MINERVA FUND, INC.
3435 Stelzer Road
Columbus, Ohio 43219
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Information and Client Services: 1-800-393-9998
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Prospectus--January 24, 1997
Minerva Fund, Inc. (the "Fund") is a no load open-end management investment
company currently consisting of one Portfolio, the Equity Portfolio (the "Equity
Portfolio" or the "Portfolio"). The Portfolio operates as a diversified
investment company.
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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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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" (the "Statement") containing additional information
about the Fund has been filed with the Securities and Exchange Commission (the
"SEC"). Such Statement is dated January 24, 1997 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 or through the SEC Internet address at http://www.sec.gov. Investors
are advised that shares of the Portfolio are not deposits or obligations of, or
endorsed or guaranteed by, The Long-Term Credit Bank of Japan, Limited ("LTCB"),
LTCB Trust Company or any other affiliates of LTCB, nor are they federally
insured by the Federal Deposit Insurance Corporation ("FDIC"), the Federal
Reserve Board or any other agency.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Page
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Fund Expenses ...................................... 3
Prospectus Summary ................................. 4
Financial Highlights ............................... 6
Yield and Total Return ............................. 7
Investment Objective ............................... 7
Investment Policies ................................ 7
Other Investment Policies .......................... 8
Special Risk Considerations ........................ 11
Investment Suitability ............................. 12
Purchase of Shares ................................. 12
Redemption of Shares ............................... 14
Page
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Shareholder Services ............................... 15
Valuation of Shares ................................ 15
Dividends, Capital Gains
Distributions and Taxes .......................... 15
Investment Management .............................. 16
Administrative Services ............................ 17
Distributor ........................................ 17
Investment Limitations ............................. 17
General Information ................................ 18
Directors and Officers ............................. 20
Investment Manager:
LTCB-MAS Investment Management, Inc.
One Tower Bridge, Suite 1000
West Conshohocken, Pennsylvania 19428
Administrator and Distributor:
BISYS Fund Services Limited
Partnership
3435 Stelzer Road
Columbus, Ohio 43219
Transfer Agent, Dividend Disbursing Agent
and Accounting Agent:
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
2
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FUND EXPENSES
<TABLE>
<CAPTION>
The following table illustrates the various expenses and fees that an
investor may incur either directly or indirectly as a shareholder in the
Portfolio.
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price) ................................................. None
Sales Load Imposed on Reinvested Dividends ............................. None
Redemption Fee ......................................................... None
Exchange Fee ........................................................... None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fee (after voluntary waivers)* .............................. .42%
Other Expenses (estimated, after expense reimbursement)** .............. .58%
-------
Total Fund Operating Expenses (estimated, after expense reimbursements)*** 1.00%
=======
</TABLE>
* Reflects voluntary advisory fee waiver of 0.15% of average daily net assets
by LTCB-MAS Investment Management, Inc. ("LTCB-MAS") and voluntary
administrative services fee waiver of 0.08% of average net assets by Furman
Selz LLC.
** 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 1.02% for
the Portfolio. "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 Portfolio for "Total Fund
Operating Expenses" in excess of 1.00% of average net assets for a period
of at least one year from the date of this Prospectus. Absent voluntary
expense reimbursements in effect during the most recent fiscal year, the
ratio of "Total Fund Operating Expenses" to average net assets would have
been 1.44%.
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 Portfolio
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
----- ------ ------ -------
$10 $32 $55 $122
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or lesser than those
shown above.
3
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PROSPECTUS SUMMARY
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 common stocks of companies which are deemed to have earnings and
dividend growth potential above the average of the economy in general.
INVESTMENT MANAGEMENT
LTCB-MAS acts as the Fund's investment manager and has overall
responsibility for supervising the investment program of the 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, 1996, had assets under
management in excess of $750 million. LTCB, with over $300 billion in assets as
of September 30, 1996, 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, 1996, had assets under management in excess of $37
billion. The selection on a day-to-day basis of appropriate investments for the
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 Portfolio.
HOW TO INVEST
Shares of the 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
Portfolio 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 the 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 Portfolio is 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 Portfolio will not be subject to
federal income taxes, securities transactions for the Portfolio 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").
ADMINISTRATIVE SERVICES
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services, provides
the Fund with administrative services and also acts as the Fund's distributor.
