A securities"), as contemplated by Rule
144A under the Securities Act of 1933, as amended (the "1933 Act"). Rule 144A
provides an exemption from the registration requirements of the 1933 Act for the
resale of certain restricted securities to qualified institutional buyers.
Rule 144A securities may be liquid or illiquid, depending upon whether
there is a secondary market of qualified institutional buyers of such Rule 144A
securities. There is no assurance that a liquid market for any particular Rule
144A securities will develop or be maintained. In promulgating Rule 144A the SEC
stated that the ultimate responsibility for liquidity determinations is that of
an investment company's board of directors, although the board may delegate the
day-to-day function of determining liquidity to the portfolio's investment
adviser, provided that the board retains sufficient oversight. The Board of
Directors has adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A are liquid or
illiquid for purposes of a Portfolio's limitation on investment in illiquid
securities. Pursuant to those policies and procedures, the Board of Directors
has delegated to MA&S the determination as to whether a particular security is
liquid or illiquid, requiring that consideration be given to, among other
things, the frequency of trades and quotes for the security, the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers, dealer undertakings to make a market in the security, the
nature of the security and the time needed to dispose of the security. The Board
of Directors periodically reviews purchases and sales of Rule 144A securities.
To the extent that liquid Rule 144A securities held by a Portfolio
become illiquid due to the lack of sufficient qualified institutional buyers or
market or other conditions, the percentage of a Portfolio's assets invested in
illiquid assets would increase. MA&S, under the supervision of the Board of
Directors, will monitor investments in Rule 144A securities and will consider
appropriate measures to enable a Portfolio to maintain sufficient liquidity for
operating purposes and to meet redemption requests.
<PAGE>
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ADDITIONAL INFORMATION CONCERNING TAXES
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IN GENERAL
Each Portfolio intends to qualify as a regulated investment company (a
"RIC") under Subchapter M of the Code during 1993 and to continue to so qualify
in subsequent years. Qualification as a RIC requires, among other things, that
each Portfolio: (a) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
(b) derive less than 30% of its gross income in each taxable year from the sale
or other disposition of any of the following held for less than three months:
(i) stock or securities, (ii) options, futures, or forward contracts, or (iii)
foreign currencies (or foreign currency options, futures or forward contracts)
that are not directly related to its principal business of investing in stock or
securities (or options and futures with respect to stocks or securities) (the
"30% limitation"); and (c) diversify its holdings so that, at the end of each
quarter of each taxable year, (i) at least 50% of the market value of the
Portfolio's assets is represented by cash, cash items, U.S. Government
securities, securities of other regulated investment companies and other
securities with such other securities limited, in respect of any issuer, to an
amount not greater than 5% of the value of the Portfolio's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of any one
issuer. Proposed legislation has been recently introduced that would repeal the
30% limitation described in (b) above. It is currently unclear whether the
proposed legislation will become law and, if enacted, the form it will take.
Investors should consider the tax implications of buying shares just
prior to distribution. Although the price of shares purchased at that time may
reflect the amount of the forthcoming distribution, those purchasing just prior
to a distribution will receive a distribution which will nevertheless be taxable
to them.
Gain or loss, if any, on the sale or other disposition of shares of
each of the Portfolios will generally result in capital gain or loss to
shareholders. Generally, a shareholder's gain or loss will be a long-term gain
or loss if the shares have been held for more than one year. If a shareholder
<PAGE>
-19-
sells or otherwise disposes of a share of a Portfolio before holding it for more
than six months, any loss on the sale or other disposition of such share shall
be treated as a long-term capital loss to the extent of any capital gain
dividends received by the shareholder with respect to such share, or shall be
disallowed to the extent of any exempt-interest dividend. Currently, the maximum
federal income tax rate imposed on individuals with respect to net realized
long-term capital gains is lower than the maximum federal income tax rate
imposed on individuals with respect to net realized short-term capital gains
(which are taxed at the same rates as ordinary income).
Each Portfolio's investments in options, futures contracts and forward
contracts, options on futures contracts and stock indices and certain other
securities, including transactions involving actual or deemed short sales or
foreign exchange gains or losses are subject to many complex and special tax
rules. For example, over-the-counter options on debt securities and equity
options, including options on stock and on narrow-based stock indexes, will be
subject to tax under Section 1234 of the Code, generally producing a long-term
or short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security. By contrast, each
Portfolio's treatment of certain other options, futures and forward contracts
entered into by the Portfolio is generally governed by Section 1256 of the Code.
These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities indexes,
options on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position
held by the Portfolios will be marked-to-market (i.e., treated as if it were
sold for fair market value) on the last business day of the Portfolios' fiscal
year, and all gain or loss associated with fiscal year transactions and
mark-to-market positions at fiscal year end (except certain currency gain or
loss covered by Section 988 of the Code) will generally be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. The
effect of Section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into short-term
capital gains or short-term capital losses into long-term capital losses within
the Portfolios. The acceleration of income on Section 1256 positions may require
the Portfolios to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, the Portfolios may be required to dispose of portfolio securities that
they otherwise would have continued to hold or to use cash flows from other
sources such as the sale of Portfolio shares. In these ways, any or all of these
<PAGE>
-20-
rules may affect the amount, character and timing of income earned and in turn
distributed to shareholders by the Portfolios.
When the Portfolios hold options or contracts which substantially
diminish their risk of loss with respect to other positions (as might occur in
some hedging transactions), this combination of positions could be treated as a
"straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Portfolio securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles, i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, each Portfolio is also subject to
the requirement that less than 30% of its annual gross income be derived from
the sale or other disposition of securities and certain other investments held
for less than three months ("short-short income"). This requirement may limit
the Portfolios' ability to engage in options, spreads, straddles, hedging
transactions, forward or futures contracts or options on any of these positions
because these transactions are often consummated in less than three months, may
require the sale of portfolio securities held less than three months and may, as
in the case of short sales of portfolio securities reduce the holding periods of
certain securities within the Portfolios, resulting in additional short-short
income for the Portfolios.
Each Portfolio will monitor its transactions in such options and
contracts and may make certain other tax elections in order to mitigate the
effect of the above rules and to prevent disqualification of the Portfolio as a
regulated investment company under Subchapter M of the Code.
The Fixed Income Portfolio may make investments that produce income
that is not matched by a corresponding cash distribution to the Portfolio, such
as investments in POs or other obligations having original issue discount (i.e.,
an amount equal to the excess of the stated redemption price of the security at
maturity over its issue price), or market discount (i.e., an amount equal to the
excess of the stated redemption price of the security over the basis of such
bond immediately after it was acquired) if the Portfolio elects to accrue market
discount on a current basis. In addition, income may continue to accrue for
federal income tax purposes with respect to a non-performing investment. Any
such income would be treated as income earned by the Portfolio and therefore
would be subject to the distribution requirements of the Code. Because such
income may not be matched by a corresponding cash distribution to the Portfolio,
it may be required to borrow money or dispose of other securities to be able to
make distriubtions to its investors. The extent to which the Portfolio may
<PAGE>
-21-
liquidate securities at a gain may be limited by the 30% limitation discussed
above. In addition, if an election is not made to currently accrue market
discount with respect to a market discount bond, all or a portion of any
deduction for any interest expense incurred to purchase or hold such bond may be
deferred until such bond is sold or otherwise disposed.
Each Portfolio will limit its equity investments in non-U.S.
corporations which would be treated as passive foreign investment companies
("PFICs") under the Code in order to avoid adverse tax consequences upon the
disposition of, or the receipt of "excess distributions" with respect to, such
equity investments. To the extent the Portfolios do invest in PFICs, they may
adopt certain tax strategies to reduce or eliminate the adverse effects of
certain federal tax provisions governing PFIC investments. Many non-U.S. banks
and insurance companies may not be treated as PFICs if they satisfy certain
technical requirements under the Code. To the extent that the Portfolios do
invest in foreign securities that are determined to be PFIC securities and are
required to pay a tax on such investments, a credit for this tax would not be
allowed to be passed through to the Portfolios' shareholders. Therefore, the
payment of this tax would reduce the Portfolios' economic return from their PFIC
investments. Gains from dispositions of PFIC shares and excess distributions
received with respect to such shares are treated as ordinary income rather than
capital gains. For these and other operations reasons, the Portfolios will
generally avoid, where possible, investment in foreign securities that are known
to be or potentially may be classified as PFIC securities.
Legislation pending in the U.S. Congress would unify and, in certain
cases, modify the anti-deferral rules contained in various provisions of the
Code, including the provisions dealing with PFICs, related to the taxation of
U.S. shareholders of foreign corporations. In the case of a passive foreign
company, as defined in the proposed legislation ("PFC"), having "marketable
stock," the proposed legislation would require U.S. shareholders, such as a
Portfolio, owning less than 25% of a PFC that is not U.S.-controlled to
mark-to-market the PFC stock annually, unless the shareholders elected to
include in income currently their proportionate shares of the PFC's income and
gain. Otherwise, U.S. shareholders would be treated substantially the same as
under current law. Special rules applicable to mutual funds would classify as
"marketable stock" all stock in PFCs held by a Portfolio; however, the Fund
would not be liable for tax on income from PFCs that is distributed to its
shareholders. It is unclear if or when the proposed legislation will become law
and if it is enacted the form it would take. Moreover, on March 31, 1992, the
Internal Revenue Service ("IRS") released proposed regulations providing a
mark-to-market election for regulated investment companies that would have
<PAGE>
-22-
effects similar to the proposed legislation. These regulations would be
effective for taxable years ending after promulgation of the regulations as
final regulations. The IRS subsequently issued a notice indicating that final
regulations will provide that regulated investment companies may elect the
mark-to-market election for tax years ending after March 31, 1992 and beginning
before April 1, 1993. Whether and to what extent the notice will apply to
taxable years of a Portfolio is unclear.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
payee fails to furnish the Fund with the payee's correct taxpayer identification
number, (ii) the IRS notifies the Fund that the payee has failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect, or (iii) when required to do so, the payee fails to
certify that he or she is not subject to backup withholding.
The foregoing discussion is only a brief summary of certain additional
tax considerations affecting the Fund, its Portfolios and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign tax concerns, and the discussion set forth here and in the
Prospectus is not intended as a substitute for careful tax planning. Investors
are urged to consult their own tax advisers with specific questions relating to
federal, state, local and foreign taxes.
