As filed with the Securities and Exchange Commission on January 29, 1996
Registration Nos. 33-65568
811-7828
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 5 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 7 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
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 845-8406
Joan V. Fiore
Secretary
Minerva Fund, Inc.
237 Park Avenue
New York, New York 10017
(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)
__X____ immediately upon filing pursuant to paragraph (b)
_______ on (date) pursuant to paragraph (b)
_______ 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 was filed on November 28, 1995.
<PAGE>
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
Fund Performance ........................... Not Applicable
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
<PAGE>
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
<PAGE>
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
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Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE>
[LOGO] 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 29, 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 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 29, 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.
<PAGE>
TABLE OF CONTENTS
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 ................................... 23
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 LLC
230 Park Avenue
New York, New York 10169
2
<PAGE>
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.
<TABLE>
<CAPTION>
Fixed
Equity Income
Portfolio Portfolio
-------- --------
<S> <C> <C>
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%
------- ------
Total Fund Operating Expenses (estimated, after expense reimbursements)** ..................... 1.00% .80%
======= ======
</TABLE>
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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 1.84% and
4.10% 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 2.34% and 4.48%
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
<PAGE>
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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 $741 million. LTCB, with over $300 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 $33
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
<PAGE>
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PROSPECTUS SUMMARY--Continued
ADMINISTRATIVE SERVICES
Furman Selz LLC ("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, commonly referred to as derivatives, 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 Rating Group
("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
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for each period below has been audited
by Price Waterhouse LLP, the Fund's independent accountants whose report on the
financial statements, including this per share 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.
<TABLE>
<CAPTION>
Equity Portfolio Fixed Income Portfolio
---------------------- ----------------------
Year Period Year Period
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1995 1994* 1995 1994**
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .......................... $10.01 $10.00 $ 8.91 $10.00
------ ------ ------ ------
Income from Investment Operations:
Net investment income(1) .................................... 0.22 0.16 0.55 0.48
Net realized and unrealized appreciation
(depreciation) on investments ............................. 2.20 0.02 0.70 (1.09)
------ ------ ------ ------
Total Increase (decrease) from Investment Operations ...... 2.42 0.18 1.25 (0.61)
------ ------ ------ ------
Less Distributions:
Dividends from net investment income ........................ (0.20) (0.15) (0.45) (0.33)
Return of Capital ........................................... -- (0.02) (0.11) (0.15)
------ ------ ------ ------
Total Distributions ....................................... (0.20) (0.17) (0.56) (0.48)
------ ------ ------ ------
Net Asset Value, End of Period ................................ $12.23 $10.01 $ 9.60 $ 8.91
====== ====== ====== ======
Total Return*** ............................................... 24.37% 1.99% 14.49% (6.18%)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands) .................... 12,725 10,227 3,275 2,861
Ratio of Net Investment Income to Average Net Assets+ ....... 1.90% 1.56% 6.00% 5.49%(a)
Ratio of Expenses to Average Net Assets++ ................... 1.03% 1.00% 0.85% 0.91%(a)
Portfolio Turnover Rate ..................................... 56% 35% 150% 196%
</TABLE>
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(1) Per share data 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 0.59%, 2.37%, 0.72% and 2.43%,
respectively.
++ Ratios of Expenses before effect of waivers and reimbursements were 2.34%,
4.48%, 1.85% and 3.40%, respectively.
(a) Annualized.
6
<PAGE>
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, will fluctuate 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 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.
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.
8
<PAGE>
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."
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.
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.
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
will maintain liquid assets in an amount at least equal to the repurchase price
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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. Such
instruments are commonly referred to as "derivatives." 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
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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.
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
flows from the mortgage pass-through are allocated to various tranches in a
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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 56% and 150%, 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
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unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connection with conversions between various currencies.
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, which
are part of a class of instruments commonly referred to as "derivatives," 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 be
purchased by wiring Federal Funds ($1 million minimum per Portfolio) 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 also 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 per Portfolio) 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
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 per Portfolio) by mailing a check to the Fund at
the address noted under "Initial Investments by Mail" (payable to Minerva Fund,
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<PAGE>
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
to verify the identity of the person who has authorized a redemption from an
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<PAGE>
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,
subject to the minimum investment requirements specified under "Purchase of
Shares" above. 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. The exchange privilege may be modified or discontinued upon 30 days'
prior written notice to shareholders.
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.
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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
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.
23
<PAGE>
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.
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 $741 million. LTCB, with
over $300 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 $33 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.
24
<PAGE>
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:
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. MA&S is wholly owned, indirectly,
by Morgan Stanley Group Inc. 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.
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 Portfolio Manager 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 Portfolio Manager 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 Portfolio Managers of MA&S have 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
the Fund's Registration Statements under federal and state laws. Pursuant to the
25
<PAGE>
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 LLC, 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 company
27
<PAGE>
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 Miller Anderson & Sherrerd (since 1989);
Miller Anderson & Sherrerd Chairman of the Board 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 Director, Thirty Thirty Park Group, Inc.
New York, NY 10022
Age: 54 years
Charles A. Parker Director Director, T.C.W. Convertible Fund, Inc.;
54 Huckleberry Hill Road formerly Executive Vice President, Director
New Canaan, CT 06840 and Chief Investment Officer, Continental
Age: 61 years Corporation
- --------------
* Director is deemed to be an "interested person" of the Fund as that term is defined in the 1940 Act.
</TABLE>
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 Director,
230 Park Avenue Treasurer Furman Selz LLC
New York, NY 10169
Age: 36 years
Joan V. Fiore Secretary Managing Director and Counsel,
230 Park Avenue Furman Selz LLC (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 LLC (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 LLC (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 29, 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 29, 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-34
Portfolio Transactions..................................................... B-34
Administration, Custody and Transfer
Agency Services........................................................... B-35
General Information ....................................................... B-37
Performance Calculations .................................................. B-39
Comparative Indices ....................................................... B-41
Appendix -- Description of Securities and Ratings.......................... A-1
Report of Independent Accountants and
Financial Statements.................................................. F-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
<PAGE>
-3-
arbitrage operations. By lending its investment 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-
- --------------------------------------------------------------------------------
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
<PAGE>
-6-
1% and 10% of the value of 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 down
from the previous
<PAGE>
-8-
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
dollars and will thereby offset, in whole or in part,
<PAGE>
-9-
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
<PAGE>
-10-
custodian) upon conversion or exchange of 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
substantially in excess of their initial investments, due to the
<PAGE>
-11-
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,
<PAGE>
-13-
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 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.
- --------------------------------------------------------------------------------
TAX ASPECTS OF OPTIONS, FUTURES,
FORWARD CONTRACTS AND SWAP AGREEMENTS
- --------------------------------------------------------------------------------
Some of the options, futures contracts or forward contracts 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 treated as 60% long-term and 40% short-term capital
gains on losses. Gains or losses from foreign currency forward contracts are
treated as ordinary income or loss, however, an election may be made to treat
such gains or losses as capital gains or losses. Any gains or losses, including
"marked to market" gains or losses, on Section 1256 contracts other than forward
foreign currency contracts are generally 60% long-term and 40% short-term
capital gains or losses. Foreign currency gains and losses from the forward
foreign exchange contracts may be treated as ordinary income pursuant to Section
988.
<PAGE>
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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.
- --------------------------------------------------------------------------------
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
<PAGE>
-16-
affecting the international currency markets. The initial public 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>
-17-
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>
-18-
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION CONCERNING TAXES
- --------------------------------------------------------------------------------
In General
Each Portfolio intends to qualify as a regulated investment company (a
"RIC") under Subchapter M of the Code. 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
<PAGE>
-19-
held for more than one year. If a shareholder 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).
Note that under H.R. 2491, as passed by Congress and vetoed by President
Clinton, individual taxpayers would have been permitted a 50 percent deduction
for any capital gains that they recognized, and corporations would have been
taxed at a 28 percent rate on capital gains, in lieu of the regular corporate
rate. The provisions generally were to be effective December 31, 1994. It is
unclear whether similar legislation will be included as part of the 1996 budget
compromise and, if so, its effective date.
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
<PAGE>
-20-
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
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
<PAGE>
-21-
the Portfolio may 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.
In the past several years, the United States Congress has considered
various legislative proposals which 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 United States
shareholders of foreign corporations. In the case of a PFIC having "marketable
stock" H.R. 2491, as passed by Congress and vetoed by President Clinton,
contained a provision that would have permitted United States shareholders such
as a Portfolio to elect to mark-to-market stock in the PFIC annually. The
legislation generally treated all PFIC stock owned by a Portfolio as "marketable
stock." Otherwise, United States shareholders were treated substantially the
same as under current law. Special rules applicable to mutual funds classified
as "marketable stock" all stock in PFICs held by a Portfolio; however, a
Portfolio was not liable for tax on income from PFICs that it distributed to its
shareholders. It is unclear whether similar legislation will be included as part
of the 1996 budget compromise. Moreover, on April 1, 1992 the Internal Revenue
Service proposed regulations providing a mark-to-market election for RICs that
would have effects similar to the proposed legislation. These regulations
<PAGE>
-22-
would be effective for taxable years ending after promulgation of the
regulations as final regulations.