BISYS Fund Services, Inc. provides the Fund with accounting, dividend disbursing
and transfer agency services.
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4
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PROSPECTUS SUMMARY--Continued
RISK FACTORS
Prospective investors in the Fund should consider the following factors:
(1) the 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) the Portfolio may lend its
investment securities which entails a risk of loss should the borrower fail
financially; (3) the 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
the Portfolio could not close out a futures or option position when it would be
most advantageous to do so; and (4) the Portfolio 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 to 5% of net assets). See "Special Risk
Considerations" for additional information regarding certain risks associated
with investment in the Portfolio.
5
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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 financial highlights table, 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>
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
1996 1995 1994*
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<S> <C> <C> <C>
Net Asset Value, Beginning of Period $12.23 $10.01 $10.00
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Income from Investment Operations:
Net investment income(1) 0.21 0.22 0.16
Net realized and unrealized appreciation
on investments 1.73 2.20 0.02
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Total Increase from Investment Operations 1.94 2.42 0.18
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Less Dividends and Distributions:
Dividends from net investment income (0.14) (0.20) (0.15)
Realized Capital Gains (0.46) -- --
Return of Capital -- -- (0.02)
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Total Dividends and Distributions (0.60) (0.20) (0.17)
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Net Asset Value, End of Period $13.57 $12.23 $10.01
====== ====== ======
Total Return** 16.37% 24.37% 1.99%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands) $63,542 $12,725 $10,227
Ratio of Net Investment Income to Average Net Assets+ 1.59% 1.90% 1.56%
Ratio of Net Expenses to Average Net Assets++ 0.98% 1.03% 1.00%
Portfolio Turnover Rate 55% 56% 35%
Average Commission Rate2 $0.059 -- --
</TABLE>
1 Per share data based on the average number of shares outstanding during
each period.
2 For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share in security
trades on which commissions are charged. This amount may vary from period
to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
* Commencement of Operations--October 1, 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 1.13%, 0.59%, and 0.71%.
++ Ratios of Expenses before effect of waivers and reimbursements were 1.44%,
2.34%, and 1.85%.
6
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YIELD AND TOTAL RETURN
From time to time, the Portfolio 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 the Portfolio from the beginning date of the measuring period to
the end of the measuring period. Such figures reflect changes in the price of
the 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 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, the Portfolio may also quote
an "aggregate" total return for various periods representing the cumulative
change in value of an investment in the 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 the 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 the 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 the Portfolio for the
fiscal year ended September 30, 1996.
INVESTMENT OBJECTIVE
The 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 the 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 the Portfolio's net asset value per share. Although the Portfolio
intends to remain substantially fully invested, a small percentage of the
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 the Portfolio is 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.
The investment objective of the Portfolio is a fundamental policy and may
not be changed without shareholder approval. The achievement of this objective
cannot be assured.
INVESTMENT POLICIES
In pursuing its objective, the 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
7
<PAGE>
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, NASDAQ or in over-the-counter markets. Although the Adviser expects
that the companies in which the Portfolio invests will be primarily those with
large capitalization's (i.e., in excess of $300 million), the Portfolio is not
limited with respect to its ability to invest in companies with smaller
capitalizations. The Adviser expects that the companies in which the Portfolio
invests will be seasoned issuers, although the Portfolio may invest up to 5% of
its total assets in securities of issuers which have (with predecessors) a
record of less than three years' continuous operations. The Adviser expects the
Portfolio's net asset value to exhibit average fluctuation relative to the stock
market in general, as measured by the Standard & Poor's 500 Index, and, thus,
the Portfolio may or may not be suitable for all investors. The Portfolio is
designed for long-term investors who can accept the risks entailed in these
investment policies and is not meant to provide a vehicle for playing short-term
swings in the market.
The Portfolio 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 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 "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 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.
OTHER INVESTMENT POLICIES
Lending of Securities
The 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, the 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.
8
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Temporary Investments
The 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 the 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).
The 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 Portfolio does not limit the amount
of its 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 Portfolio 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 to 10% of the value of the Portfolio's 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
The Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities, certificates of deposit and certain bankers' acceptances.
Repurchase agreements are transactions by which the 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 the Portfolio have a total value in
excess of the value of the repurchase agreement and are held by the 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.