- --------------------------------------------------------------------------------
INVESTMENT SUITABILITY
- --------------------------------------------------------------------------------
Section 404 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), imposes certain duties on fiduciaries of employee benefit
plans which are subject to its provisions. While ERISA does not prohibit a
fiduciary from investing in any specific type of asset, it does require a
fiduciary to discharge his or her duties solely in the interest of plan
participants and their beneficiaries with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the conduct of an
enterprise of like character and with like aims. In addition, Section 404 of
ERISA requires a fiduciary to diversify the investments of a plan so as to
minimize the risk of large losses, unless under the circumstances it is clearly
prudent not to do so. Plan fiduciaries should give appropriate consideration to
all relevant factors in deciding whether to authorize the purchase of shares of
<PAGE>
-23-
the Fund's Portfolios, including the opportunity for gain and the risk of loss,
the plan's overall investment portfolio and its needs for diversification,
liquidity, current return relative to anticipated cash flow requirements, and
projected return relative to funding objectives.
The foregoing discussion is merely a summary of certain issues that a
fiduciary of an employee benefit plan investor should evaluate when considering
an investment in the Fund. Fiduciaries are urged to consult with their legal
advisers before investing plan assets in shares of the Fund's Portfolios.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
For information pertaining to the manner in which shares of each
Portfolio are offered to the public, see the Prospectus, "Purchase of Shares."
The Fund reserves the right, in its sole discretion, to (i) suspend the offering
of shares of its Portfolios, and (ii) reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interest of
the Fund. The officers of the Fund may, from time to time, waive the minimum
initial and subsequent investment requirements.
If LTCB-MAS Investment Management, Inc. ("LTCB-MAS") or one of its
affiliates has a pre-existing fiduciary relationship with an employee benefit
plan investor, an independent named fiduciary of the plan must provide prior
written authorization of the plan's investment in the Fund on an Employee
Benefit Plan Fiduciary Authorization Form (provided with the Prospectus).
If accepted by a Portfolio, shares of a Portfolio may be purchased in
exchange for securities which are eligible for acquisition by the Portfolio as
described in the Fund's Prospectus. Securities to be exchanged which are
accepted by a Portfolio will be valued in accordance with the procedures
referenced under "Valuation of Shares" in the Fund's Prospectus at the time of
the next determination of net asset value after such acceptance. Shares issued
by a Portfolio in exchange for securities will be issued at net asset value
determined as of the same time. All dividends, interest, subscription, or other
rights pertaining to such securities shall become the property of the Portfolio
whose shares are being acquired and must be delivered to the Portfolio by the
investor upon receipt from the issuer.
The Portfolios will accept securities for their portfolios in exchange
for shares issued by them, but only if (1) such securities are, at the time of
the exchange, eligible to be included in the Portfolio whose shares are to be
<PAGE>
-24-
issued and current market quotations are readily available for such securities;
(2) the investor represents and agrees that all securities offered to be
exchanged are not subject to any restrictions upon their sale by the Portfolio
under the 1933 Act or under the laws of the country in which the principal
market for such securities exists, or otherwise; (3) the value of any such
security (except U.S. Government securities) being exchanged together with other
securities of the same issuer owned by the Portfolio will not exceed 5% of the
net assets of the Portfolio immediately after the transaction; and (4) such
securities are consistent with the Portfolio's investment objective and
policies, as applied by the Adviser (as defined under "Investment Management"
below), and otherwise acceptable to the Adviser in its sole discretion.
A gain or loss for federal income tax purposes may be realized by
taxable investors making in-kind purchases upon the exchange depending upon the
cost of the securities exchanged. Investors interested in such exchanges should
contact LTCB-MAS.
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REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange (the "NYSE") or
the bond market is closed, or trading on the NYSE is restricted as determined by
the SEC, (ii) during any period when an emergency exists as defined by the rules
of the SEC as a result of which it is not reasonably practicable for a Portfolio
to dispose of securities owned by it, or fairly to determine the value of its
assets, and (iii) for such other periods as the SEC may permit.
The Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Portfolio
at the beginning of such period. Such commitment is irrevocable without the
prior approval of the SEC. Redemptions in excess of the above limits may be paid
in whole or in part in investment securities or in cash, as the Board of
Directors may deem advisable; however, payment will be made wholly in cash
unless the Board of Directors believes that economic or market conditions exist
which would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be valued
as set forth in the Fund's Prospectus under "Valuation of Shares" and redeeming
shareholders would normally incur brokerage expenses if they converted these
securities to cash.
<PAGE>
-25-
No charge is made by a Portfolio for redemptions. Redemption proceeds
may be more or less than the shareholder's cost depending on the market value of
the securities held by a Portfolio.
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DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
EQUITY PORTFOLIO
Net asset value per share is determined by dividing the total market
value of the Equity Portfolio's investments and other assets, less any
liabilities, by the total outstanding shares of the Portfolio. Net asset value
per share is determined as of 4:15 p.m., New York time, on each day that the
NYSE and the Portfolio are open for business. Securities listed on a U.S.
securities exchange or NASDAQ for which market quotations are available are
valued at the last quoted sale price on the day the valuation is made. Price
information on listed securities is taken from the exchange where the security
is primarily traded. Securities listed on a foreign exchange are valued at the
latest quoted sales price available on the exchange where they are primarily
traded before the time when assets are valued. For purposes of net asset value
per share, all assets and liabilities initially expressed in foreign currencies
are converted into U.S. dollars at the bid price of such currencies against U.S.
dollars last quoted by any major bank. Unlisted securities and listed U.S.
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean of the most recent quoted bid and asked
price. The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good faith
at fair value using methods approved by the Board of Directors.
FIXED INCOME PORTFOLIO
Net asset value per share is computed by dividing the total value of
the investments and other assets of the Portfolio, less any liabilities, by the
total outstanding shares of the Portfolio. The net asset value per share is
determined as of 4:15 p.m., New York time, on each day that the NYSE and the
Portfolio are open for business. Securities listed on a foreign exchange are
valued at the latest quoted sales price available on the exchange where they are
primarily traded before the time when assets are valued. For purposes of net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars at the bid price of such
currencies against U.S. dollars last quoted by any major bank.
<PAGE>
-26-
Net asset value includes interest on fixed-income securities which is
accrued daily. Securities which are traded over-the-counter and on a stock
exchange will be valued according to the broadest and most representative
market, and it is expected that for bonds and other fixed-income securities this
ordinarily will be the over-the-counter market.
However, bonds and other fixed-income securities may be valued on the
basis of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by a
pricing service are determined without regard to bid or last sale prices but
take into account institutional size trading in similar groups of securities and
any developments related to specific securities. Securities not priced in this
manner are valued at the most recent quoted bid price, or when stock exchange
valuations are used, at the latest quoted sale price on the day of valuation. If
there is no such reported sale, the latest quoted bid price will be used.
Securities with remaining maturities of 60 days or less are valued at amortized
cost unless the Board of Directors determines that amortized cost does not
reflect fair value. In the event that amortized cost does not approximate
market, market prices as determined above will be used. Other assets and
securities, for which no quotations are readily available, will be valued in
good faith at fair value using methods approved by the Board of Directors.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The following supplements the shareholder services set forth in the
Fund's Prospectus:
EXCHANGE PRIVILEGE
Shares of each Portfolio of the Fund may be exchanged for shares of the
Fund's other Portfolio. Exchange requests should be made as described in the
Prospectus. Any such exchange will be based on the respective net asset values
of the shares involved. There is no sales commission or charge of any kind.
Before making an exchange, a shareholder should consider the investment
objective of the Portfolio to be purchased. Exchange requests may be made either
by mail or telephone. Telephone exchanges (referred to as "expedited exchanges")
will be accepted only if the certificates for the shares to be exchanged are
held by the Fund for the account of the shareholder and the registration of the
two accounts is identical. Requests for expedited exchanges received prior to
4:15 p.m. (New York time) will be processed as of the close of business on the
<PAGE>
-27-
same day. Requests received after this time will be processed on the next
business day. Expedited exchanges may also be subject to limitations as to
amounts or frequency, and to other restrictions established by the Board of
Directors to assure that such exchanges do not disadvantage the Fund and its
shareholders.
For federal income tax purposes, an exchange between Portfolios of the
Fund is a taxable event, and, accordingly, a capital gain or loss may be
realized. In a revenue ruling relating to circumstances similar to the Fund's,
an exchange between a series of a fund was deemed to be a taxable event. It is
likely, therefore, that a capital gain or loss would be realized on an exchange
between Portfolios; shareholders may want to consult their tax advisers for
further information in this regard. The exchange privilege may be modified or
terminated at any time.
TRANSFER OF SHARES
Shareholders may transfer shares of the Fund's Portfolios to another
person by written request to the Minerva Fund, Inc., P.O. Box 4490, New York,
New York 10163. The request should clearly identify the account and number of
shares to be transferred and include the signature of all registered owners and
all share certificates, if any, which are subject to the transfer. The signature
on the letter of request, the share certificate or any stock power must be
guaranteed in the same manner as described under "Redemption of Shares" in the
Prospectus. As in the case of redemptions, the written request must be received
in good order before any transfer can be made.
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INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
Each Portfolio of the Fund is subject to the following restrictions
which are fundamental policies and may not be changed without the approval of
the lesser of: (1) at least 67% of the voting securities of the Portfolio
present at a meeting if the holders of more than 50% of the outstanding voting
securities of the Portfolio are present or represented by proxy, or (2) more
than 50% of the outstanding voting securities of the Portfolio. Each Portfolio
will not:
(a) invest in physical commodities or contracts on physical commodities;
(b) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real
estate limited partnerships, and may purchase and sell marketable
securities which are secured by interests in real estate;
<PAGE>
-28-
(c) make loans except (i) by purchasing debt securities in accordance
with its investment objective and policies, or entering into repurchase
agreements, subject to the applicable limitations of its investment
policies, (ii) by lending its portfolio securities;
(d) with respect to 75% of its assets, purchase a security if, as a
result, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any issuer;
(e) with respect to 75% of its assets, purchase securities of any issuer
if, as a result, more than 5% of the Portfolio's total assets, taken at
market value at the time of such investment, would be invested in
securities of such issuer except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities;
(f) borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes or (ii) in connection with reverse repurchase
agreements provided that (i) and (ii) in combination do not exceed
33-1/3% of the Portfolio's total assets (including the amount borrowed)
less liabilities (exclusive of borrowings), provided, however, that
trading in futures contracts, options on futures contracts and options
and entering into swap transactions shall not be deemed to involve a
"borrowing" for purposes of this limitation, and provided further that
additional portfolio securities may not be purchased by a Portfolio
while borrowings and reverse repurchase agreements exceed 5% of the
Portfolio's total assets;
(g) underwrite the securities of other issuers (except to the extent
that the Portfolio may be deemed to be an underwriter within the meaning
of the 1933 Act in the disposition of restricted securities); and
(h) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the
Portfolio's total assets would be invested in securities of companies
within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, or instruments
issued by U.S. banks when any such Portfolio adopts a temporary
defensive position.