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
the Fund's Portfolios, including the
<PAGE>
-23-
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
<PAGE>
-24-
included in the Portfolio whose shares are to be 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.
- --------------------------------------------------------------------------------
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
<PAGE>
-25-
incur brokerage expenses if they converted these securities to cash.
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.
- --------------------------------------------------------------------------------
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
<PAGE>
-26-
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.
- --------------------------------------------------------------------------------
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)
<PAGE>
-27-
will be processed as of the close of business on the 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.
- --------------------------------------------------------------------------------
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
<PAGE>
-28-
purchase and sell marketable securities which are secured by interests in
real estate;
(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.
<PAGE>
-29-
In addition to the foregoing fundamental limitations, as a matter of
non-fundamental operating policy, each Portfolio will not:
(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
<PAGE>
-30-
not registered under the 1933 Act but which can be sold to qualified
institutional investors in accordance with Rule 144A under the 1933 Act;
(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 LLC ("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>
James D. Schmid $2,000 0 N/A $2,000
Director
Carl T. Hagberg $2,750 0 N/A $2,750
Director
Raymond F. Miller $2,750 0 N/A $2,750
Director
Charles A. Parker* $500 0 N/A $500
Director
- -------------
* Elected to the Board on September 6, 1995.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-31-
As of January 9, 1996, 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 $741 million. LTCB, with over $300 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
$33 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. The sole
general partner of MA&S is Morgan Stanley Asset Management Holdings Inc.
("MSAM"), and indirect wholly owned subsidiary of Morgan Stanley Group Inc.
("MSGI"). MSAM and two other wholly owned subsidiaries of MSGI are the limited
partners 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>
-32-
Rate
----
Equity Portfolio .50%
Fixed Income Portfolio .375%
For the fiscal year ended September 30, 1995, LTCB-MAS waived its entire
fee of $55,698 for the Equity Portfolio and $11,360 for the Fixed Income
Portfolio. In addition, LCM voluntarily reimbursed expenses of $89,818 on the
Equity Portfolio and $98,496 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.
The Investment Management Agreement and the Investment Services Agreement
became effective on January 3, 1996, and were approved in connection with the
acquisition of MA&S by MSGI. The Investment Management Agreement and the
Investment Services Agreement are substantially identical to the investment
management agreement and the investment services agreement, respectively, which
were effective prior to the consumation of
<PAGE>
-33-
such acquisition. Each Agreement continues in effect until January 3, 1998 and
for successive one year periods thereafter if approved 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.
<PAGE>
-34-
- --------------------------------------------------------------------------------
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 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 $14,369 and $-0-, 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.
<PAGE>
-35-
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 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 received $17,154
and $4,553, respectively, from the Equity Portfolio and the Fixed Income
Portfolio in administrative fees. In addition, Furman Selz is entitled to an
annual fee of $30,000 per portfolio for performing fund accounting services. For
the fiscal year ended September 30, 1995 the Fund paid $45,000 and $32,276 for
the Equity Portfolio and the Fixed Income Portfolio, respectively, which numbers
include out-of-pocket expenses, for receiving fund accounting services. 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, 1994, 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
<PAGE>
-36-
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 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
$8,500 in Transfer Agency fees and the Fixed Income Portfolio paid $8,321 for
the same period, which numbers include out-of-pocket expenses. 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,
<PAGE>
-37-
and such Agreement may be terminated by either party on 60 days' written notice.
LTCB Trust Company is a wholly owned subsidiary of LTCB. For the fiscal year
ended September 30, 1995, LTCB Trust Company received $16,044 from the Equity
Portfolio and $8,943 from the Fixed Income Portfolio for their services as
Custodian. For the period ended September 30, 1994, LTCB Trust Company received,
for their services as Custodian, $14,102 and $7,096, respectively, from the
Equity and Fixed Income Portfolios.
- --------------------------------------------------------------------------------
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
<PAGE>
-38-
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.
As of January 9, 1996, the following persons owned of record and
beneficially 5% or more of the Fund:/
<TABLE>
<CAPTION>
Fixed Income Portfolio Shares Owned Percentage
- ---------------------- ------------ ----------
<S> <C> <C>
Japan First Development Inc. 339,427.25 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 539,480.72 45.51%
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 539,480.72 45.51%
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
Japan Airlines Pension Plan 101,130.38 8.53%
LTCB Trust
165 Broadway
New York, N.Y. 10006-1404
</TABLE>
- --------
/ 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-
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 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
<PAGE>
-40-
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
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 24.37% and 14.50% 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 cumulative total return for the Equity Fund was 26.6%
and for the period November 2, 1993 (commencement of operations) through
September 30, 1995, the cumulative total return for the Fixed Income Portfolio
was 7.4%.
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:
<PAGE>
-41-
a-b
Yield = 2 [ (---- + 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
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 5.32% as of 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
<PAGE>
-42-
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.
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.
<PAGE>
-43-
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
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.
<PAGE>
-44-
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.
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 Ratings Group'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.
A-1
<PAGE>
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 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.
A-2
<PAGE>
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.
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
A-3
<PAGE>
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.
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
A-4
<PAGE>
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
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
A-5
<PAGE>
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 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,
A-6
<PAGE>
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.
A-7
<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
A-8
<PAGE>
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and the Federal National Mortgage Association.
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
A-9
<PAGE>
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.
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.
A-10
<PAGE>
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.
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.
A-11
<PAGE>
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.
A-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of
Minerva Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Minerva Equity Portfolio and
Minerva Fixed Income Portfolio (constituting Minerva Fund, Inc., hereafter
referred to as the "Portfolios") at September 30, 1995, the results of each of
their operations for the year then ended and the changes in each of their net
assets and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Portfolios' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1995 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
November 10, 1995
F-1
<PAGE>
MINERVA FUND, INC.
EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2b)
- ------ ---------- ----------
<S> <C> <C>
COMMON STOCKS - 87.6%
AEROSPACE - 2.9%
615 Lockheed Martin Corp............................... $31,373 $41,282
800 Raytheon Co........................................ 50,548 68,000
900 Rockwell International Corp........................ 41,454 42,525
2,400 United Technologies Corp........................... 143,967 212,100
---------- ----------
267,342 363,907
---------- ----------
AIR TRANSPORTATION - 0.5%
900 AMR Corp*.......................................... 59,567 64,913
---------- ----------
APPAREL - 0.4%
1,000 Fruit of the Loom Inc*............................. 31,185 20,625
900 Springs Industries Inc. - Class A.................. 32,229 35,325
---------- ----------
63,414 55,950
---------- ----------
AUTOMOBILES - 1.7%
900 Chrysler Corporation............................... 51,242 47,700
3,600 General Motors Corp................................ 154,341 168,750
---------- ----------
205,583 216,450
---------- ----------
AUTOMOTIVE RELATED - 1.2%
1,100 Eaton Corporation.................................. 59,566 58,300
2,400 Goodyear Tire and Rubber Co........................ 99,069 94,500
---------- ----------
158,635 152,800
---------- ----------
BANKS - 6.7%
1,000 Bank of Boston Corp................................ 35,710 47,625
2,700 Chemical Banking Corp.............................. 112,612 164,363
1,200 Citicorp........................................... 49,722 84,900
900 Crestar Financial Corp............................. 42,017 50,288
1,500 First America Bancorp.............................. 62,903 64,500
1,200 First Union Corp................................... 61,422 61,200
1,350 Mercantile Bancorporation.......................... 45,729 60,413
2,900 NationsBank Corp................................... 148,262 195,025
500 Northern Trust Corp................................ 21,125 23,000
900 TCF Financial Corp................................. 35,267 52,425
1,700 U.S. Bancorp....................................... 44,500 48,025
---------- ----------
659,269 851,764
---------- ----------
BASIC CHEMICALS - 3.4%
400 Airgas Inc*........................................ 10,524 10,650
4,000 Du Pont (E.I.) De Nemours.......................... 226,628 275,000
600 Olin Corp.......................................... 37,761 41,250
600 Rohm & Haas........................................ 34,686 36,225
1,200 W.R. Grace & Co.................................... 52,422 80,100
---------- ----------
362,021 443,225
---------- ----------
BEVERAGES - 2.5%
1,000 Anheuser-Busch Co. Inc............................. 58,310 62,375
2,200 Cott Corp.......................................... 50,025 20,900
4,500 Pepsico Inc........................................ 172,173 229,500
---------- ----------
280,508 312,775
---------- ----------
BUILDING AND HOUSING - 0.3%
400 Armstrong World Industries Inc..................... 17,699 22,200
800 Danaher Corp....................................... 24,148 26,200
---------- ----------
41,847 48,400
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
MINERVA FUND, INC.
EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2b)
- ------ ---------- ----------
<S> <C> <C>
BUSINESS SERVICES - 1.2%
400 Cintas Corp........................................ $11,200 $17,600
600 Gartner Group Inc. - Class A*...................... 12,600 19,650
1,100 PHH Corp........................................... 39,804 49,500
2,500 WMX Technologies, Inc.............................. 71,388 71,250
---------- ----------
134,992 158,000
---------- ----------
COMPUTERS AND OFFICE EQUIPMENT - 2.9%
2,200 Compaq Computer Corp*.............................. 83,882 106,425
1,100 International Business Machines Corp............... 118,329 103,813
2,400 Seagate Technology Inc*............................ 51,606 101,100
800 Stratus Computer, Inc*............................. 23,907 21,000
600 Sun Microsystems Corp*............................. 17,603 37,800
---------- ----------
295,327 370,138
---------- ----------
COMPUTER SOFTWARE AND SERVICES - 0.7%
500 Adobe Systems Inc.................................. 27,875 25,875
800 Fiserv, Inc*....................................... 17,000 23,100
1,000 Oracle Systems Corp*............................... 20,262 38,375
---------- ----------
65,137 87,350
---------- ----------
CONTAINERS - 0.5%
1,200 Temple-Inland Inc.................................. 62,885 63,900
---------- ----------
CREDIT AND FINANCE - 2.0%
800 Federal Home Loan Mortgage Corp.................... 40,248 55,300
1,300 Federal National Mortgage Association.............. 102,416 134,550
1,200 Sirrom Capital Corp................................ 19,350 21,750
597 TransAmerica Corp.................................. 34,543 42,536
---------- ----------
196,557 254,136
---------- ----------
DEPARTMENT STORES - 1.9%
1,200 Dillard Department Stores - Class A................ 37,961 38,250
2,300 Federated Department Stores........................ 65,976 65,263
3,700 Sears, Roebuck and Co.............................. 120,812 136,438
---------- ----------
224,749 239,951
---------- ----------
DISCOUNTERS - 1.1%
1,900 K Mart Corp........................................ 45,477 27,550
4,600 Wal-Mart Stores Inc................................ 115,551 114,425
---------- ----------
161,028 141,975
---------- ----------
DRUGS - 4.8%
1,700 Allergan Inc....................................... 37,404 56,738
600 Alza Corp. - Class A*.............................. 13,386 13,800
1,300 American Home Products Corp........................ 79,091 110,338
2,700 Bristol-Myers Squibb Co............................ 154,600 196,763
1,400 Johnson & Johnson.................................. 64,297 103,775
800 Rhone-Poulenc Rorer................................ 29,648 36,400
1,000 Warner-Lambert Co.................................. 74,015 95,250
---------- ----------
452,441 613,064
---------- ----------
ELECTRICAL EQUIPMENT - 2.2%
4,400 General Electric Co................................ 214,466 280,500
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MINERVA FUND, INC.
EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1995 - (CONTINUED)
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2b)
- ------ ---------- ----------
<S> <C> <C>
ELECTRICAL POWER - 3.0%
700 Consolidated Edison of New York.................... $20,167 $21,263
2,400 Entergy Corp....................................... 73,319 62,700
700 Florida Progress Corp.............................. 20,255 22,663
2,700 Ohio Edison Co..................................... 60,912 61,425
2,000 Pacific Gas & Electric Co.......................... 56,870 59,750
1,600 Peco Energy Company................................ 47,971 45,800
1,400 Public Service Enterprise Group, Inc............... 37,797 41,650
2,000 Unicom Corporation................................. 50,208 60,500
---------- ----------
367,499 375,751
---------- ----------
ELECTRONICS - 3.0%
2,000 Intel Corp......................................... 61,575 120,250
800 LSI Logic Corp*.................................... 21,524 46,200
3,200 National Semiconductor Corp*....................... 88,788 88,400
1,600 Texas Instruments Inc.............................. 57,523 127,800
---------- ----------
229,410 382,650
---------- ----------
FOOD PRODUCTS - 2.3%
4,200 Archer-Daniels Midland Co.......................... 80,065 64,575
2,000 Campbell Soup Co................................... 86,973 100,500
800 Ralston Purina Group............................... 32,548 46,300
600 Unilever NV - ADR.................................. 75,636 78,000
---------- ----------
275,222 289,375
---------- ----------
FOOD RETAILERS - 0.5%
1,900 Kroger Supermarkets*............................... 47,977 64,838
---------- ----------
FURNISHINGS AND APPLIANCES - 0.8%
1,200 Premark International, Inc......................... 38,436 61,050
800 Whirlpool Corp..................................... 41,248 46,200
---------- ----------
79,684 107,250
---------- ----------
HEALTH SERVICES - 2.5%
2,436 Columbia HCA Healthcare Corp....................... 90,262 118,451
1,125 Health Management Associates Inc*.................. 20,030 36,141
2,100 Humana Inc*........................................ 43,959 42,263
900 Lincare Holdings Inc*.............................. 20,700 23,175
1,600 U.S. Healthcare Inc................................ 65,600 56,600
300 Vivra Inc*......................................... 9,806 9,525
---------- ----------
250,357 286,155
---------- ----------
HEALTH TECHNOLOGY - 0.3%
1,300 Beckman Instruments Inc............................ 35,178 39,325
---------- ----------
HOSPITAL SUPPLIES - 1.6%
1,900 Baxter International Inc........................... 44,064 78,138
1,400 Becton Dickinson & Co.............................. 52,759 88,025
1,100 Mallinckrodt Group Inc............................. 34,579 43,588
---------- ----------
131,402 209,751
---------- ----------
INSURANCE - 3.0%
1,100 Aetna Life & Casualty Co........................... 58,624 80,713
556 Allstate Corp...................................... 13,729 19,669
1,400 American General Corp.............................. 44,259 52,325
1,900 Exel Limited....................................... 89,102 110,438
1,000 Providian Corp..................................... 36,177 41,500
600 SAFECO Corp........................................ 35,325 39,375
600 St. Paul Companies Inc............................. 27,618 35,025
---------- ----------
304,834 379,045
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MINERVA FUND, INC.
EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1995 - (CONTINUED)
<TABLE>
VALUE
SHARES COST (NOTE 2b)
- ------ ---------- ----------
<S> <C> <C>
LODGING - 0.1%
600 La Quinta Inns Inc................................. $16,686 $16,800
---------- ----------
Machinery - 0.8%
1,200 Cummins Engine..................................... 50,048 46,200
700 Deere & Co......................................... 52,192 56,963
---------- ----------
102,240 103,163
---------- ----------
MISCELLANEOUS INDUSTRIALS - 2.8%
700 FMC Corp*.......................................... 34,692 53,200
500 ITT Corp........................................... 42,804 62,000
500 Minnesota Mining & Manufacturing Co................ 26,209 28,250
2,100 Tenneco Inc........................................ 87,530 97,125
1,000 Textron Inc........................................ 52,285 68,250
1,200 Trinova Corp....................................... 42,072 40,500
---------- ----------
285,592 349,325
---------- ----------
NATURAL GAS - 0.8%
2,200 Coastal Corp....................................... 60,157 73,975
1,000 El Paso Natural Gas................................ 32,310 27,500
---------- ----------
92,467 101,475
---------- ----------
OIL - DOMESTIC AND CRUDE - 3.6%
1,900 Amoco Corp......................................... 116,114 121,838
1,400 Atlantic Richfield Co.............................. 148,809 150,325
1,400 Burlington Resources Inc........................... 56,184 54,250
600 Mapco Inc.......................................... 38,211 30,900
1,100 Ultramar Corp...................................... 28,545 26,125
2,700 Unocal Corporation................................. 75,650 76,950
---------- ----------
463,513 460,388
---------- ----------
OIL - INTERNATIONAL - 3.2%
1,100 British Petroleum PLC - ADR........................ 87,673 98,863
1,300 Chevron Corporation................................ 57,783 63,213
1,400 Mobil Corp......................................... 113,659 139,475
800 Norsk Hydro A.S. - ADR............................. 36,211 34,500
2,500 Total S.A. - ADR................................... 68,225 75,313
---------- ----------
363,551 411,364
---------- ----------
OTHER CONSUMER SERVICES - 0.5%
1,500 Service Corporation International.................. 38,903 58,688
---------- ----------
PAPER - 1.6%
700 Georgia-Pacific Corp............................... 53,417 61,250
1,800 Scott Paper Co..................................... 59,717 87,300
1,100 Weyerhaeuser Co.................................... 48,604 50,188
---------- ----------
161,738 198,738
---------- ----------
PERSONAL PRODUCTS - 2.0%
1,000 Avon Products Inc.................................. 54,435 71,750
2,300 Proctor & Gamble Co................................ 117,101 177,100
---------- ----------
171,536 248,850
---------- ----------
PUBLISHING AND BROADCASTING - 2.2%
600 Capital Cities / ABC Inc........................... 49,311 70,575
500 Cicasters Inc*..................................... 19,500 16,688
1,350 Comcast Corp. - Class A............................ 26,100 27,000
700 International CableTelecommunications Inc*......... 19,425 19,600
1,500 Liberty Media Group - Class A*..................... 39,323 40,125
2,800 Telecommunications Inc. - Class A*................. 55,527 49,000
1,600 Time Warner, Inc................................... 64,496 63,600
---------- ----------
273,682 286,588
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MINERVA FUND, INC.
EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1995 - (CONTINUED)
<TABLE>
VALUE
SHARES COST (NOTE 2b)
- ------ ---------- ----------
<S> <C> <C>
RAILROADS - 2.1%
1,151 Burlington Northern, Inc........................... $52,627 $83,416
200 CSX Corp........................................... 15,562 16,825
2,600 Union Pacific Corp................................. 168,005 172,250
---------- ----------
236,194 272,491
---------- ----------
REAL ESTATE INVESTMENT TRUSTS - 0.3%
1,300 Debartolo Realty Corp.............................. 19,253 18,200
1,012 Security Capital Pacific Trust..................... 20,886 19,228
---------- ----------
40,139 37,428
---------- ----------
RECREATION AND TOYS - 0.3%
700 Eastman Kodak Co................................... 33,852 41,475
---------- ----------
RESTAURANTS - 0.6%
3,400 Wendy's International Inc.......................... 61,404 71,825
---------- ----------
SPECIALTY STORES - 1.7%
1,700 Circuit City Stores Inc............................ 40,906 53,763
800 Gymboree*.......................................... 18,250 24,100
1,800 Home Depot, Inc.................................... 70,583 71,775
1,200 Melville Corp...................................... 37,422 41,400
1,100 Officemax Inc*..................................... 23,166 26,675
400 Viking Office Products*............................ 11,800 16,700
---------- ----------
202,127 234,413
---------- ----------
TELECOMMUNICATIONS EQUIPMENT - 0.8%
300 Cidco Inc*......................................... 9,375 10,575
800 Motorola, Inc...................................... 40,024 61,100
300 Qualcomm, Inc*..................................... 14,513 13,763
400 Tellabs Inc*....................................... 13,650 16,850
---------- ----------
77,562 102,288
---------- ----------
TELEPHONE SERVICES - 7.1%
1,900 Airtouch Communications Co*........................ 46,735 58,188
400 Cellular Communications Inc*....................... 18,500 21,800
2,600 Frontier Corp*..................................... 54,453 69,225
800 Globalstar Telecommunications*..................... 12,400 17,100
4,000 GTE Corp........................................... 136,028 157,000
3,200 MCI Communications Corp............................ 86,800 83,400
650 Paging Network Inc*................................ 21,033 31,200
2,200 SBC Communications Inc............................. 93,882 121,000
3,200 Sprint Corporation................................. 104,567 112,000
2,800 U.S. West Inc...................................... 122,548 131,950
2,300 Vodafone Group PLC - ADR........................... 70,388 94,300
---------- ----------
767,334 897,163
---------- ----------
TOBACCO - 3.2%
2,800 Philip Morris Cos., Inc............................ 154,148 233,800
3,680 RJR Nabisco Holdings Corp.......................... 105,297 119,140
1,700 UST, Inc........................................... 45,177 48,646
---------- ----------
304,622 401,586
---------- ----------
TOTAL COMMON STOCK 9,320,473 11,147,386
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
MINERVA FUND, INC.
EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1995
<TABLE>
VALUE
SHARES COST (NOTE 2b)
- ------ ----------- ------------
<S> <C> <C>
PREFERRED STOCKS - 0.5%
2,900 News Corp. Ltd. - ADR........................................ $63,612 $57,638
----------- ------------
MONEY MARKET FUNDS - 9.4%
$606,562 Federated Trust for Government Cash Reserves, 5.29% (a)....... 606,562 606,562
593,366 Fidelity Institutional Cash Treasury II, 5.60% (a)............ 593,366 593,366
----------- ------------
TOTAL MONEY MARKET FUNDS 1,199,928 1,199,928
----------- ------------
TOTAL INVESTMENTS - 97.5% $10,584,013 ** 12,404,952
===========
OTHER ASSETS IN EXCESS OF LIABILITIES - 2.5% 320,144
-----------
NET ASSETS - 100% $12,725,096
===========
</TABLE>
*Non-income producing security
**The cost for Federal income tax purposes is the same. See Note 6b.
ADR - American Depository Receipt
(a) Yield effective on 9/30/95.
See accompanying notes to financial statements.
F-7
<PAGE>
MINERVA FUND, INC.
FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT COST (NOTE 2b)
- --------- ------- ---------
<S> <C> <C>
CORPORATE OBLIGATIONS - 11.4%
ENERGY - 0.5%
$15,000 Maxus Energy 10.83%, 9/1/2004.................................................. $15,000 $15,711
------- ---------
FINANCE - 1.2%
15,000 Conseco Inc. 8.125%, 2/15/2003................................................. 14,297 14,325
15,000 Fireman's Fund Mortgage Corp. 8.875%, 10/15/2001............................... 16,441 16,050
10,000 Home Holdings Inc. 8.625%, 12/15/2003.......................................... 9,898 8,075
------- ---------
40,636 38,450
------- ---------
INDUSTRIALS - 8.0%
15,000 Blue Bell Funding 11.85%, 5/1/1999............................................. 15,889 15,788
15,000 Columbia/HCA Healthcare 7.69%, 6/15/2025....................................... 14,981 15,335
15,000 Comcast Corp. 9.375%, 5/15/2005................................................ 14,978 15,263
15,000 Digital Equipment Corporation 8.625%, 11/1/2012................................ 14,292 15,537
8,000 Dillon Read Structure Finance Series 94K2 9.35%, 8/15/2019..................... 7,864 7,897
15,000 Federated Department Stores 10.00%, 2/15/2001.................................. 15,012 16,256
20,000 Fleming Co. Inc. 10.625%, 12/15/2001........................................... 20,582 21,300
20,000 News American Holdings Inc. 10.125%, 10/15/2012................................ 21,328 22,775
15,000 Paramount Communications 8.25%, 8/1/2022....................................... 14,498 14,927
10,000 PT Alatief Freeport 9.75%, 4/15/2001........................................... 9,991 10,575
15,000 Rogers Cable Systems 10.00%, 3/15/2005......................................... 15,050 15,750
20,000 RJR Nabisco Inc. 8.75%, 4/15/2004.............................................. 19,106 20,250
13,645 Scotia Pacific Holdings 7.95%, 7/20/2015....................................... 13,207 14,106
25,000 Southland Corp. 5.00%, 12/15/2003.............................................. 18,098 19,344
5,000 Telecommunications Inc. 9.875%, 6/15/2022...................................... 5,156 5,663
15,000 Telecommunications Inc. 9.25%, 1/15/2023....................................... 14,640 15,769
15,000 Time Warner Inc. 9.15%, 2/1/2023............................................... 14,473 16,350
------- ---------
249,145 262,885
------- ---------
TELEPHONE - 0.7%
10,000 AT & T Corp. 8.35%, 1/15/2025.................................................. 10,782 10,888
15,000 Comcast Cellular 0.00% 3/5/2000................................................ 10,360 11,381
------- ---------
21,142 22,269
------- ---------
TRANSPORTATION - 0.8%
4,992 Jet Equipment Trust 10.91%, 6/15/2006.......................................... 5,179 5,659
20,000 Jet Equipment Trust 10.00%, 6/15/2012.......................................... 20,007 23,044
------- ---------
25,186 28,703
------- ---------
UTILITIES - 0.2%
5,000 Long Island Lighting Co. 8.90%, 7/15/2019...................................... 5,144 5,000
------- ---------
TOTAL CORPORATE OBLIGATIONS 356,253 373,018
------- ---------
FOREIGN GOVERNMENT OBLIGATIONS - 12.1%
125,000 (a)Government of Canada 8.50%, 4/1/2002........................................... 98,878 97,127
250,000 (b)Government of France OAT 8.50%, 11/25/2002..................................... 47,628 54,583
350,000 (b)Government of France OAT 8.50%, 4/25/2023...................................... 71,880 74,665
150,000 (b)Government of France OAT 9.50%, 1/25/2001...................................... 29,204 33,974
230,000 (c)Kingdom of Denmark 9.00%, 11/15/2000........................................... 44,109 44,643
100,000 (d)Treuhandanstalt 7.125%, 1/29/2003.............................................. 73,453 73,061
10,000 (e)United Kingdom 9.125%, 2/21/2001............................................... 13,898 16,996
------- ---------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS 379,050 395,049
------- ---------
MORTGAGE - BACKED SECURITIES - 20.0%
ADJUSTABLE RATE:
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 9.0%
146,903 #8326 6.50%, 11/20/2023.................................................... 148,966 149,107
47,375 #8399 5.00%, 4/20/2024..................................................... 46,288 47,346
48,448 #8496 5.50%, 9/20/2024..................................................... 47,722 48,902
48,490 #8502 6.00%, 9/20/2024..................................................... 49,041 49,460
------- ---------
292,017 294,815
------- ---------
FIXED RATE:
FEDERAL HOME LOAN MORTGAGE CORP. - 3.7%
43,462 #140509 11.50%, 3/1/2014................................................... 48,347 48,176
66,491 #555183 11.25%, 12/1/2015.................................................. 73,733 73,473
------- ---------
122,080 121,649
------- ---------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
MINERVA FUND, INC.
FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT COST (NOTE 2b)
- --------- ---------- ----------
<S> <C> <C>
FIXED RATE - (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 4.4%
$66,983 #243156 10.50%, 8/1/2019................................................... $74,435 $73,619
63,817 #046364 11.50%, 11/1/2015.................................................. 71,152 71,297
---------- ----------
145,587 144,916
---------- ----------
NON-GOVERNMENT AGENCY ISSUED - 2.9%
25,000 American Southwest Financial Securities Corp. 7.40%, 11/17/2004................ 25,369 25,664
25,000 Residential Funding Mortgage Series 95 S16 A7 Mezz 7.50% 10/15/2025............ 25,098 25,009
48,147 Rural Housing Trust 1987-1 3.33%, 4/1/2026..................................... 44,548 43,900
---------- ----------
95,015 94,573
---------- ----------
TOTAL MORTGAGE BACKED SECURITIES 654,699 655,953
---------- ----------
U.S. TREASURY OBLIGATIONS - 27.3%
335,000 Bonds 8.75%, 8/15/2020..................................................... 405,191 419,467
320,000 Bonds 7.875%, 2/15/2021.................................................... 364,013 367,261
100,000 Notes 7.250%, 8/15/2004.................................................... 106,415 106,930
---------- ----------
TOTAL U.S. TREASURY OBLIGATIONS 875,619 893,658
---------- ----------
YANKEE BONDS - 1.4%
50,000 Argentina Par Bonds 5.00%, 3/31/23............................................. 26,629 24,250
20,000 Hydro Quebec 8.40%, 1/15/2022.................................................. 19,803 21,675
---------- ----------
TOTAL YANKEE BONDS 46,432 45,925
---------- ----------
MONEY MARKET FUNDS - 9.5%
156,297 Federated Trust for Gov6ernment Cash Reserves, 5.29%**......................... 156,297 156,297
154,993 Fidelity Institutional Cash Treasury II, 5.60%**............................... 154,993 154,993
---------- ----------
TOTAL MONEY MARKET FUNDS 311,290 311,290
---------- ----------
VARIABLE RATE NOTES+ - 1.5%
$25,000 Marshall & Illsley 5.9375%, 10/26/1995......................................... 24,993 24,995
25,000 Wells Fargo & Co. 5.8125%, 12/2/1995........................................... 24,922 24,993
---------- ----------
TOTAL VARIABLE RATE NOTES 49,915 49,988
---------- ----------
TOTAL INVESTMENTS 83.2% $2,673,258 * 2,724,881
==========
OTHER ASSETS IN EXCESS OF LIABILITIES 16.8% 549,910
----------
NET ASSETS 100.0% $3,274,791
==========
FORWARD FOREIGN CURRENCY CONTRACTS - SOLD SHORT
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
AMOUNT OF ORIGINAL MARKET APPRECIATION
CONTRACTS CURRENCY EXPIRATION DATE VALUE VALUE (DEPRECIATION)
- ------------- -------- --------------- -------- ------ --------------
<S> <C> <C> <C> <C> <C>
(35,000) Canadian Dollar 12/26/95 ($25,751) ($25,899) ($148)
(100,000) Canadian Dollar 12/14/95 (73,624) (73,914) (290)
(80,000) Danish Krone 10/11/95 (14,815) (14,402) 413
(10,000) Ecu 10/11/95 (13,343) (7,706) 5,637
(165,000) French Franc 12/12/95 (32,496) (33,582) (1,086)
(675,000) French Franc 10/12/95 (139,269) (137,450) 1,819
(100,000) German Mark 11/6/95 (70,878) (70,458) 420
(55,000) German Mark 10/19/95 (39,568) (38,716) 852
---------- ---------- ------
TOTAL FORWARD FOREIGN CURRENCY CONTRACTS - SOLD SHORT ($409,744) ($402,127) $7,617
========== ========== ======
</TABLE>
(a) Principal amount in Canadian Dollars.
(b) Principal amount in French Francs.
(c) Principal amount in Danish Krones.
(d) Principal amount in German Marks.
(e) Principal amount in British Pounds.
OAT - Obligation Assimilabli du Tresor
CMO- Collateralized Mortgage Obligation
*The cost for Federal income tax purposes is the same. See Note 6b.
**Yield effective 9/30/95
+Maturity date shown is the next interest reset date; rate shown is rate
in effect on September 30, 1995.
See accompanying notes to financial statements.
F-9
<PAGE>
MINERVA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO
----------- ----------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(identified cost $10,584,013 and $2,673,258 respectively).......................... $12,404,952 $2,724,881
Cash............................................................................... 239,589 400,493
Receivable for investment securities sold.......................................... 92,445 37,131
Receivable from Adviser............................................................ 89,818 98,496
Unamortized organizational cost.................................................... 63,829 64,060
Dividends and interest receivable.................................................. 24,233 44,852
Receivable for forward currency contracts closed(Note 2e).......................... -- 1,529
Receivable for forward currency contracts (Note 2e)................................ -- 7,617
----------- ----------
Total Assets................................................................... 12,914,866 3,379,059
----------- ----------
LIABILITIES:
Payable for investment securities purchased........................................ 127,398 78,944
Fund accounting fee payable........................................................ 2,500 2,500
Custodian fee payable.............................................................. 4,924 3,224
Administrative services fee payable................................................ 3,111 806
Transfer agent fee payable......................................................... 500 500
Other accrued expenses............................................................. 51,337 18,294
----------- ----------
Total Liabilities............................................................... 189,770 104,268
----------- ----------
NET ASSETS $12,725,096 $3,274,791
=========== ==========
Net Assets
Par value of shares of capital stock outstanding (par value $.001 per share,
200,000,000 shares authorized)..................................................... $1,040 $341
Additional paid-in capital......................................................... 10,400,827 3,283,594
Accumulated undistributed (overdistributed) net investment income.................. 19,577 (14,940)
Accumulated undistributed net realized gain (loss) on investments.................. 482,713 (53,444)
Unrealized appreciation on forward currency contracts (Note 2e).................... -- 7,617
Unrealized appreciation of investments............................................. 1,820,939 51,394
Unrealized foreign exchange gain................................................... -- 229
----------- ----------
Net Assets......................................................................... $12,725,096 $3,274,791
=========== ==========
Shares of Capital Stock Outstanding................................................ 1,040,164 341,145
--------- -------
Net Asset Value (Maximum Offering Price and Redemption Price Per Share) ........... $12.23 $9.60
====== =====
</TABLE>
See accompanying notes to financial statements
F-10
<PAGE>
MINERVA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO
--------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends........................................................................ $264,831 --
Interest ........................................................................ 61,963 $206,160 (a)
---------- ------------
326,794 206,160
---------- ------------
EXPENSES:
Advisory ........................................................................ 55,698 11,359
Fund accounting.................................................................. 45,000 32,276
Legal............................................................................ 32,000 10,176
Audit............................................................................ 23,700 15,841
Amortization of organization expenses............................................ 20,115 20,183
Administrative services ......................................................... 17,154 4,553
Custodian ....................................................................... 16,044 8,943
Insurance........................................................................ 14,256 3,933
Transfer agent .................................................................. 8,500 8,321
Reports to shareholders.......................................................... 8,500 3,388
Directors........................................................................ 7,000 6,852
Registration..................................................................... 5,960 5,570
Miscellaneous.................................................................... 7,000 4,280
---------- ------------
Total expenses before waivers / reimbursements................................... 260,927 135,675
Expenses waived / reimbursed by Adviser.......................................... (145,516) (109,856)
---------- ------------
NET EXPENSES..................................................................... 115,411 25,819
---------- ------------
NET INVESTMENT INCOME.............................................................. 211,383 180,341
---------- ------------
Net realized gain on investments................................................... 490,664 468
Net realized loss on forward currency contracts (Note 2e).......................... -- (25,081)
Change in unrealized appreciation on forward currency contracts and foreign exchang -- 11,968
Change in unrealized appreciation on investments................................... 1,795,679 245,771
---------- ------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS.................................... 2,286,343 233,126
---------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................... $2,497,726 $413,467
========== ============
</TABLE>
(a) Net $180 of foreign withholding tax expense.