9
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Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase agreements to avoid selling
securities during unfavorable market conditions to meet redemptions. Pursuant to
a reverse repurchase agreement, the 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 the 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 marked to
market daily (including accrued interest), and will subsequently monitor the
account to ensure that such equivalent value is maintained. The Portfolio will
pay interest on amounts obtained pursuant to reverse repurchase agreements.
Reverse repurchase agreements are considered to be borrowings by the Portfolio
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 Portfolio has 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, the
Portfolio 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 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).
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, the 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 the Portfolio's overall
transaction costs.
Over-the-counter options may lack a liquid secondary market. The Portfolio
will not 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. The 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.
The 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. The 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 Portfolio may
invest in put and call options on securities, financial indices or foreign
currencies. The Portfolio will maintain assets sufficient to meet its
obligations under such transactions in a segregated account with the custodian
bank.
Forward Foreign Currency Exchange Contracts
The Portfolio 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 Portfolio 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 the 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 the 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
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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 the Portfolio's obligation under the
forward contract. On the date of maturity, the Portfolio may be exposed to some
risk of loss from fluctuations in that currency. Although the Portfolio will
attempt to hold such mismatching to a minimum, there can be no assurance that
the Portfolio will be able to do so.
The 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 liquid securities or cash in a segregated account
with a daily value at least equal to the amount of such excess.
Illiquid Investments
The Portfolio 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.
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
Portfolio's outstanding voting securities," as defined in the 1940 Act.
Portfolio Turnover
The Portfolio is 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 Portfolio 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 Portfolio's
annual portfolio turnover rate will not exceed 100%. A 100% rate of turnover
would occur, for example, if all of the Portfolio's securities are replaced
within a one year period. For the fiscal period ended September 30, 1996, the
portfolio turnover rate for the Portfolio was 55%.
High rates of portfolio turnover necessarily result in correspondingly
heavier brokerage and portfolio trading costs which are paid by the 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.
SPECIAL RISK CONSIDERATIONS
Foreign Securities
The Portfolio may invest in foreign securities, but such securities
(including ADR's) will not comprise more than 5% of its net assets. Although the
Portfolio expects its investments in foreign securities to be primarily
securities of issuers located in developed countries, on occasion the Portfolio
may invest in securities of issuers located in lesser-developed or other
countries, subject to satisfying any applicable credit quality standards of the
Portfolio 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 the Portfolio may temporarily hold uninvested reserves in
bank deposits in foreign currencies, the 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.
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
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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 the 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 the 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 the Portfolio receives from the companies
comprising the 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 the Portfolio and the prices of futures and/or options purchased or sold
by the 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 the Portfolio's ability to hedge. In the opinion
of the Board of Directors, the risk that the 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 the 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.
INVESTMENT SUITABILITY
The Portfolio is 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 Portfolio will not be subject to
federal income taxes, securities transactions for the Portfolio 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 the 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 the Portfolio may be purchased
by wiring Federal Funds ($1 million minimum). Please call the Fund at
1-800-393-9998 for wiring instructions. A completed Account Registration Form
must be sent by overnight courier to the Fund at the address noted below in
advance of the wire. For the Portfolio, notification must be given to the Fund
at 1-800-393-9998 prior to 4:00 p.m., Eastern Standard time, of the wire date.
(Prior notification must also be received from investors with existing
accounts.):
Minerva Fund, Inc.
c/o BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-8021
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Federal Funds purchases will be accepted only on a day on which the
Portfolio and the Fund's Custodian Bank, LTCB Trust Company, 165 Broadway, New
York, New York 10006, 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) payable to the Minerva Fund, Inc.:
Minerva Fund, Inc.
P.O. Box 182489
Columbus, Ohio 43218-2489
The Portfolio 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 are not permitted to be redeemed until payment
of the purchase has been collected, which may take up to fifteen business days
after purchase.
Additional Investments
Additional purchases of shares at net asset value may be made at any time
(minimum investment $100,000) by mailing a check to the Fund at the address
noted under "Initial Investments by Mail" (payable to Minerva Fund, Inc.) or by
wiring monies to the Custodian Bank as outlined above under "Initial Investments
by Wire." Notification must be given to the Fund at 1-800-393-9998 prior to 4:00
p.m., Eastern Standard time, of the wire date.
Other Purchase Information
The Fund reserves the right, in its sole discretion, to suspend the
offering of shares of the Portfolio or to reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interests of
the Fund. No third party or foreign checks are accepted.