In addition to the foregoing fundamental limitations, as a matter of
non-fundamental operating policy, each Portfolio will not:
<PAGE>
-29-
(1) enter into futures contracts, options on futures contracts or
options to the extent that its aggregate net outstanding obligation
under such instruments exceeds 35% of the Portfolio's total assets;
(2) invest in puts, calls, straddles or spreads, except as described
above in (1);
(3) invest in warrants, valued at the lower of cost or market, in excess
of 5% of the value of its net assets. Included within that amount, but
not to exceed 2% of the value of the Portfolio's net assets, may be
warrants that are not listed on the New York or American Stock Exchanges
or an exchange with comparable listing requirements. Warrants attached
to securities are not subject to this limitation;
(4) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, but it
may make margin deposits in connection with transactions in options,
futures and options on futures; or sell short unless, by virtue of its
ownership of other securities, it has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right
is conditional, the sale is made upon the same conditions. Transactions
in futures contracts and options are not deemed to constitute selling
securities short;
(5) purchase or retain securities of an issuer if those officers or
Directors of the Fund or its investment manager owning more than 1/2 of
1% of such securities together own more than 5% of such securities;
(6) borrow money other than from banks;
(7) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33-1/3% of its total assets at fair market value;
(8) invest more than an aggregate of 15% of the total assets of the
Portfolio, determined at the time of investment, in securities subject
to legal or contractual restrictions on resale or securities for which
there are no readily available markets, including repurchase agreements
having maturities of more than seven days and over-the-counter options,
provided that there is no limitation with respect to or arising out of
investment in (i) securities that have legal or contractual restrictions
on resale but have a readily available market or (ii) securities that
are not registered under the 1933 Act but which can be sold to qualified
institutional investors in accordance with Rule 144A under the 1933 Act;
<PAGE>
-30-
(9) invest for the purpose of exercising control over management of any
company;
(10) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers'
commissions or in connection with mergers, acquisitions of assets or
consolidations and except as may otherwise be permitted by the 1940 Act;
(11) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous operation;
and
(12) write or acquire options on interests in oil, gas or other mineral
exploration or development programs or leases.
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS OF THE FUND
- --------------------------------------------------------------------------------
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Board of Directors sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past 5 years are set forth in the Fund's
prospectus.
The Fund pays each Director an annual fee of $2,000 plus a fee of $500
and reimbursement for travel and other expenses per Board meeting attended. The
Fund's officers are paid by Furman Selz Incorporated ("Furman Selz").
- --------------------------------------------------------------------------------
DIRECTOR COMPENSATION
(for fiscal year ended September 30, 1995)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pension or Total
Aggregate Retirement Compensation
Name of Compensa- Benefits Accrued Estimated Annual From Registrant
Person, tion From As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Directors
- -------- ---------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
James D. Schmid $ 0 N/A $
Director
Carl T. Hagberg $ 0 N/A $
Director
Raymond F. Miller $ 0 N/A $
Director
Charles A. Parker* $ 0 N/A $
Director
- ------------
* Elected to the Board on September 6, 1995.
</TABLE>
<PAGE>
-31-
As of November 14, 1995, the Directors and Officers, as a group did not
own 1% or more of the Fund.
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
LTCB-MAS acts as the Fund's investment manager and has overall
responsibility for supervising the investment program of each Portfolio.
LTCB-MAS, a joint subsidiary of The Long-Term Credit Bank of Japan, Limited
("LTCB") and MA&S, is registered under the Investment Advisers Act of 1940, as
amended and provides investment counselling services to employee benefit plans
and other institutional investors. As of September 30, 1995, LTCB-MAS had assets
under management in excess of $_____ million. LTCB, with over $___ billion in
assets as of September 30, 1995, is one of the 25 largest banks in the world.
MA&S provides investment counselling services primarily to institutional
investors and as of September 30, 1995, had assets under management in excess of
$ ____ billion. The selection on a day-to-day basis of appropriate investments
for each Portfolio is made by MA&S acting in collaboration with and under the
supervision of LTCB-MAS. As used in this Statement of Additional Information,
the term "Adviser" refers to LTCB-MAS and MA&S acting in collaboration in the
provision of investment advisory services to the Fund's Portfolios.
[Sixty percent of the outstanding capital stock of LTCB-MAS is owned by
LTCB Capital Markets, Inc. ("LCM") which, in turn, is wholly owned by LTCB.
Forty percent of the outstanding capital stock of LTCB-MAS is owned by MA&S. LCM
owns a non-voting limited partnership interest in MA&S equal to approximately
eighteen percent of the total equity of MA&S. The principal offices of LTCB-MAS
are located at One Tower Bridge, Suite 1000, West Conshohocken, Pennsylvania
19428. The principal offices of MA&S are located at One Tower Bridge, Suite
1150, West Conshohocken, Pennsylvania 19428.]
Pursuant to an investment management agreement (the "Investment
Management Agreement") with the Fund, LTCB-MAS has responsibility for the
investment and reinvestment of the assets of each Portfolio and will supervise
the investment program of each Portfolio in accordance with the stated
investment objective and policies of each Portfolio. The activities of LTCB-MAS
as investment manager shall remain under the control and supervision of the
Fund's Board of Directors. LTCB-MAS shall advise and consult with MA&S regarding
each Portfolio's overall investment strategy and consult with MA&S on at least a
weekly basis regarding specific decisions concerning the purchase, sale or
holding of particular securities. As compensation for the services rendered by
LTCB-MAS under the Investment Management Agreement, each Portfolio will pay
LTCB-MAS an investment management fee calculated and accrued daily and paid
monthly, based on the following annual percentage rates, to the Portfolio's
average daily net assets for the month:
<PAGE>
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RATE
----
Equity Portfolio .50%
Fixed Income Portfolio .375%
For the fiscal year ended September 30, 1995, LTCB-MAS waived its
entire fee of $______ for the Equity Portfolio and $______ for the Fixed Income
Portfolio. [In addition, LCM voluntarily reimbursed expenses of $_____ on the
Fixed Income Portfolio for the fiscal year ended September 30, 1995.]
For the fiscal period ended September 30, 1994, LTCB-MAS waived its
entire fee of $50,780 for the Equity Portfolio and $10,124 for the Fixed Income
Portfolio. In addition, LCM voluntarily reimbursed expenses of $41,177 on the
Fixed Income Portfolio for the fiscal period ended September 30, 1994.
Pursuant to an investment services agreement (the "Investment Services
Agreement") between LTCB-MAS and MA&S, MA&S, acting in collaboration with and
under the supervision of LTCB-MAS, is responsible on a day-to-day basis for
selecting investments for each Portfolio in conformity with the stated
investment objective and policies of each Portfolio. MA&S will place purchase
and sale orders for each Portfolio's portfolio securities. MA&S receives no fee
pursuant to the Investment Services Agreement for the services it provides.
In cases where a shareholder of either of the Portfolios has an
investment counselling relationship with LTCB-MAS, LTCB-MAS may reduce the
investment counselling fees paid by the client directly to LTCB-MAS. This
procedure will be utilized with clients having contractual relationships based
on total assets managed by LTCB-MAS to avoid situations where excess investment
management fees might be paid to LTCB-MAS. In no event will a client pay higher
total investment management fees as a result of the client's investment in the
Fund.
MA&S has entered into an agreement to be acquired by Morgan Stanley
Group Inc. In connection with that transaction, the 40% of the outstanding
capital stock of LTCB-MAS currently held by MA&S will also be acquired by one or
more affiliates of Morgan Stanley Group Inc. Each of LTCB-MAS and MA&S will
retain its name and remain at its current location. Consummation of the
transaction with Morgan Stanley Group Inc. will cause a termination of the
current investment management agreement between the Fund and LTCB-MAS and the
current investment services agreement between LTCB-MAS and MA&S. At a special
meeting held on September 29, 1995, the Fund's shareholders voted to approve a
new investment management agreement with LTCB-MAS and a new investment services
agreement between LTCB-MAS and MA&S, which agreements will take effect upon the
consummation of the transaction. The new investment management and investment
services agreements are substantially identical to the Investment Management
<PAGE>
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Agreement and Investment Services Agreement, respectively. If the acquisition of
MA&S is consummated, these new agreements will remain in effect for an initial
two year period and for successive one year periods thereafter upon the annual
approval of the Board of Directors.
The Investment Management Agreement and the Investment Services
Agreement each continues in effect until September 28, 1996 and for successive
one year periods thereafter. These Agreements were recently re-approved at the
September 6, 1996 Board Meeting by a vote of the Fund's Board of Directors,
including the affirmative votes of a majority of the Directors who are not
parties to the agreement or "interested persons" (as defined in the 1940 Act) of
any such party in person at a meeting called for the purpose of considering such
approval. In addition, the question of continuance of the Investment Management
Agreement or the Investment Services Agreement may be presented to the
shareholders of each Portfolio; in such event, continuance shall be effected
only if approved by the affirmative vote of a majority of the outstanding voting
securities of that Portfolio. The Investment Management Agreement and the
Investment Services Agreement are automatically terminated if assigned, and may
be terminated by any Portfolio without penalty, at any time, (1) either by vote
of the Board of Directors or by vote of the outstanding voting securities of a
Portfolio on sixty (60) days' written notice, (2) in the case of the Investment
Management Agreement, by LTCB-MAS upon ninety (90) days' notice to the Fund, or
(3) in the case of the Investment Services Agreement, by LTCB-MAS or MA&S upon
90 days' notice to the Fund and the other party thereto.
The Fund bears all of its own costs and expenses, including: services
of its independent accountants, its administrator and dividend disbursing and
transfer agent, legal counsel, taxes, insurance premiums, costs incidental to
meetings of its shareholders and Board of Directors, the cost of filing its
registration statements under federal and state securities laws, reports to
shareholders, and custodian fees. These Fund expenses are, in turn, allocated to
each Portfolio, based on such Portfolio's relative net assets. Each Portfolio
bears its own advisory fees and brokerage commissions and transfer taxes in
connection with the acquisition and disposition of its investment securities.