See accompanying notes to financial statements.
F-11
<PAGE>
MINERVA FUND, INC.
MINERVA EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Net investment income............................................................ $211,383 $158,884
Net realized gain (loss) on investments.......................................... 490,664 (6,774)
Change in unrealized appreciation of investments................................. 1,795,679 25,260
------------- -------------
Net increase in net assets resulting from operations............................... 2,497,726 177,370
------------- -------------
DISTRIBUTIONS:
Net investment income............................................................ (202,662) (149,205)
Return of capital................................................................ ----- (18,362)
------------- -------------
Total Distributions.............................................................. (202,662) (167,567)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sales of shares.................................................... --- 10,000,000
Net asset value of shares issued in reinvestment of distributions................ 202,662 167,567
------------- -------------
Net increase in net assets from capital share transactions....................... 202,662 10,167,567
------------- -------------
Total Increase in Net A............................................................ 2,497,726 10,177,370
NET ASSETS:
Beginning of period.............................................................. 10,227,370 50,000
------------- -------------
End of period (including undistributed net investment income
of $19,577 and $10,856, respectively)........................................... $12,725,096 $10,227,370
============= =============
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
MINERVA FUND, INC.
FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Year
Ended Ended
September 30, September 30,
1995 1994*
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Net investment income...................................................................... $180,341 $148,170
Net realized loss on investments, forward currency contracts and foreign exchange.......... (24,613) (138,348)
Change in unrealized appreciation (depreciation) of investments and foreign exchange....... 257,739 (198,498)
------- --------
Net increase (decrease) in net assets resulting from operations.............................. 413,467 (188,676)
------- --------
DISTRIBUTIONS:
Net investment income...................................................................... (147,818) (102,636)
Return of capital.......................................................................... (35,725) (45,501)
-------- --------
Total Distributions........................................................................ (183,543) (148,137)
-------- --------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sales of shares.............................................................. --- 3,000,000
Net asset value of shares issued in reinvestment of distributions.......................... 183,543 148,137
------- -------
Net increase in net assets from capital share transactions................................. 183,543 3,148,137
------- ---------
Total Increase in Net Assets................................................................. 413,467 2,811,324
NET ASSETS:
Beginning of period........................................................................ 2,861,324 50,000
---------- ----------
End of period (including overdistribution of net investment income
of ($14,940) and ($38,902), respectively).................................................. $3,274,791 $2,861,324
========== ==========
</TABLE>
See accompanying notes to financial statements.
* Commencement of Operations - November 2, 1993
F-13
<PAGE>
MINERVA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1. DESCRIPTION AND ORGANIZATION. Minerva Fund, Inc. (the
"Fund") is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company, and was incorporated in the State of
Maryland on June 28, 1993. The Fund currently consists of two investment
portfolios: Equity Portfolio and Fixed Income Portfolio (the "Portfolios").
At September 30, 1995 there were authorized 200,000,000 shares of capital stock
having a par value of $.001 per share. Equity Portfolio commenced operations
on October 1, 1993 and Fixed Income Portfolio commenced operations on November
2, 1993. Prior to Commencement of Operations, the Portfolios had no operations
other than organizational matters and the sale of 5,000 shares of each of the
Portfolios at $10.00 per share to Furman Selz Incorporated ("Furman Selz"), the
Fund's Administrator and Distributor, representing the initial capital of the
Fund.
The majority shareholder of Equity Portfolio is Marine Midland Bank
Trustee for Dunlop Tire Corporation with 1,034,989 shares or 99.5% of the
outstanding shares as of September 30, 1995.
The majority shareholder of Fixed Income Portfolio is Japan First
Development Inc. with 335,553 shares or 98.4% of the outstanding shares as of
September 30, 1995.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES. Following is a summary of
the significant accounting policies followed by the Portfolios:
a. Security Valuation - 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 denominated 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 securities and other assets for which no quotations
are readily available (including restricted securities) are determined in good
faith at fair value using methods approved by the Board of Directors.
F-14
<PAGE>
MINERVA FUND, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
Fixed-income securities which are traded over-the-counter and on a
stock exchange will be valued according to the broadest and most representative
market. For bonds and other fixed-income securities this ordinarily is 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 market value. The Fund has been informed that the
prices provided by the 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.
Short-term securities with remaining maturities of 60 days or less are
valued at amortized cost.
b. Investment transactions are recorded on the trade date.
Identified cost of investments sold is used to calculate realized gains and
losses for both financial statement and Federal income tax purposes. Interest
income, including the amortization of discount or premium, is recorded as
earned or accrued.
c. Dividends and Capital Gains Distributions - Dividends from net
investment income are declared and paid to shareholders on a quarterly basis.
If any net capital gains are realized from the sale of securities, the
Portfolios normally distribute such gains with the last dividend for the
calendar year. Dividends are recorded on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with Federal income tax regulations which
may differ with generally accepted accounting principles. These "book/tax"
differences are either temporary (primarily attributable to post October
capital and foreign currency loss deferrals) or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their tax-basis treatment. Temporary
differences do not require a reclassification.
Permanent differences ($16,520) which primarily resulted from a
difference in tax treatment for organizational expenses have been charged to
paid-in-capital. Realized currency losses of $25,081 were reclassified from
accumulated net investment income to accumulated realized loss to conform to
its tax treatment.
d. Forward Currency Contracts and Foreign Currency Translation - The
books and records of the Fixed Income Portfolio are maintained in U.S. dollars
as follows: (1) the foreign currency market value of investment securities,
forward currency contracts, and other assets and liabilities denominated in
foreign currencies are translated at the exchange rates at the end of the
period; and (2) purchases, sales, income and expenses are translated at the
rate of exchange prevailing on the respective dates of such transactions. The
Fixed Income Portfolio does not separately identify that portion of the results
of operations of the Portfolio that arise as a result
F-15
<PAGE>
MINERVA FUND, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
of changes in the exchange rates from the fluctuations that arise from changes
in market prices of equity investments during the year. However, in accordance
with the requirements of the Internal Revenue Code, the portfolio isolates the
effect of changes in foreign exchange rates from the fluctuations arising from
changes in market prices of foreign debt obligations sold, and such net foreign
exchange gains, which amounted to $962 for fiscal year ended September 30,
1995, are included in ordinary income for Federal income tax purposes.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
The Fixed Income Portfolio may enter into forward currency contracts
to hedge the U.S. dollar value of securities and related receivables and
payables against changes in future exchange rates. Forward currency contracts
are valued based upon the current forward rates. Fluctuations in the value of
such contracts are recorded as unrealized gains or losses; realized gains or
losses include net gains or losses on contracts which have settled. The Fixed
Income Portfolio enters into a forward currency contract as a hedge against
foreign exchange rate fluctuation, upon the purchase or sale of a security
denominated in a foreign currency. The Fixed Income Portfolio maintains, as
collateral, U.S. Government or other highly liquid debt obligations in an
amount equal to or greater than its net obligation for forward currency
contracts. The Fixed Income Portfolio bears the risk of an unfavorable change
in the foreign exchange rate underlying the forward contracts. Risks may also
arise as a result of the potential inability of the counterparties to meet the
terms of their contracts. Forward contracts involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities to
the extent of the value of the contracts.
e. Federal income taxes - The Portfolios intend to continue to qualify
as "regulated investment companies" under Subchapter M of the Internal Revenue
Code of 1986, as amended. By so qualifying, each Portfolio will not be subject
to Federal income taxes with respect to net investment income and net realized
capital gains, if any, that are distributed to shareholders. The Portfolios
also intend to meet the distribution requirements to avoid the payment of an
excise tax.
f. Organization Expenses. Costs incurred in connection with the
organization and initial registration of the Portfolios were paid by Furman
Selz and reimbursed by the Fund. These costs have been deferred and are being
amortized on the straight-line method against operations over a period of sixty
months beginning with each Portfolio's commencement of operations. In the
event any of the initial shares of the Fund are redeemed during the
amortization period, the redemption proceeds will be reduced by a pro-rata
F-16
<PAGE>
MINERVA FUND, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
portion of any unamortized organization expenses in the same proportion as the
number of shares being redeemed bears to the number of initial shares
outstanding at the time of the redemption.
g. Expenses - Expenses directly attributable to a portfolio are
charged to that portfolio. Other expenses are allocated proportionately to
each Portfolio in relation to the net assets of the Fund or on another
reasonable basis.