Under certain circumstances, shares of the 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 the 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.
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 Portfolio, 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 Portfolio 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 Portfolio 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.
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<PAGE>
REDEMPTION OF SHARES
Shares of the Portfolio 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
The Portfolio will redeem its shares at the net asset value next determined
after the request is received in "good order." The net asset value per share of
the Portfolio is determined as of 4:00 p.m., Eastern Standard 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
182489, Columbus, Ohio 43218-2489.
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
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. If the Telephone Redemption Option 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. Telephone Redemption will be suspended
for a period of 10 days following a telephone address change.
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 fifteen 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.
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<PAGE>
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 the 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
Transfer of Registration
The registration of Fund shares may be transferred by writing to Minerva
Fund, Inc., P.O. Box 182489, Columbus, Ohio 43218-2489. As in the case of
redemptions, the written request must be received in "good order" as defined
above.
VALUATION OF SHARES
The Portfolio's net asset value per share is determined by dividing the
total market value of the 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 4:00 p.m., Eastern Standard 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.
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
Portfolio normally distributes 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 the 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.
If you elect to receive distributions in cash and checks (1) are returned
and marked as "undeliverable" or (2) remain uncashed for six months, your cash
election will be changed automatically and your future dividend and capital
gains distributions will be reinvested in the Portfolio at the per share net
asset value determined as of the date of payment of the distribution. In
addition, any undeliverable checks or checks that remain uncashed for six months
will be canceled and will be reinvested in the Portfolio at the per share net
asset value determined as of the date of cancellation.
Federal Taxes
The Portfolio intends to continue to qualify and elect to be treated as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). By so qualifying, the Portfolio will not be
subject to federal income taxes with respect to net investment income (i.e., its
investment company taxable income as that term is defined in the Code, without
regard to the deduction for dividends paid) and net capital gains (i.e. the
excess of its net realized long-term capital gains over net realized short-term
capital losses), if any, that are distributed to its shareholders, provided that
the Portfolio distributes in each taxable year at least 90% of its net
investment income. The Portfolio 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 the Portfolio
separately, rather than to the Fund as a whole.
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<PAGE>
Dividends, either in cash or reinvested in shares, paid by the Portfolio
from net investment income will be taxable to shareholders as ordinary income.
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 United States sources. The Portfolio 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 the Portfolio, and regardless
of the length of time the shares in the Portfolio have been owned by the
shareholder, distributions of net capital gains designated by the Portfolio as
"capital gain dividends" will be taxable as long-term capital gains and will not
be eligible for the dividends received deduction for corporations. Shareholders
are notified annually by the Portfolio as to federal tax status of dividends and
distributions paid by the Portfolio. Such dividends and distributions may also
be subject to state and local taxes.
Exchanges and redemptions of shares in the Portfolio are generally taxable
events for federal income tax purposes. Individual shareholders may also be
subject to state and local taxes on such exchanges and redemptions.
The Portfolio intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of a nonde-ductible 4% federal excise
tax. 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 the 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,
1996, LTCB-MAS had assets under management in excess of $750 million. LTCB, with
over $300 billion in assets as of September 30, 1996, 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, 1996, had assets under
management in excess of $37 billion. The selection on a day-to-day basis of
appropriate investments for the Portfolio is made by MA&S acting in
collaboration with and under the supervision of LTCB-MAS.
Pursuant to an investment management agreement (the "Investment Management
Agreement") with the Fund, LTCB-MAS has responsibility for the investment and
reinvestment of the assets of the Portfolio and will supervise the investment
program of the Portfolio in accordance with the stated investment objective and
policies of the 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 the 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, the Portfolio will pay LTCB-MAS an investment
management fee calculated and accrued daily and paid monthly, at an annual rate
of .50% of the Portfolio's average daily net assets for the month.
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 the Portfolio in conformity with the stated investment
objective and policies of the Portfolio. MA&S will place purchase and sale
orders for the 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. 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.
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<PAGE>
In cases where a shareholder of the Portfolio 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 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. Ms. Arden C. Armstrong and Messrs. Nicholas J.
Kovich, Robert J. Marcin, 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 Portfolio in consultation with and under the supervision of
Mr. Ueki. Each of the aforementioned Portfolio Managers of MA&S have been
affiliated with MA&S for at least the past five years.