LTCB-MAS has agreed to reimburse the Equity Portfolio and the Fixed Income
Portfolio for total annual operating expenses in excess of 1.00% and .80%,
respectively, of average net assets for a period of at least one year from the
date of this Statement of Additional Information.
- --------------------------------------------------------------------------------
DISTRIBUTOR FOR THE FUND
- --------------------------------------------------------------------------------
Furman Selz, with its principal office at 230 Park Avenue, New York,
New York 10169, distributes the shares of the Fund. Under a distribution
<PAGE>
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agreement (the "Distribution Agreement"), Furman Selz, as agent of the Fund,
agrees to use its best efforts as sole distributor of the Fund's shares. Furman
Selz does not receive any fee or other compensation under the Distribution
Agreement which continues in effect so long as such continuance is approved at
least annually by the Fund's Board of Directors, including a majority of those
Directors who are not parties to such Distribution Agreement nor interested
persons of any such party. The Distribution Agreement provides that the Fund
will bear the costs of the registration of its shares with the SEC and various
states and the printing of its prospectuses, statements of additional
information and reports to shareholders.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
The Investment Services Agreement authorizes MA&S to select the brokers
or dealers that will execute the purchases and sales of investment securities
for each of the Fund's Portfolios and directs MA&S to use its best efforts to
obtain the best execution with respect to all transactions for the Portfolios.
In doing so, a Portfolio may pay higher commission rates than the
lowest available when MA&S believes it is reasonable to do so in light of the
value of the research, statistical and pricing services provided by the broker
effecting the transaction.
Total brokerage commissions paid by the Equity Portfolio and the Fixed
Income Portfolio amounted to $______ and $____, respectively, for the fiscal
year ended September 30, 1995 and $18,020 and $0, respectively, for the fiscal
period ended September 30, 1994.
Since shares of the Fund's Portfolios are not marketed through
intermediary brokers or dealers, it is not the Fund's practice to allocate
brokerage or principal business on the basis of sales of shares which may be
made through such firms. However, MA&S may place portfolio orders with qualified
broker-dealers who recommend the Fund's Portfolios or who act as agents in the
purchase of shares of the Portfolios for their clients.
Some securities considered for investment by each of the Fund's
Portfolios may also be appropriate for other clients served by MA&S. If
purchases or sales of securities consistent with the investment policies of a
Portfolio and one or more of these other clients served by MA&S are considered
at or about the same time, transactions in such securities will be allocated
<PAGE>
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among the Portfolio and clients in a manner deemed fair and reasonable by MA&S.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by MA&S, and the results of such allocations,
are subject to periodic review by the Fund's Board of Directors.
- --------------------------------------------------------------------------------
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES
- --------------------------------------------------------------------------------
Furman Selz provides the Fund with administrative and fund accounting
services pursuant to a Fund Administration Agreement dated as of September 28,
1993. The services provided by and the fees payable to Furman Selz for such
services are described in the Prospectus. The Fund Administration Agreement
continues in effect until September 28, 1996 and from year to year thereafter if
such continuance is approved at least annually by the Fund's Board of Directors
and by a majority of the Directors who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any party, and such
Agreement may be terminated by either party on 60 days' written notice.
For the fiscal year ended September 30, 1995, Furman Selz [waived its
entire administrative fees of $_____ and $_____, respectively, from the Equity
Portfolio and the Fixed Income Portfolio. In addition, Furman Selz is entitled
to an annual fee of $30,000 per portfolio for performing fund accounting
services. Furman Selz waived $______ and $_____ for the Equity Portfolio and the
Fixed Income Portfolio, respectively, for the year ended September 30, 1995.]
For the fiscal period ended September 30, 1994, Furman Selz waived its entire
administrative fees of $15,234 and $4,050, respectively, from the Equity
Portfolio and the Fixed Income Portfolio. In addition, for the period ended
September 30, 1995, Furman Selz waived $19,777 and $20,834 for the Equity
Portfolio and the Fixed Income Portfolio, respectively, of the $30,000 annual
fee per portfolio it is entitled to for performing fund accounting services.
Furman Selz serves as the Fund's Transfer Agent and Dividend Disbursing
Agent pursuant to a transfer agency agreement (the "Transfer Agency Agreement")
with the Fund. Under the Transfer Agency Agreement, Furman Selz has agreed,
among other things, to: (i) issue and redeem shares of each Portfolio; (ii)
transmit all communications by each Portfolio to its shareholders of record,
including reports to shareholders, dividend and distribution notices and proxy
materials for meetings of shareholders; (iii) respond to correspondence by
security brokers and others relating to its duties; (iv) maintain shareholder
accounts; and (v) make periodic reports to the Board of Directors concerning the
Portfolios' operations. Under the Transfer Agency Agreement, Furman Selz is
entitled to a fee of $15 per account per year. The Transfer Agency Agreement
<PAGE>
-36-
continues in effect until September 28, 1996 and from year to year thereafter if
such continuance is approved at least annually by the Fund's Board of Directors
and by a majority of the Directors who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any party, and such
Agreement may be terminated by either party on 60 days' written notice. For the
fiscal year ended September 30, 1995, the Equity Portfolio paid [$_____ in
Transfer Agency fees and the Fixed Income Portfolio paid $____ for the same
period.] For the fiscal period ended September 30, 1994, the Equity Portfolio
paid $8,481 in Transfer Agency fees and the Fixed Income Portfolio paid $8,500
for the same period.
LTCB Trust Company (the "Custodian") serves as the Fund's custodian
pursuant to a custodian agreement (the "Custodian Agreement") with the Fund. The
Custodian is located at 165 Broadway, New York, New York 10006. Under the
Custodian Agreement, the Custodian has agreed to (i) maintain a separate account
or accounts in the name of each Portfolio; (ii) hold and disburse portfolio
securities on account of each Portfolio; (iii) collect and receive all income
and other payments and distributions on account of each Portfolio's portfolio
securities; (iv) respond to correspondence by security brokers and others
relating to its duties; and (v) make periodic reports to the Fund's Board of
Directors concerning the Portfolios' operations. The Custodian is authorized
under the Custodian Agreement to select one or more banks or trust companies to
serve as sub-custodian on behalf of the Portfolios, provided that the Custodian
remains responsible for the performance of all of its duties under the Custodian
Agreement. The Custodian under the Custodian Agreement is entitled to receive
monthly fees based upon the types of assets held by each Portfolio, at the
annual rate of up to .05% of the value of assets held in the United States,
depending on the types of assets, and at the annual rate of up to .15% of the
value of assets held outside the United States, depending on country in which
such assets are held; securities transaction fees and income collection fees of
up to $25.00 per transaction involving a security held in the United States and
up to $85.00 per transaction for a security held outside the United States;
specified fees for optional additional services, if utilized; and out-of-pocket
expenses. The Custodian Agreement continues in effect until September 28, 1996
and from year to year thereafter if such continuance is approved at least
annually by the Fund's Board of Directors and by a majority of the Directors who
are not parties to such Agreement or "interested persons" (as defined in the
1940 Act) of any party, and such Agreement may be terminated by either party on
60 days' written notice. LTCB Trust Company is a wholly owned subsidiary of
LTCB.
<PAGE>
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- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
CAPITAL STOCK
For additional information as to the organization and capital stock of
the Fund, see "General Information -- Organization and Capital Stock" in the
Prospectus.
As used in the Prospectus and in this Statement of Additional
Information, the term "majority", when referring to the approvals to be obtained
from shareholders in connection with matters affecting any particular Portfolio
(e.g., approval of advisory contracts), means the vote of the lesser of (i) 67%
of the shares of that Portfolio represented at a meeting if the holders of more
than 50% of the outstanding shares of such Portfolio are present in person or by
proxy, or (ii) more than 50% of the outstanding shares of such Portfolio.
Shareholders are entitled to one vote for each full share held and the
fractional votes for fractional shares held.
The By-Laws of the Fund provide that the Fund shall not be required to
hold an annual meeting of shareholders in any year in which the election of the
Directors to the Fund's Board of Directors is not required to be acted upon
under the 1940 Act.
Each share of a particular Portfolio is entitled to such dividends and
distributions out of the assets belonging to that Portfolio as are declared in
the discretion of the Fund's Board of Directors. In determining a Portfolio's
net asset value, assets belonging to a particular Portfolio are credited with a
proportionate share of any general assets of the Fund not belonging to a
particular Portfolio and are charged with the direct liabilities in respect of
that Portfolio and with a share of the general liabilities of the Fund which are
normally allocated in proportion to the relative net asset values of the
respective Portfolios at the time of allocation.
In the event of the liquidation or dissolution of the Fund, shares of a
Portfolio are entitled to receive the assets attributable to that Portfolio that
are available for distribution, and a proportionate distribution, based upon the
relative net assets of the Portfolios, of any general assets not attributable to
a Portfolio that are available for distribution. Shareholders are not entitled
to any preemptive rights.
Subject to the provisions of the Fund's Articles of Incorporation,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets of the Fund, with
respect to a particular Portfolio are conclusive.
<PAGE>
-38-
As of November 14, 1995, the following persons owned of record and
beneficially 5% or more of the Fund:/
FIXED INCOME PORTFOLIO SHARES OWNED PERCENTAGE
Japan First Development Inc. 335,552.86 98.36%
c/o United States Corporation Co
32 Lockerman Square, Suite L-100
Dover, DE 19901-7421
EQUITY PORTFOLIO
Marine Midland Bank Trustee FBO 517,494.62 49.75%
Dunlop Tire Corp - Salaried Pension
Attn: Clair Lindauer AVP
Employee Benefit Trust Service
1 Marine Midland Center
Buffalo, N.Y. 14203-2842
Marine Midland Bank Trustee FBO 517,494.62 49.75%
Dunlop Tire Corp
Buffalo Hourly Pension Plan (1950)
Attn: Clair Lindauer AVP
Employee Benefit Trust Service
1 Marine Midland Center
Buffalo, N.Y. 14203-2842
VALIDITY OF SHARES
The validity of the shares has been passed upon for the Fund by Piper &
Marbury, Baltimore, Maryland.
DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each
Portfolio's net investment income, if any, together with any net realized
- ---------------
// Japan First Development, Inc. ("JFD") and Marine Midland Bank ("Marine")
are listed above as owning beneficially 25% or more of the outstanding
shares of the Fixed Income Portfolio and the Equity Portfolio,
respectively, and may be presumed to "control" (as that term is defined in
the 1940 Act) that Portfolio. As a result, JFD and Marine would have the
ability to vote a majority of the shares of their respective Portfolio on
any matter requiring the approval of shareholders. JFD is organized in the
state of Delaware and its parent companies are Nipan Landic Co., Ltd. and
Cho Bull Corporation, Ltd. Marine is organized in the state of New York and
its parent company is The HongKong & Shanghai Banking Corporation.
<PAGE>
-39-
capital gains in the amount and at the times that will avoid both income
(including capital gains) taxes and the imposition of the federal excise tax on
undistributed income and capital gains. See discussion under "Dividends, Capital
Gains Distributions and Taxes" in the Prospectus. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares
of a Portfolio by an investor may have the effect of reducing the per share net
asset value of that Portfolio by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in effect a
return of capital, are subject to income taxes as set forth in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise
in writing, all dividends and capital gains distributions are automatically
received in additional shares of that Portfolio of the Fund at net asset value
(as of the business day following the record date). This will remain in effect
until the Fund is notified by the shareholder in writing at least three days
prior to the record date that either the Income Option (income dividends in cash
and capital gains distributions in additional shares at net asset value) or the
Cash Option (both income dividends and capital gains distributions in cash) has
been elected. An account statement is sent to shareholders whenever an income
dividend or capital gains distribution is paid.
Each Portfolio of the Fund is treated as a separate entity (and hence
as a separate "regulated investment company") for federal tax purposes. Any net
capital gains recognized by a Portfolio are distributed to its investors without
need to offset (for federal income tax purposes) such gain against any net
capital losses of another Portfolio.
- --------------------------------------------------------------------------------
PERFORMANCE CALCULATIONS
- --------------------------------------------------------------------------------
The Fund may from time to time quote various performance figures to
illustrate the past performance of its Portfolios. Performance quotations by
investment companies are subject to rules adopted by the SEC, which require the
use of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the SEC methods for computing performance follows.
TOTAL RETURN
A Portfolio's average annual total return is determined by finding the
average annual compounded rates of return over 1, 5 and 10 year periods (or, if
shorter, the period since inception of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
<PAGE>
-40-
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1, 5 and 10 year period (or, if shorter, the period since inception of the
Portfolio) and the deduction of all applicable Fund expenses on an annual basis.
Average annual total return is calculated 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 stated period
The Portfolios may also calculate total return on an aggregate basis
which reflects the cumulative percentage change in value over the measuring
period. The formula for calculating aggregate total return can be expressed as
follows:
Aggregate Total Return [ ( ERV )- 1 ]
---
P
For the fiscal year ended September 30, 1995, the total return for the
Equity Portfolio was % and % for the Fixed Income Portfolio. Total returns are
aggregate and have not been annualized, and reflect voluntary fee waivers. For
the period October 1, 1993 (commencement of operations) through September 30,
1995, the total return for the Equity Fund was ____% and for the period November
2, 1993 (commencement of operations) through September 30, 1995, the total
return for the Fixed Income Portfolio was ___%.
In addition to total return, each fixed income portfolio of the Fund
may quote performance in terms of a 30-day yield. The yield figures provided
will be calculated according to a formula prescribed by the SEC and can be
expressed as follows:
a-b
Yield = 2 [ (AAAA + 1)6 - 1 ]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Portfolio at a discount or
<PAGE>
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premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations. The 30-day yield figure for the
Fixed Income Portfolio was % for the fiscal year ended September 30, 1995.
The performance of a Portfolio, as well as the composite performance of
the Fund's Fixed Income Portfolio, may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc.,
the Donoghue Organization, Inc. or other independent services which monitor the
performance of investment companies, and may be quoted in advertising in terms
of their rankings in each applicable universe. In addition, the Fund may use
performance data reported in financial and industry publications, including
Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money
Fund Report, Money Magazine, The Wall Street Journal and USA Today.
- --------------------------------------------------------------------------------
COMPARATIVE INDICES
- --------------------------------------------------------------------------------
Each Portfolio of the Fund may from time to time use one or more of the
following unmanaged indices for performance comparison purposes:
LEHMAN BROTHERS AGGREGATE INDEX
The Lehman Brothers Aggregate Index is a fixed income market value-weighted
index that combines the Lehman Brothers Government/Corporate Index and the
Lehman Brothers Mortgage-Backed Securities Index. It includes fixed rate issues
of investment grade (BBB) or higher, with maturities of at least one year and
outstanding par values of at least $100 million for U.S.
Government issues and $25 million for others.
LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX
The Lehman Brothers Government/Corporate Index is a combination of the
Government and Corporate Bond Indices. The Government Index includes public
obligations of the U.S. Treasury, issues of Government agencies and corporate
debt backed by the U.S. Government. The Corporate Bond Index includes fixed-rate
nonconvertible corporate debt. Also included are Yankee Bonds and nonconvertible
debt issued by or guaranteed by foreign or international governments and
agencies. All issues are investment grade (BBB) or higher, with maturities of at
least one year and an outstanding par value of at least $100 million for U.S.
Government issues and $25 million for others. Any security downgraded during the
month is held in the index until month-end and then removed. All returns are
market value weighted inclusive of accrued income.
<PAGE>
-42-
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE INDEX
The Lehman Brothers Intermediate Government/Corporate Index is a combination of
the Government and Corporate Bond Indices. All issues are investment grade (BBB)
or higher, with maturities of one to ten years and an outstanding par value of
at least $100 million for U.S. Government issues and $25 million for others. The
Government Index includes public obligations of the U.S. Treasury, issues of
Government agencies and corporate debt backed by the U.S. Government. The
Corporate Bond Index includes fixed-rate nonconvertible corporate debt. Also
included are Yankee Bonds and nonconvertible debt issued by or guaranteed by
foreign or international governments and agencies. Any security downgraded
during the month is held in the index until month-end and then removed. All
returns are market value weighted inclusive of accrued income.
LIPPER GROWTH & INCOME FUND INDEX
The Lipper Growth & Income Fund Index is a net asset value weighted index of the
30 largest funds within the growth and income investment objective. It is
calculated daily with adjustments for income dividends and capital gains
distributions as of the ex-dividend dates.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX
The Merrill Lynch Corporate & Government Bond Index includes over 4,500 U.S.
Treasury, agency and investment grade corporate bonds. The Index is calculated
daily and will be used from time to time in performance comparisons for partial
month periods.
NASDAQ INDUSTRIALS INDEX
The NASDAQ Industrials Index is a measure of all NASDAQ National Market System
issues classified as industrial based on Standard Industrial Classification
codes relative to a company's major source of revenue. The index is exclusive of
warrants and all domestic common stocks traded in the regular NASDAQ market
which are not part of the NASDAQ National Market System. The NASDAQ Industrials
Index is market value weighted.
RUSSELL 1000 INDEX
The Russell 1000 Index consists of the 1000 largest of the 3000 largest stocks.
Market capitalization is typically between $450 million and $80 billion. The
list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 1000 stocks in the Russell 1000 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
RUSSELL 2000 INDEX
The Russell 2000 Index consists of the 2000 smallest of the 3000 largest stocks.
Market capitalization is typically between $35 million and $450 million. The
<PAGE>
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list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2000 stocks in the Russell 2000 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
RUSSELL 2500 INDEX
The Russell 2500 Index consists of the 2500 smallest of the 3000 largest stocks.
Market capitalization is typically between $1.2 billion and $35 million. The
list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2500 stocks in the Russell 2500 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
SALOMON 1-3 YEAR TREASURY/GOVERNMENT SPONSORED INDEX
The Salomon 1-3 Year Treasury/Government Sponsored Index includes U.S. Treasury
and agency securities with maturities one year or greater and less than three
years. Securities with amounts outstanding of at least $25 million are included
in the index.
SALOMON 1-3 YEAR TREASURY/GOVERNMENT SPONSORED/CORPORATE INDEX
The Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index includes U.S.
Treasury, agency and investment grade (BBB or better) securities with maturities
one year or greater and less than three years. Securities with amounts
outstanding of at least $25 million are included in the index.
SALOMON BROAD INDEX
The Salomon Broad Index, also known as the Broad Investment Grade (BIG) Index,
is a fixed income, market capitalization-weighted index, including U.S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry subsectors. Securities excluded
from the Broad Index are floating/variable rate bonds, private placements, and
derivatives (e.g., U.S. Treasury zeros, CMOs, mortgage strips). Every issue is
trader-priced at month-end and the index is published monthly.
SALOMON ONE TO THREE YEAR TREASURY INDEX
The Salomon One To Three Year Treasury Index includes only U.S. Treasury Notes
and Bonds with maturities one year or greater and less than three years.
<PAGE>
-44-
S&P 500
The S&P 500 is a portfolio of 500 stocks designed to mimic the overall equity
market's industry weightings. Most, but not all, large capitalization stocks are
in the index. There are also some small capitalization names in the index. The
list is maintained by Standard & Poor's and is market capitalization weighted.
Unlike the Russell indices, there are always 500 names in the S&P 500. Changes
are made by Standard & Poor's as needed.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX -- DESCRIPTION OF SECURITIES AND RATINGS
- --------------------------------------------------------------------------------
DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc.'s Corporate Bond Ratings:
AAA: judged to be the best quality; carry the smallest degree of
investment risk; Aa--judged to be of high quality by all standards; A: possess
many favorable investment attributes and are to be considered as higher medium
grade obligations; BAA: considered as lower medium grade obligations, i.e., they
are neither highly protected nor poorly secured; BA: B: protection of interest
and principal payments is questionable.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest. CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1,2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpt from Standard & Poor's Corporation's Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of
protection as to principal and interest; AA: also qualify as high grade
obligations, and in the majority of instances differs from AAA issues only in
small degree; A: regarded as upper medium grade; have considerable investment
strength but are not entirely free from adverse effects of changes in economic
and trade conditions. Interest and principal are regarded as safe; BBB: regarded
as borderline between definitely sound obligations and those where the
speculative element begins to predominate; this group is the lowest which
qualifies for commercial bank investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. CI: The rating CI is reserved for income bonds on which no interest
is being paid. D: Debt rated D is in payment default. The D rating category is
A-1
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used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
Excerpts from Fitch Investors Services, Inc. Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short term debt of these issuers is generally rated "-,+".