NOTE 3. ADVISER. The Fund has entered into an investment management
agreement (the "Investment Management Agreement") with LTCB-MAS Investment
Management, Inc. ("LTCB-MAS") (the "Investment Manager"). LTCB-MAS is a joint
subsidiary of The Long-Term Credit Bank of Japan, Limited ("LTCB") and Miller,
Anderson & Sherrerd, LLP ("MA&S").
Pursuant to an Investment Services Agreement (the "Investment Services
Agreement") between the Investment Manager and MA&S, MA&S acting in
collaboration with and under the supervision of the Investment Manager, is
responsible on a day-to-day basis for selecting investments for each Portfolio
in conformity with the Portfolio's stated investment objective and policies,
consulting with the Investment Manager regarding specific decisions concerning
the purchase, sale, or holding of particular securities on behalf of each
Portfolio and placing purchase and sale orders for each Portfolio's securities.
MA&S receives no fee from the Investment Manager or the Fund pursuant to the
Investment Services Agreement for the services it provides.
Sixty percent of the outstanding capital stock of the Investment
Manager is owned by LTCB Capital Markets, Inc. ("LCM") which, in turn, is
wholly owned by LTCB. Forty percent of the outstanding capital stock of the
Investment Manager 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.
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.
F-17
<PAGE>
MINERVA FUND, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
At the meeting 1,362,404 shares or 100% were voted for approval of the
new contracts, and 0 shares voted against, and 0 shares abstained.
Except for different effective and terminations dates, the terms of
the New Investment Management Agreement are identical in all respects to the
terms of the Current Investment Management Agreement.
The Current Investment Management Agreement provides for Equity
Portfolio and Fixed Income Portfolio to pay the Investment Manager an
investment management fee calculated and accrued daily and paid monthly at the
annual rates of 0.50% and 0.375%, respectively, of the respective Portfolio's
average daily net assets. The Investment Manager will provide portfolio
management and certain administrative, clerical and bookkeeping services for
the Fund.
During the year ended September 30, 1995, the Investment Manager
waived its fees of $55,698 and $11,360, respectively, from Equity Portfolio and
Fixed Income Portfolio. In addition, LTCB Capital Markets, Inc. has agreed to
voluntarily reimburse expenses of $89,818 and $98,496 respectively, of the
Equity Portfolio and the Fixed Income Portfolio.
LTCB-MAS has agreed that, in any fiscal year, it will reduce its
management fee to a Portfolio to the extent that the Portfolio's expenses
exceed the most restrictive expense limitation imposed by state securities laws
or regulations in states where the Portfolio's shares are sold. There was no
reimbursement of expenses to meet these limitations for the fiscal year ended
September 30, 1995.
NOTE 4. ADMINISTRATOR AND DISTRIBUTOR. Furman Selz provides the Fund
with administrative and fund accounting services pursuant to an 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 includes the 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 the Fund's registration
statements under federal and state laws. Pursuant to the Fund Administration
Agreement, the Fund pays Furman Selz a monthly fee which on an annualized basis
will not exceed 0.15% of the average daily net assets of each Portfolio.
For the year ended September 30, 1995, Furman Selz was entitled to and
received administrative services fees of $17,154 and $4,553, respectively, from
Equity Portfolio and Fixed Income Portfolio.
F-18
<PAGE>
MINERVA FUND, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
In addition, Furman Selz is entitled to an annual fee of $30,000 per
portfolio for performing fund accounting services. For the fiscal year ended
September 30, 1995, Furman Selz received its full fund accounting fee from both
the Equity Portfolio and the Fixed Income Portfolio.
The Fund has entered into a distribution agreement (the "Distribution
Agreement") with Furman Selz. Under the Distribution Agreement, Furman Selz
does not receive any fee or other compensation for distributing shares of the
Fund.
NOTE 5. OTHER TRANSACTIONS WITH AFFILIATES. The Fund has
entered into a Transfer Agency Agreement (the "Transfer Agent Agreement") with
Furman Selz whereby Furman Selz provides personnel necessary to perform
shareholder servicing functions. For its services, Furman Selz receives a fee
of $15 per account with a minimum of $6,000 per year plus reimbursement of
out-of-pocket expenses.
For the year ended September 30, 1995, Furman Selz received the
minimum fee from each of the Equity Portfolio and Fixed Income Portfolio for
performing transfer agency services.
LTCB Trust Company, a subsidiary of LTCB and an affiliate of the
Investment Manager, serves as custodian for the Fund. For furnishing custodian
services, LTCB Trust Company is paid a monthly fee with respect to the
Portfolios at an annual rate based on a percentage of average daily net assets
plus certain transaction and out of pocket expenses. For the year ended
September 30, 1995, LTCB Trust Company received fees of $16,044 and $8,943,
respectively, from Equity Portfolio and Fixed Income Portfolio.
NOTE 6 - SECURITIES TRANSACTIONS.
(a) Purchase and Sale Transactions. The aggregate amount of purchases
and sales of investment securities, other than short-term securities, for the
year ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Common Stocks & Bonds U.S. Gov't Obligations
Purchases Sales Purchases Sales
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Equity Portfolio $5,765,014 $6,307,958 --- $ 991,719
Fixed Income
Portfolio 621,570 605,355 $2,836,706 3,536,414
</TABLE>
F-19
<PAGE>
MINERVA FUND, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
(b) Federal income tax basis. Gross unrealized appreciation and
depreciation on investment securities at September 30, 1995, based on cost for
Federal income tax purposes is as follows:
<TABLE>
<CAPTION>
Gross Gross Net Unrealized
Unrealized Unrealized Appreciation
Appreciation Depreciation (Depreciation)
------------ --------------- --------------
<S> <C> <C> <C>
Equity Portfolio $1,995,871 $174,932 $1,820,939
Fixed Income
Portfolio 60,588 8,965 51,623
</TABLE>
NOTE 7 - CAPITAL SHARE TRANSACTIONS. The 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. For the
periods indicated, transactions of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
September 30,1995 September 30, 1994
Equity Portfolio
-------------------------------------------
<S> <C> <C>
Shares sold..................... --- 1,000,000
Shares issued in reinvestment of
dividends..................... 18,234 16,930
------ ------
Net increase in shares ......... 18,234 1,016,930
------ ---------
</TABLE>
<TABLE>
<CAPTION>
Fixed Income Portfolio**
-------------------------------------------
<S> <C> <C>
Shares sold..................... --- 300,000
Shares issued in reinvestment of
dividends..................... 19,960 16,930
------ ------
Net increase in shares ......... 19,960 316,185
------ -------
</TABLE>
**November 2, 1993 - Commencement of Operations
NOTE 8. FEDERAL INCOME TAXES. Capital and foreign currency losses
incurred after October 31, 1994 within the year ended, September 30, 1995 are
deemed to arise on the first business day of the following fiscal year.
Minerva Fixed Income Portfolio incurred and will elect to defer post-October
capital and foreign currency losses of approximately $21,000 and $14,000,
respectively.
At September 30, 1995, Minerva Fixed Income Portfolio had net capital
loss carryovers of approximately $33,000, which will be available through
September 2003 to offset future capital gains as provided by the regulations.
To the extent that these carryover losses are used to offset future capital
gains, the gains so offset would not be distributed to shareholders.
F-20
<PAGE>
MINERVA FUND, INC.
Equity Portfolio
Financial Highlights
For a share outstanding throughout each period (1)
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................................................ $10.01 $10.00
====== ======
Income from Investment Operations:
Net investment income................................................................... 0.22 0.16
Net realized and unrealized appreciation on investments................................. 2.20 0.02
---- ----
Total Increase from Investment Operations............................................... 2.42 0.18
---- ----
Less Distributions:
Dividends from net investment income.................................................... (0.20) (0.15)
Return of Capital....................................................................... -- (0.02)
---- ----
Total Distributions....................................................................... (0.20) (0.17)
---- ----
Net Asset Value, End of Period.............................................................. $12.23 $10.01
====== ======
Total Return................................................................................ 24.37% 1.99%
Ratios / Supplemental Data:
Net Assets, End of Period (in thousands) $12,725 $10,227
Ratio of Net Investment Income to Average Net Assets+ 1.90% 1.56%
Ratio of Expenses to Average Net Assets++ 1.03% 1.00%
Portfolio Turnover Rate 56% 35%
</TABLE>
(1) Per share based on the average number of shares outstanding during the
period.