ADMINISTRATIVE SERVICES
BISYS Group, Inc. ("BISYS"), headquartered in Little Falls, New Jersey,
supports more than 5,000 financial institutions and corporate clients through
two strategic business units. BISYS Information Services Group provides image
and data processing outsourcing, and pricing analysis to more than 600 banks
nationwide. BISYS Investment Services Group designs, administers and distributes
over 30 families of proprietary mutual funds consisting of more than 365
portfolios, and provides 401(k) marketing support, administration, and
recordkeeping services in partnership with banking institutions and investment
management companies. BISYS and its affiliates BISYS Fund Services Limited
Partnership and BISYS Fund Services, Inc. have their principal place of business
at 3435 Stelzer Road, Columbus, Ohio 43219. BISYS Fund Services Limited
Partnership provides the Fund with administrative services pursuant to an
administration agreement (the "Fund Administration Agreement"). BISYS Fund
Services, Inc. provides the Fund with accounting services pursuant to an
accounting agreement (the "Fund Accounting Agreement"). The services under the
agreements 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 Fund Administration Agreement, the Fund
will pay BISYS Fund Services Limited Partnership a monthly fee for its services
which on an annualized basis will not exceed .15% of the average daily net
assets of the Fund. Pursuant to the Fund Accounting Agreement, the Fund will pay
BISYS Fund Services, Inc. an annual fee of $30,000 for fund accounting services.
From time to time, subject to review by the Board of Directors, each of
BISYS Fund Services Limited Partnership and BISYS Fund Services, Inc. may make
certain adjustments to the fees it is entitled to receive from the Fund pursuant
to the Fund Administration Agreement and the Fund Accounting Agreement,
respectively.
DISTRIBUTOR
Shares of the Fund are distributed through BISYS Fund Services Limited
Partnership pursuant to a distribution agreement (the "Distribution Agreement").
Under the Distribution Agreement, BISYS Fund Services Limited Partnership does
not receive any fee or other compensation for distributing shares of the Fund.
The principal offices of BISYS Fund Services Limited Partnership are located at
3435 Stelzer Road, Columbus, Ohio 43219.
INVESTMENT LIMITATIONS
The 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, the Portfolio will not:
(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;
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(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 the
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 the 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 Portfolio, 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
a separate class of shares corresponding to shares in the Equity Portfolio, and
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.
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 Portfolio is managed under the general
direction and supervision of the Fund's Board of Directors. The day-to-day
operations of the Portfolio is handled by the Fund's officers.
Custodian
LTCB Trust Company, 165 Broadway, New York, New York 10006, acts as
Custodian for the Portfolio.
Transfer Agent and Dividend Disbursing Agent
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, acts as
Transfer Agent and Dividend Disbursing Agent for the Fund.
18
<PAGE>
Counsel
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York, serves as counsel to the Fund.
Financial Statements/Independent Accountants
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.
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 will, in turn, be allocated
to the Portfolio and other portfolios that may be established in the future
based on each portfolio's relative net assets. The 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 Portfolio for total annual operating expenses in excess
of 1.00%, 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
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.
19
<PAGE>
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>
<S> <C> <C>
Name, Address and Age Position with the Fund Principal Occupation During Past Five Years
- ----------------- ---------------- -------------------------------
* James D. Schmid Director and Principal, Morgan Stanley Group; Partner, Miller
Miller Anderson & Sherrerd Chairman of the Board Anderson & Sherrerd (since 1989);
One Tower Bridge President, MAS Funds; Director, MAS
West Conshohocken, PA 19428 Funds Distributor, Inc.; formerly Vice President,
Age: 46 years Chase Manhattan Bank.
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: 54 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: 55 years
Charles A. Parker Director Director, T.C.W. Convertible Fund, Inc.;
54 Huckleberry Hill Road Director, URC Holding Corp., formerly
New Canaan, CT 06840 Executive Vice President, Director
Age: 62 years and Chief Investment Officer, Continental
Corporation.
W. Anthony Turner President Senior Vice President and Regional Client Executive,
125 West 55th Street BISYS Fund Services, Inc. 1996 to present; formerly
New York, NY 10019 Senior Vice President and National Sales Manager, First
Age: 36 years Union Brokerage Services, Inc. 1995; Senior Vice
President, Global Finance Group, NationsBanc Capital
Markets Inc. 1993-1995; Executive Vice President and
Principal, The Selbst Group, Inc. 1988-1993; Vice
President, Putnam Investments 1987-1988.