A: Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
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<PAGE>
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on these bonds, and
"D" represents the lowest potential for recovery.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed-through" to investors such
as the Portfolio. Most issuers or poolers provide guarantees of payments,
regardless of whether the mortgagor actually makes the payment. The guarantees
made by issuers or poolers are supported by various forms of credit, collateral,
guarantees or insurance, including individual loan, title, pool and hazard
insurance purchased by the issuer. There can be no assurance that the private
issuers can meet their obligations under the policies. Mortgage-backed
securities issued by private issuers, whether or not such securities are subject
to guarantees, may entail greater risk. If there is no guarantee provided by the
issuer, mortgage-backed securities purchased by the Fixed Income Portfolio will
be those rated investment grade by Moody's or Standard & Poor's, or, if unrated,
deemed by MA&S to be of investment grade quality.
UNDERLYING MORTGAGES
Pools consist of whole mortgage loans or participation in loans. The
majority of these loans are made to purchasers of 1-4 family homes. The terms
and characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. For example, in addition to fixed-rate fixed-term
mortgages, the Fixed Income Portfolio may purchase pools of adjustable rate
mortgages (ARM), growing equity mortgages (GEM), graduated payment mortgages
(GPM) and other types where the principal and interest payment procedures vary.
ARM's are mortgages which reset the mortgage's interest rate with changes in
open market interest rates. The Fixed Income Portfolio's interest income will
vary with changes in the applicable interest rate on pools of ARM's. GPM and GEM
pools maintain constant interest rates, with varying levels of principal
repayment over the life of the mortgage. These different interest and principal
payment procedures should not impact the Fixed Income Portfolio's net asset
value since the prices at which these securities are valued each day will
reflect the payment procedures.
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All poolers apply standards for qualifications to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, many mortgages included in pools are insured through
private mortgage insurance companies.
AVERAGE LIFE
The average life of pass-through pools varies with the maturities,
coupon rates and type of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
RETURNS OF MORTGAGE-BACKED SECURITIES
Yields on mortgage-backed pass-through securities are typically quoted
based on a prepayment assumption derived from the coupon and maturity of the
underlying instruments. Actual prepayment experience may cause the realized
return to differ from the assumed yield. Reinvestment of prepayments may occur
at higher or lower interest rates than the original investment, thus affecting
the realized returns of the Fixed Income Portfolio. The compounding effect from
reinvestment of monthly payments received by the Fixed Income Portfolio will
increase its return to shareholders, compared to bonds that pay interest
semi-annually.
ABOUT MORTGAGE-BACKED SECURITIES
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments resulting from the
sale of the underlying residential property, refinancing or foreclosure net of
fees or costs which may be incurred. Some mortgage-backed securities are
described as "modified pass-through." These securities entitle the holders to
receive all interest and principal payments owed on the mortgages in the pool,
net of certain fees, regardless of whether or not the mortgagors actually make
payment.
Residential mortgage loans are pooled by the Federal Home Loan Mortgage
Corporation (FHLMC). FHLMC is a corporate instrument of the U.S. Government and
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. FHLMC issues Participation
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<PAGE>
Certificates ("PC's") which represent interests in mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal.
The Federal National Mortgage Association (FNMA) is a
Government-sponsored corporation owned entirely by private shareholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases residential mortgages from a list of approved seller/services
which include state and federally-chartered savings and loan associations,
mutual savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to time, payment of
principal and interest by FNMA.
The principal Government guarantor of mortgage-backed securities is the
Government National Mortgage Association (GNMA). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than Government and Government-related pools because there are no
direct or indirect Government guarantees of payments in the former pools.
However, timely payment of interest and principal of the pools is supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance purchased by the issuer. The insurance and guarantees are
issued by Governmental entities, private insurers and the mortgage poolers. Any
guarantee of the securities in which the Fixed Income Portfolio invests runs
only to principal and interest payments on the securities and not to the market
value of such securities or the principal and interest payments on the
underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the Fixed Income Portfolio and not to the purchase of shares
of the Portfolio. There can be no assurance that the private insurers can meet
their obligations under the policies. Mortgage-backed securities purchased for
the Fixed Income Portfolio will, however, be rated of investment grade quality
by Moody's, Standard & Poor's or Fitch or, if unrated, deemed by MA&S to be of
investment grade quality. The ratings of such securities could be subject to
reduction in the event of deterioration in the creditworthiness of the credit
enhancement provider even in cases where the delinquency and loss experience on
the underlying pool of assets is better than expected.
It is expected that Governmental or private entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, i.e., mortgage instruments whose principal or interest
payment may vary or whose terms to maturity may be shorter than previously
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<PAGE>
customary. As new types of mortgage-backed securities are developed and offered
to investors, the Fixed Income Portfolio will, consistent with its investment
objective and policies, consider making investments in such new types of
securities.
STRIPPED MORTGAGED-BACKED SECURITIES
Stripped mortgage-backed securities ("SMBS") are derivative multiclass
mortgage-backed securities. SMBS may be issued by agencies or instrumentalities
of the U.S. Government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on SMBS is extremely
sensitive not only to changes in prevailing interest rates but also to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Fixed Income Portfolio's yield to maturity from these securities.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fixed Income Portfolio may fail to fully recoup
its initial investment in these securities even if the security is in one of the
highest rating categories.
SMBS have greater volatility than other types of mortgage securities.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not been fully developed. Accordingly, SMBS are generally
illiquid and subject to the Fixed Income Portfolio's limitations on investments
in illiquid securities.
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<PAGE>
DESCRIPTION OF U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Government and by various
instrumentalities which have been established or sponsored by the U.S.
Government. U.S. Treasury securities are backed by the "full faith and credit"
of the United States. Securities issued or guaranteed by federal agencies and
U.S. Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is defeased by U.S. Treasury
zero coupon issues, while the U.S. Treasury is explicitly required to advance
funds sufficient to pay interest on it, if needed. Certain agencies and
instrumentalities, such as the Government National Mortgage Association, are, in
effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make "indefinite and unlimited"
drawings on the Treasury, if needed, to service their debt. Debt from certain
other agencies and instrumentalities, including the Federal Home Loan Bank and
Federal National Mortgage Association, are not guaranteed by the United States,
but those institutions are protected by the discretionary authority for the U.S.
Treasury to purchase certain amounts of their securities to assist the
institution in meeting its debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System and the Federal Home Loan
Mortgage Corporation, are federally chartered institutions under Government
supervision, but their debt securities are backed only by the creditworthiness
of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency
organized under federal charter with Government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal National Mortgage Association.
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<PAGE>
FLOATING AND VARIABLE RATE OBLIGATIONS
Certain of the obligations that the Fixed Income Portfolio may purchase
have a floating or variable rate of interest. Such obligations may include
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government and certificates of deposit. Floating or variable rate obligations
bear interest at rates that are not fixed, but vary with changes in specified
market rates or indices, such as the prime rate, and at specified intervals.
Certain of the floating or variable rate obligations that may be
purchased by the Fixed Income Portfolio may carry a demand feature that would
permit the holder to tender them back to the issuer of the underlying
instrument, or to a third party, at par value prior to maturity. Such
obligations include variable rate demand or master notes, which provide for
periodic adjustments in the interest rate. Master demand notes, which are
instruments issued pursuant to an agreement between the issuer and the holder
may permit the indebtedness thereunder to vary.
The demand features of certain floating or variable rate obligations
may permit the Fixed Income Portfolio to tender the obligations to foreign
banks. The ability to receive payment in such circumstances under the demand
feature is subject to certain of the risks generally associated with foreign
investments, as discussed under "Foreign Investments."
INVERSE FLOATING RATE OBLIGATIONS
The Fixed Income Portfolio may invest in inverse floating rate
obligations, or "inverse floaters." Inverse floaters have coupon rates that vary
inversely at a multiple of a designated floating rate (which typically is
determined by reference to an index rate, but may also be determined through a
dutch auction or a remarketing agent) (the "reference rate"). Inverse floaters
may constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Inter-Bank Offered Rate) or COFI (Cost
of Funds Index). Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate. Inverse floaters exhibit substantially greater price volatility
than fixed rate obligations having similar credit quality, redemption provisions
and maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some inverse
floater CMOs exhibit extreme sensitivity to changes in prepayments. As a result,
the yield to maturity of an inverse floater CMO is sensitive not only to changes
in interest rates but also to changes in prepayment rates on the related
underlying mortgage assets.
A-8
<PAGE>
ZERO COUPON OBLIGATIONS
The Fixed Income Portfolio may invest in zero coupon obligations, which
are fixed income securities that do not pay regular interest payments. Instead,
zero coupon obligations are sold at substantial discounts from their "face
value"--what they will be worth at maturity. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until maturity.
For tax purposes, a portion of this imputed interest is deemed as income
received by the holders of zero coupon obligations each year. The Fund, which
intends to qualify as a regulated investment company, intends to pass along such
interest as a component of the Fixed Income Portfolio's net investment income.
Zero coupon obligations may offer investors the opportunity to earn higher
yields than those available on ordinary interest-paying obligations of similar
credit quality and maturity. However, zero coupon obligation prices may also
exhibit greater price volatility than ordinary fixed income securities because
of the manner in which their principal and interest is returned to the investor.
Among the zero coupon obligations in which the Fixed Income Portfolio
may invest are Zero Coupon Treasury bonds, a term used to describe U.S. Treasury
notes and bonds which have been stripped of their unmatured interest coupons, or
the coupons themselves, and also receipts or certificates representing interest
in such stripped debt obligations and coupons. Under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program, the
principal and interest components of certain U.S. Treasury securities with
remaining maturities of longer than ten years are issued separately by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts separately. Zero coupon obligations may also be created from
U.S. Treasury bonds when a dealer deposits a U.S. Treasury bond with a custodian
and then sells the coupon payments and principal payment that will be generated
by this bond separately. Such obligations are sold under a variety of different
names, such as: Certificates of Accrual on Treasury Securities (CATS), Treasury
Receipts (Trs) and Treasury Investment Growth Receipts (TIGRs). Bonds issued by
other U.S. Government agencies may also be stripped.