+ Ratios of Net Investment Income before effect of waivers and reimbursements
were 0.59% and 0.72%, respectively.
++ Ratios of Expenses before effect of waivers and reimbursements were 2.34%
and 1.85%, respectively.
F-21
<PAGE>
MINERVA FUND, INC.
FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (1)
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994*
------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period............................................... $8.91 $10.00
----- ------
Income from Investment Operations:
Net investment income.......................................................... 0.55 0.48
Net realized and unrealized appreciation (depreciation) on investments......... 0.70 (1.09)
----- ------
Total Increase (decrease) from Investment Operations........................... 1.25 (0.61)
----- ------
Less Distributions:
Dividends from net investment income........................................... (0.45) (0.33)
Return of Capital.............................................................. (0.11) (0.15)
----- ------
Total Distributions.............................................................. (0.56) (0.48)
----- ------
Net Asset Value, End of Period..................................................... $9.60 $8.91
===== ======
Total Return....................................................................... 14.49% -6.18%
Ratios / Supplemental Data:
Net Assets, End of Period (in thousands) $3,275 $2,861
Ratio of Net Investment Income to Average Net Assets+ 6.00% 5.49% (a)
Ratio of Expenses to Average Net Assets++ 0.85% 0.91% (a)
Portfolio Turnover Rate 150% 196%
</TABLE>
(1) Per share based on the average number of shares outstanding during the
period.
* Commencement of Operations - November 2, 1993
(a) Annualized
+ Ratios of Net Investment Income before effect of waivers and reimbursements
were 2.37% and 2.67%, respectively.
++ Ratios of Expenses before effect of waivers and reimbursements were 4.48%
and 3.73%, respectively.
F-22
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in the Prospectus:
(1) Financial Highlights for the periods ended September 30, 1995 and
September 30, 1994.
Included in Statement of Additional Information:
(1) Portfolio of Investments as of September 30, 1995
(2) Statement of Assets and Liabilities as of
September 30, 1995
(3) Statement of Operations for the year ended
September 30, 1995
(4) Statement of Changes in Net Assets for the periods
ended September 30, 1995 and September 30, 1994
(5) Notes to Financial Statements as of September 30,
1995
(6) Financial Highlights for the periods ended
September 30, 1995 and 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
("MA&S")****
C-1
<PAGE>
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 - filed
herewith.
12 -- None.
13 -- Purchase Agreement***
14 -- None.
15 -- None.
16 -- Performance Calculations***
17(A)-- Powers of Attorney from Messrs. Schmid, Hagberg,
Miller and Pileggi**
-- Power of Attorney from Charles A. Parker - filed
herewith
17(B)-- Financial Data Schedule - filed herewith.
* Exhibit is incorporated by reference to same exhibit to the
Registrant's Registration Statement on Form N-1A,
Registration Nos. 33-65568 and 811-7828 (the "Registration
Statement") 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.
**** Exhibit is incorporated by reference to same exhibit to
Post-Effective Amendement No. 4, filed November 29, 1995 to
the Registration Statement.
Item 25. Persons Controlled by or Under Common Control with
Registrant
Not applicable.
C-2
<PAGE>
Item 26. Number of Holders of Securities
Number of Record
Holders at
Title of Class January 9, 1996
-------------- ---------------
Shares of the Equity Portfolio, 4
par value $.001 per share
Shares of the Fixed Income 2
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).
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
C-3
<PAGE>
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 LLC is incorporated by reference to
Schedule A of Form BD filed by Furman Selz LLC 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 LLC
230 Park Avenue
New York, New York 10169
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has met all of
the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 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 29th day of January, 1996
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 29th ay of January, 1996.
SIGNATURE TITLE
- --------- -----
*
- ------------------ Chairman of the Board
James D. Schmid of Directors and Director
/s/ John J. Pileggi President and Treasurer
- ------------------
John J. Pileggi
*
- ------------------
James D. Schmid Director
*
- ------------------
Carl T. Hagberg Director
*
- ------------------
Raymond F. Miller Director
*
- ------------------
Charles A. Parker Director
*By:/s/ John J. Pileggi
------------------
John J. Pileggi
Attorney-in-Fact
C-5
<PAGE>
MINERVA FUND, INC.
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
11 Consent of Independent Accountants
17(A) Power of Attorney
17(B) Financial Data Schedule
C-6
Exhibit 11
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 5 to the registration
statement on Form N- 1A (the "Registration Statement") of our report dated
November 10, 1995, relating to the financial statements and financial highlights
of Minerva Fund, Inc., which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the references to us under the headings "Financial Highlights" and
"Reports" in such Prospectus.
/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
January 24, 1996
Exhibit 17(A)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being an
officer or director, of MINERVA FUND, INC., a Maryland corporation (the
"Company"), does hereby make, constitute and appoint John J. Pileggi, Joan V.
Fiore and Robert Kaner, and each of them, attorneys-in-fact and agents of the
undersigned with full power and authority of substitution and resubstitution, in
any and all capacities, to execute for and on behalf of the undersigned the
Registration Statement on Form N-1A relating to the shares of the Company, and
any and all amendments (including post-effective amendments) to the foregoing
Registration Statement and any other documents and instruments incidental
thereto, and to deliver and file the same, with all exhibits thereto, and all
documents and instruments in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
that said attorneys-in-fact and agents, and each of them, deem advisable or
necessary to enable the Company to effectuate the intents and purposes hereof,
and the undersigned hereby fully ratify and confirm all that said
attorneys-in-fact and agents, or any of them, or their or his or her substitute
or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed his name, this 15th day
of January, 1996.
/s/ Charles A. Parker
---------------------
Charles A. Parker
Director
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
[NUMBER] 1
<NAME> EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 10,584,013
<INVESTMENTS-AT-VALUE> 12,404,952
<RECEIVABLES> 206,496
<ASSETS-OTHER> 68,829
<OTHER-ITEMS-ASSETS> 239,589
<TOTAL-ASSETS> 12,914,866
<PAYABLE-FOR-SECURITIES> 127,398
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 62,372
<TOTAL-LIABILITIES> 189,770
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,400,827
<SHARES-COMMON-STOCK> 1,040,164
<SHARES-COMMON-PRIOR> 1,021,930
<ACCUMULATED-NII-CURRENT> 19,577
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 482,713
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,820,939
<NET-ASSETS> 12,725,096
<DIVIDEND-INCOME> 264,831
<INTEREST-INCOME> 61,963
<OTHER-INCOME> 0
<EXPENSES-NET> 115,411
<NET-INVESTMENT-INCOME> 211,383
<REALIZED-GAINS-CURRENT> 490,664
<APPREC-INCREASE-CURRENT> 1,795,679
<NET-CHANGE-FROM-OPS> 2,497,726
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 202,662
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 18,234
<NET-CHANGE-IN-ASSETS> 2,497,726
<ACCUMULATED-NII-PRIOR> 10,856
<ACCUMULATED-GAINS-PRIOR> (6,774)
<OVERDISTRIB-NII-PRIOR> (18,362)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 55,698
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 260,927
<AVERAGE-NET-ASSETS> 11,139,654
<PER-SHARE-NAV-BEGIN> 10.01
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> 2.20
<PER-SHARE-DIVIDEND> 0.20
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 12.21
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
[NUMBER] 2
<NAME> FIXED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 2,673,258
<INVESTMENTS-AT-VALUE> 2,724,881
<RECEIVABLES> 155,189
<ASSETS-OTHER> 98,196
<OTHER-ITEMS-ASSETS> 400,493
<TOTAL-ASSETS> 3,379,059
<PAYABLE-FOR-SECURITIES> 78,944
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 104,268
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,283,594
<SHARES-COMMON-STOCK> 341,145
<SHARES-COMMON-PRIOR> 321,386
<ACCUMULATED-NII-CURRENT> (14,940)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (53,444)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 59,241
<NET-ASSETS> 3,274,791
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 206,160
<OTHER-INCOME> 0
<EXPENSES-NET> 25,819
<NET-INVESTMENT-INCOME> 180,341
<REALIZED-GAINS-CURRENT> (24,613)
<APPREC-INCREASE-CURRENT> 257,739
<NET-CHANGE-FROM-OPS> 413,467
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 183,543
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 19,960
<NET-CHANGE-IN-ASSETS> 413,467
<ACCUMULATED-NII-PRIOR> (48,902)
<ACCUMULATED-GAINS-PRIOR> (138,348)
<OVERDISTRIB-NII-PRIOR> (45,501)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,359
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 135,675
<AVERAGE-NET-ASSETS> 3,029,131
<PER-SHARE-NAV-BEGIN> 8.91
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> 2.70
<PER-SHARE-DIVIDEND> 0.45
<PER-SHARE-DISTRIBUTIONS> 0.11
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.60
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