Michael Sakala Treasurer Vice President and Treasurer, BISYS Fund Services, Inc.
3435 Stelzer Road since December 1996; formerly Associate Director of
Columbus, OH 43219 Fund Accounting BISYS Fund Services, Inc. from April
Age: 31 years 1996 to December 1996. From April 1994 to April 1996, he
was head of worldwide Fund Administration at Banque
Paribas Luxemburg. From June 1989 to April 1994, he was
Accounting Manager at Fidelity Investments in Boston,
MA.
20
<PAGE>
Michael J. Brascetta Vice President Senior Vice President, Shareholder Services, BISYS Fund
3435 Stelzer Road Services, Inc. since April 1996; formerly Vice
Columbus, OH 43219 President, Individual Investor Services, The Vanguard
Age: 37 years Group 1992 to 1996; Assistant Vice President, Individual
Shareholder Operations, The Vanguard Group 1989 to 1992.
Dana Gentile Vice President Vice President, Administration and Regulatory Services,
3435 Stelzer Road BISYS Fund Services, Inc., since September 1996,
Columbus, OH 43219 formerly Registration and Compliance Officer, BISYS Fund
Age: 34 years Services, Inc. from April 1993 to September 1996. From
December 1987 to April 1993, Client Services Manager,
The Winsbury Co., Inc.
Carl Juckett Vice President Vice President, Accounting Services, BISYS Fund
3435 Stelzer Road Services, Inc. since September 1996; formerly Associate
Columbus, OH 43219 Director, Fund Accounting, BISYS Fund Services, Inc.
Age: 41 years from June 1995 to September 1996. Accounting Manager,
BISYS Fund Services, Inc. from July 1994 to June 1995.
Assistant Vice President, Huntington Bank from 1989 to
1994.
James E. White Vice President Client Services Manager, BISYS Fund Services, Inc. since
3435 Stelzer Road December 1995; formerly Sales Director/Variable
Columbus, OH 43219 Products, Financial Horizons Distributors Agency, Inc.
Age: 42 years (Nationwide Insurance subsidiary) from October 1991 to
June 1995.
Sheryl Hirschfeld Secretary Manager-Legal Services, BISYS Fund Services, Inc.
125 West 55th Street since January 1997; formerly Director, Corporate
New York, NY 10019 Secretary Services, Furman Selz LLC November 1994 to
Age: 36 years December 1995; formerly Assistant to the Corporate
Secretary and General Counsel at The Dreyfus
Corporation.
21
<PAGE>
Alaina V. Metz Assistant Secretary Chief Administrative Officer at BISYS Fund Services,
3435 Stelzer Road Inc. from June 1995 to present; formerly Supervisor of
Columbus, OH 43219 Blue Sky Department at Alliance Capital Management from
Age: 29 years May 1989 to June 1995.
Bruce Treff Assistant Secretary Counsel, BISYS Fund Services, Inc. since September 1995;
3435 Stelzer Road formerly Manager, Alliance Capital Management, L.P.
Columbus, OH 43219
Age: 30 years
</TABLE>
* Director is deemed to be an "interested person" of the Fund as that term is
defined in the 1940 Act.
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 BISYS Fund Services Limited Partnership.
22
<PAGE>
-1-
MINERVA FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 24, 1997
Minerva Fund, Inc. (the "Fund") is a no load open-end management
investment company currently consisting of the Equity Portfolio (the "Equity
Portfolio" or the "Portfolio"). This Statement of Additional Information
sets forth information about the Fund applicable to the Portfolio.
This Statement is not a Prospectus but should be read in conjunction
with the Fund's Prospectus dated January 24, 1997. 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-3
Futures Contracts ...........................................B-4
Options .....................................................B-6
Options on Foreign Currencies ...............................B-6
Risks of Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies...................... B-7
Tax Aspects of Options, Futures,
Forward Contracts and Swap Agreements .....................B-8
Rule 144A Securities ........................................B-9
Additional Information Concerning Taxes .....................B-9
Investment Suitability.......................................B-12
Purchase of Shares...........................................B-12
Redemption of Shares.........................................B-13
Determination of Net Asset Value.............................B-13
Shareholder Services.........................................B-14
Investment Limitations.......................................B-14
Officers and Directors of the Fund...........................B-16
Investment Management........................................B-16
Distributor for the Fund.....................................B-184
Portfolio Transactions.......................................B-18
Administration, Custody and Transfer
Agency Services............................................B-18
General Information .........................................B-20
Performance Calculations ....................................B-22
Comparative Indices .........................................B-22
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
The Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities, certificates of deposit and certain bankers' acceptances.