BRADY BONDS
A portion of the Fixed Income Portfolio's investments may consist of
certain debt obligations customarily referred to as "Brady Bonds", which are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not
have a long payment history. They may be collaterized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
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Dollar-denominated, collaterized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collaterized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case or fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
and, among other factors, the history of default with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
Brady Plan debt restructurings totalling approximately $73 billion have
been implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the
Philippines, Uruguay and Venezuela, with the largest proportion of Brady Bonds
having been issued to date by Mexico and Venezuela. Brazil has announced plans
to issue Brady Bonds aggregating approximately $35 billion, based on current
estimates. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
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<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in the Prospectus:
(1) Financial Highlights for the period ended September 30, 1994.
Included in Statement of Additional Information:
(1) Portfolio of Investments as of September 30, 1994***
(2) Statement of Assets and Liabilities as of September 30,
1994***
(3) Statement of Operations for the period ended September 30,
1994***
(4) Statement of Changes in Net Assets for the period ended
September 30, 1994***
(5) Notes to Financial Statements as of September 30, 1994***
(6) Financial Highlights for the period ended September 30,
1994***
(b) Exhibits:
Exhibit
Number Description
------- -----------
1 -- Registrant's Articles of Incorporation**
2 -- Registrant's By-Laws - ***
3 -- None.
4(a) -- Form of Share Certificate for shares of Class A stock***
4(b) -- Form of Share Certificate for shares of Class B stock***
5(a) -- Form of Investment Management Agreement between Registrant
and LTCB-MAS Investment Management, Inc. ("LTCB-MAS")***
5(b) -- Form of Investment Services Agreement between LTCB-MAS and
Miller Anderson & Sherrerd ("MAS")***
<PAGE>
5(c) -- Form of Investment Management Agreement between Registrant and
LTCB-MAS to become effective upon the change of control of
MA&S - filed herewith.
5(d) -- Form of Investment Services Agreement between LTCB-MAS and MAS
to become effective upon the change of control of MA&S -
filed herewith.
6 -- Form of Distribution Agreement between Registrant and Furman
Selz Incorporated***
7 -- None.
8 -- Form of Custodian Agreement between Registrant and LTCB Trust
Company***
9(a) -- Form of Fund Administration Agreement between Registrant and
Furman Selz Incorporated***
9(b) -- Form of Transfer Agency Agreement between Registrant and
Furman Selz Incorporated***
10 -- Opinion and consent of Piper & Marbury***
11 -- Consent of independent accountants.
12 -- None.
13 -- Purchase Agreement****
14 -- None.
15 -- None.
16 -- Performance Calculations****
17 -- Powers of Attorney from Messrs. Schmid, Hagberg, Miller and
Pileggi***
- ----------------
* These financial statements were included in Post-Effective Amendment
No. 3, filed on January 30, 1995 to the Registration Statement on Form
N-1A, Registration Nos. 33-65568 and 811-7828 (the "Registration
Statement".)
** Exhibit is incorporated by reference to same exhibit to the Registrant's
Registration Statement on Form N-1A, filed July 2, 1993.
*** Exhibit is incorporated by reference to same exhibit to Pre-Effective
Amendment No. 2, filed September 29, 1993 to the Registration Statement.
**** Exhibit is incorporated by reference to same exhibit to Post-Effective
Amendment No. 3, filed January 30, 1995 to the Registration Statement.
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<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record
Holders at
Title of Class November 14, 1995
-------------- -----------------
Shares of the Equity Portfolio, 6
par value $.001 per share
Shares of the Fixed Income 5
Portfolio, par value $.001 per share
Item 27. Indemnification
Reference is made to Article VII of Registrant's Articles of
Incorporation and Article IV of Registrant's By-Laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
The list required by this Item 28 of officers and directors of
LTCB-MAS, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules A
and D of FORM ADV filed by LTCB-MAS pursuant to the Advisers Act (SEC File No.
801-35451).
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The list required by this Item 28 of officers and directors of MA&S,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by MA&S pursuant to the Advisers Act (SEC File No. 801-10437).
Item 29. Principal Underwriters
(a) Not applicable.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Furman Selz Incorporated is incorporated by
reference to Schedule A of Form BD filed by Furman Selz Incorporated pursuant to
the Securities Exchange Act of 1934 (SEC File No. 801-12425).
(c) Not applicable.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of:
(1) Minerva Fund, Inc.
237 Park Avenue
New York, New York 10017
(2) Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
C-4
<PAGE>
(c) Registrant hereby undertakes to furnish to each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(d) Registrant hereby undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of one or more of
Registrant's directors when requested in writing to do so by the holders of at
least 10% of Registrant's outstanding shares of common stock and, in connection
with such meeting, to assist in communications with other shareholders in this
regard, as provided under Section 16(c) of the 1940 Act.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, and has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 28th day
of November, 1995.
MINERVA FUND, INC.
By /s/ John J. Pileggi
--------------------------
John J. Pileggi
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the 28th day of November, 1995.
SIGNATURE TITLE
- --------- -----
* Chairman of the Board
- --------------- of Directors and Director
James D. Schmid
/s/ John J. Pileggi President and Treasurer
- -------------------
John J. Pileggi
*
- ---------------
James D. Schmid Director
*
- ---------------
Carl T. Hagberg Director
*
- -----------------
Raymond F. Miller Director
*By: /s/ John J. Pileggi
-------------------
John J. Pileggi
Attorney-in-Fact
C-6
<PAGE>
MINERVA FUND, INC.
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------ ---------------------- -------------
5(c) Form of Investment Management Agreement
5(d) Form of Investment Services Agreement
<PAGE>
Exhibit 5(c)
INVESTMENT MANAGEMENT AGREEMENT
MINERVA FUND, INC.
237 Park Avenue
New York, New York 10017
, 1995
LTCB-MAS Investment Management, Inc.
One Tower Bridge, Suite 1000
West Conshohocken, PA 19428
Ladies and Gentlemen:
This will confirm the agreement between the undersigned (the "Fund") and
you ("LTCB-MAS") as follows:
1. The Fund is an open-end investment company that consists of the
separate investment portfolios listed on Schedule A hereto, as amended from time
to time (the "Portfolios"). The Fund proposes to engage in the business of
investing and reinvesting the assets of each Portfolio in accordance with the
investment objective and limitations of each Portfolio specified in the Fund's
Articles of Incorporation (the "Articles"), and the currently effective
prospectus, including the documents incorporated by reference therein (the
"Prospectus"), relating to the Fund and each Portfolio, included in the Fund's
Registration Statement, as amended from time to time (the "Registration
Statement"), filed under the Investment Company Act of 1940, as amended (the
"1940 Act"), and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to LTCB-MAS. Any
amendments to these documents shall be furnished to LTCB-MAS promptly.
2. Each Portfolio hereby employs LTCB-MAS to (a) be responsible for the
investment and reinvestment of the assets of such Portfolio as specified in
paragraph 1. Consistent with the requirements of the 1940 Act, LTCB-MAS may
engage one or more sub-investment advisers or other investment services
providers (each, an "Investment Services Provider"), on terms satisfactory to
the Fund's Board of Directors, to assist it in carrying out its responsibilities
under this Agreement. If LTCB-MAS so engages an Investment Services Provider
with respect to the management of one or more Portfolios, LTCB-MAS will continue
<PAGE>
2
to perform the following services, unless the Fund's Board of Directors
otherwise instructs: (a) supervise the investment program of each such Portfolio
in accordance with the stated investment objective and policies of such
Portfolio, (b) advise and consult with such Investment Services Provider
regarding each such Portfolio's overall investment strategy, and (c) consult
with such Investment Services Provider on at least a weekly basis regarding
specific decisions concerning the purchase, sale or retention of particular
securities on behalf of each such Portfolio.
3. LTCB-MAS shall provide, at its own expense, the office space,
furnishings and equipment and the personnel required by it to perform the
services to be performed hereunder on the terms and for the compensation
provided herein. The Fund shall be responsible for all of the expenses and
liabilities of each Portfolio, including organizational expenses; taxes;
interest; fees (including fees paid to its directors, but excluding any fees
paid to an Investment Services Provider); fees payable to the Securities and
Exchange Commission; state securities qualification fees; costs of preparing and
printing prospectuses; advisory and administration fees; charges of the
custodian and transfer agent; charges of any shareholder servicing agents;
certain insurance premiums; auditing and legal expenses; costs of shareholders'
reports and shareholder meetings; any extraordinary expenses; brokerage fees,
commissions, and transfer taxes, if any, in connection with the purchase or sale
of portfolio securities; and payments, if any, to the distributor of each
Portfolio for activities intended to result in the sale of shares of the
Portfolio.
4. Each Portfolio shall be managed by LTCB-MAS in accordance with the
investment objective and limitations of such Portfolio set forth in the
Articles, the Prospectus, the 1940 Act, the provisions of the Internal Revenue
Code relating to regulated investment companies, other applicable laws and
regulations, and policy decisions adopted by the Fund's Board of Directors from
time to time and communicated to LTCB-MAS in writing. LTCB-MAS shall advise the
Fund's officers and Board of Directors, at such times as the Fund's Board of
Directors may specify, of investments made for the account of each Portfolio and
shall, when requested by the Fund's officers or Board of Directors, supply the
reasons for making such investments.
5. In consideration of LTCB-MAS's undertaking to render the services
described in this agreement, the Fund agrees that LTCB-MAS shall not be liable
under this agreement for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the performance of this agreement,
provided that nothing in this agreement shall be deemed to protect or purport to
protect LTCB-MAS against any liability to the Fund or its stockholders to which
LTCB-MAS would otherwise be subject by reason of willful misfeasance, bad faith
or gross
<PAGE>
3
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder.
6. In consideration of the services to be rendered by LTCB-MAS under this
agreement, each Portfolio shall pay LTCB-MAS an investment management fee
calculated and accrued daily and paid monthly, as set forth on Schedule B
hereto, as amended from time to time. For purposes of calculating such fee, the
value per share of the Portfolio's net assets shall be computed in the manner
specified in the Prospectus and the Articles.
7. LTCB-MAS is authorized to select the brokers or dealers that will
execute the purchases and sales of securities for each of the Fund's Portfolios
and is directed to use its best efforts to obtain the best available price and
most favorable execution, except as prescribed herein. Subject to policies
established by the Board of Directors of the Fund, LTCB-MAS may also be
authorized to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if LTCB-MAS determines in good
faith that such amount of commission is reasonable in relation to the value of
the brokerage or research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall responsibilities of
LTCB-MAS with respect to the Fund. The execution of such transactions shall not
be deemed to represent an unlawful act of breach of any duty created by this
Agreement or otherwise. LTCB-MAS will promptly communicate to the officers and
Directors of the Fund such information relating to portfolio transactions as
they may reasonably request.
8. If the aggregate expenses incurred by, or allocated to, a Portfolio in
any fiscal year shall exceed the expense limitations applicable to the Portfolio
imposed by state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, LTCB-MAS shall reimburse the
Portfolio for such excess. LTCB-MAS's reimbursement obligation will be limited
to the amount of fees it received under this agreement during the period in
which such expense limitations were exceeded, unless otherwise required by
applicable laws or regulations. With respect to portions of a fiscal year in
which this contract shall be in effect, the foregoing limitations shall be
prorated according to the proportion which that portion of the fiscal year bears
to the full fiscal year. Any payments required to be made by this paragraph 8
shall be made once a year promptly after the end of the Fund's fiscal year.
9. This agreement shall continue in effect for an initial period of two
years from the date hereof and thereafter with respect to each Portfolio for
successive annual periods, provided that such continuance is specifically
approved at least annually (a) by the vote of a majority of that Portfolio's
<PAGE>
4
outstanding voting securities (as defined in the 1940 Act) or by the Fund's
Board of Directors and (b) by the vote, cast in person at a meeting called for
such purpose, of a majority of the Fund's directors who are not parties to this
agreement or "interested persons" (as defined in the 1940 Act) of any such
party. This agreement may be terminated by any Portfolio without penalty, at any
time, (1) either by a vote of the Board of Directors or by vote of the
outstanding voting securities of that Portfolio on sixty (60) days' written
notice, or (2) by LTCB-MAS upon ninety (90) days notice to the Fund. This
agreement may remain in effect with respect to a Portfolio even if it has been
terminated in accordance with this paragraph with respect to other Portfolios of
the Fund. This agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
10. Except to the extent necessary to perform LTCB- MAS's obligations
under this agreement, nothing herein shall be deemed to limit or restrict the
right of LTCB-MAS, or any affiliate of LTCB-MAS, or any employee of LTCB-MAS, to
engage in any other business or to devote time and attention to the management
or other aspects of any other business, whether of a similar or dissimilar
nature, or to render services of any kind to any other corporation, firm,
individual or association.
11. This agreement shall be governed by the laws of the State of New York.
<PAGE>
5
If the foregoing correctly sets forth the agreement between the Fund and
LTCB-MAS, please so indicate by signing and returning to the Fund the enclosed
copy hereof. Very truly yours,
MINERVA FUND, INC.
By:______________________________
Title:
ACCEPTED:
LTCB-MAS INVESTMENT MANAGEMENT, INC.
By:______________________________
Title:
<PAGE>
6
SCHEDULE A
Equity Portfolio
Fixed Income Portfolio
<PAGE>
7
SCHEDULE B
In consideration of the services to be rendered by LTCB-MAS under this
agreement, each Portfolio shall pay LTCB-MAS an investment management fee
calculated and accrued daily and paid monthly, based on the following annual
percentage rates, to the Portfolio's average daily net assets for the month:
RATE
-----
Equity Portfolio .50%
Fixed Income Portfolio .375%
For purposes of calculating such fee, the value per share of the Portfolio's net
assets shall be computed in the manner specified in the Prospectus and the
Articles.
<PAGE>
Exhibit 5(d)
INVESTMENT SERVICES AGREEMENT
LTCB-MAS Investment Management, Inc.
One Tower Bridge, Suite 1000
West Conshohocken, PA 19428
, 1995
Miller Anderson & Sherrerd, LLP
One Tower Bridge, Suite 1150
West Conshohocken, PA 19428
Ladies and Gentlemen:
This will confirm the agreement between the undersigned ("LTCB-MAS") and
Miller Anderson & Sherrerd, LLP (or any successor-in-interest (by merger or
otherwise) thereto or transferee thereof that does not involve an "assignment"
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act"), and that is a limited partnership or other entity wholly owned, directly
or indirectly, by Morgan Stanley Asset Management Holdings, Inc. and/or its
affiliates (Miller Anderson & Sherrerd, LLP or such successor-in-interest or
transferee being referred to herein as the "Sub-adviser") as follows:
1. LTCB-MAS has been employed by Minerva Fund, Inc. (the "Fund") to
provide investment services to the Fund pursuant to an investment management
agreement dated , 1995 (the "Investment Management Agreement"). The Fund is an
open-end investment company that consists of the separate investment portfolios
set forth on Schedule A hereto, as amended from time to time (the "Portfolios").
The Fund invests and reinvests the assets of each Portfolio in the manner and in
accordance with the investment objective and limitations of each Portfolio
specified in the Fund's Articles of Incorporation (the "Articles"), and the
currently effective prospectus, including the documents incorporated by
reference therein (the "Prospectus"), relating to the Fund and each Portfolio,
included in the Fund's Registration Statement, as amended from time to time (the
"Registration Statement"), filed under the 1940 Act and the Securities Act of
1933, as amended. Copies of the documents referred to in the preceding sentence
have been furnished to the Sub-adviser. Any amendments to these documents shall
be furnished to the Sub- adviser promptly.
<PAGE>
2
2. For good and valuable consideration, LTCB-MAS hereby employs the
Sub-adviser, acting in collaboration with and under the supervision of LTCB-MAS,
to (a) be responsible for selecting investments for each Portfolio in conformity
with the stated investment objective and policies of such Portfolio, (b) advise
and consult with LTCB-MAS regarding each Portfolio's overall investment
strategy, and (c) consult with LTCB-MAS on at least a weekly basis regarding
specific decisions concerning the purchase, sale or retention of particular
securities on behalf of each Portfolio.
3. The Sub-adviser shall provide, at its own expense, the office space,
furnishings and equipment and the personnel required by it to perform the
services to be performed hereunder on the terms provided herein. The Sub-adviser
shall not be responsible for the expenses of the Fund or LTCB-MAS.
4. The Sub-adviser, acting in collaboration with and under the supervision
of LTCB-MAS, shall make investments and shall place purchase and sale orders for
the account of each Portfolio in accordance with the investment objective and
limitations of each Portfolio set forth in the Articles, the Prospectus, the
1940 Act, the provisions of the Internal Revenue Code relating to regulated
investment companies, other applicable laws and regulations, and policy
decisions adopted by the Fund's Board of Directors from time to time and
communicated to the Sub- adviser in writing. The Sub-adviser shall advise
LTCB-MAS and, through LTCB-MAS, the Fund's officers and Board of Directors, at
such times as the Fund's Board of Directors may specify, of investments made for
the account of each Portfolio and shall, when requested by LTCB-MAS or the
Fund's officers or Board of Directors, supply the reasons for making such
investments.
5. In consideration of the Sub-adviser's undertaking to render the
services described in this agreement, LTCB-MAS agrees that the Sub-adviser shall
not be liable under this agreement for any error of judgment or mistake of law
or for any loss suffered by LTCB-MAS or the Fund in connection with the
performance of this agreement, provided that nothing in this agreement shall be
deemed to protect or purport to protect the Sub-adviser against any liability to
LTCB-MAS or the Fund to which the Sub-adviser would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of its duties under this agreement or by reason of its reckless disregard of its
obligations and duties hereunder.
6. The Sub-adviser shall receive no fee for the services it provides
pursuant to this agreement.
<PAGE>
3
7. The Sub-adviser is authorized to select the brokers or dealers that
will execute the purchases and sales of securities for each of the Fund's
Portfolios and is directed to use its best efforts to obtain the best available
price and most favorable execution, except as prescribed herein. Subject to
policies established by the Board of Directors of the Fund, the Sub-adviser may
also be authorized to effect individual securities transactions at commission
rates in excess of the minimum commission rates available, if the Sub-adviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage or research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
overall responsibilities of the Sub-adviser under this agreement. The execution
of such transactions shall not be deemed to represent an unlawful act or breach
of any duty created by this agreement or otherwise. The Sub-adviser will
promptly communicate to LTCB-MAS and the officers and Directors of the Fund such
information relating to portfolio transactions as they may reasonably request.
8. The Sub-adviser will notify LTCB-MAS of any change or pending change in
its direct or indirect ownership or in its organizational structure within a
reasonable period of time after learning of such change or pending change.
9. This agreement shall continue in effect for an initial period of two
years from the date hereof and thereafter with respect to each Portfolio for
successive annual periods, provided that such continuance is specifically
approved at least annually (a) by the vote of a majority of that Portfolio's
outstanding voting securities (as defined in the 1940 Act) or by the Fund's
Board of Directors and (b) by the vote, cast in person at a meeting called for
such purpose, of a majority of the Fund's directors who are not parties to this
agreement or "interested persons" (as defined in the 1940 Act) of any such
party. This agreement may be terminated by any Portfolio without penalty, at any
time, (1) either by a vote of the Board of Directors or by vote of the
outstanding voting securities of that Portfolio on sixty (60) days' written
notice, (2) by LTCB-MAS upon ninety (90) days' notice to the Sub-adviser and the
Fund, or (3) by the Sub- adviser upon ninety (90) days' notice to LTCB-MAS and
the Fund. This agreement may remain in effect with respect to a Portfolio even
if it has been terminated in accordance with this paragraph with respect to the
other Portfolio of the Fund. This agreement will also terminate automatically in
the event of its assignment (as defined in the 1940 Act).
10. Except to the extent necessary to perform the Sub- adviser's
obligations under this agreement, nothing herein shall be deemed to limit or
restrict the right of the Sub-adviser, or any affiliate of the Sub-adviser, or
any employee of the Sub- adviser, to engage in any other business or to devote
time and attention to the management or other aspects of any other business,
whether of a similar or dissimilar nature, or to render services of any kind to
<PAGE>
4
any other corporation, firm, individual or association.
11. This agreement shall be governed by the laws of the State of New York.
<PAGE>
5
If the foregoing correctly sets forth the agreement between LTCB-MAS and
the Sub-adviser, please so indicate by signing and returning to LTCB-MAS the
enclosed copy hereof.
Very truly yours,
LTCB-MAS INVESTMENT MANAGEMENT, INC.
By:______________________________
Title:
ACCEPTED:
MILLER ANDERSON & SHERRERD
By:______________________________
Title:
<PAGE>
6
SCHEDULE A
Equity Portfolio
Fixed Income Portfolio
<PAGE>