Repurchase agreements are transactions by which the 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 the Portfolio have a total value in
excess of the value of the repurchase agreement and are held by the 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
The Portfolio may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, the 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. The 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.
<PAGE>
-3-
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.
U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of
securities which are issued or guaranteed by the U.S. Government and by various
instrumentalities which have been established or sponsored by the U.S.
Government. U.S. Treasury securities are backed by the "full faith and credit"
of the United States. Securities issued or guaranteed by federal agencies and
U.S. Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain debt issued by Resolution Funding
Corporation has both its principal and interest backed by the full faith and
credit of the U.S. Treasury in that its principal is defeased by U.S. Treasury
zero coupon issues, while the U.S. Treasury is explicitly required to advance
funds sufficient to pay interest on it, if needed. Certain agencies and
instrumentalities, such as the Government National Mortgage Association, are, in
effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make "indefinite and unlimited"
drawings on the Treasury, if needed, to service their debt. Debt from certain
other agencies and instrumentalities, including the Federal Home Loan Bank and
Federal National Mortgage Association, are not guaranteed by the United States,
but those institutions are protected by the discretionary authority for the U.S.
Treasury to purchase certain amounts of their securities to assist the
institution in meeting its debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System and the Federal Home Loan
Mortgage Corporation, are federally chartered institutions under Government
supervision, but their debt securities are backed only by the creditworthiness
of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee
securities include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency
organized under federal charter with Government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal National Mortgage Association.
- --------------------------------------------------------------------------------
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
the Portfolio may temporarily hold uninvested reserves in bank deposits in
foreign currencies, the 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 the Portfolio 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.
<PAGE>
-4-
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 the 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 the 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 the Portfolio receives from the companies comprising the Portfolio's
investments. These foreign withholding taxes, however, are not expected to have
a significant impact on the Portfolio.
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
- --------------------------------------------------------------------------------
In order to further its investment objective and policies, the
Portfolio may purchase and sell financial futures contracts and options on
financial futures contracts. The 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).
Futures contracts provide for the sale by one party and purchase by
another party of a specified amount of the underlying instrument or currency at
a specified future time and price (or, in the case of certain cash-settled
instruments, a net cash amount). Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (the "CFTC"), a U.S.
Government Agency.
Although most futures contracts by their terms call for actual delivery
or acceptance of the underlying instrument or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures traders are required to make a good faith margin deposit in
cash or acceptable securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
securities) if it is not terminated prior to the specified delivery date.
Minimal initial margin requirements are established by the futures exchange and
may be changed. Brokers may establish deposit requirements which are higher than
the exchange minimums. Futures contracts are customarily purchased and sold on
the basis of margin deposits that may range between 1% and 10% of the value of
the contract being traded. The 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,
<PAGE>
-5-
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 Portfolio intends 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 Portfolio
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
position. In the event of adverse price movements, the 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, the 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 the Portfolio's ability to effectively hedge. The 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 Portfolio is subject to the risks of loss
frequently associated with futures transactions. The 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 the 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
<PAGE>
-6-
possible that the 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 the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the 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 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.
- --------------------------------------------------------------------------------
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 the Portfolio to the same risks associated with speculative use of
futures and options transactions.
- --------------------------------------------------------------------------------
OPTIONS ON FOREIGN CURRENCIES
- --------------------------------------------------------------------------------
The 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, the Portfolio may purchase put
options on the foreign currency. If the value of the currency does decline, the
Portfolio will have the right to sell such currency for a fixed amount in
dollars and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the 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 the 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, the 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.
The Portfolio may write options on foreign currencies for the same
types of hedging purposes. For example, where the 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
<PAGE>
-7-
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, the
Portfolio could write a put option on the relevant currency which, if exchange
rates move in the manner projected, will expire unexercised and allow the
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 the 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, the 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.
The Portfolio intends to write covered call options on foreign
currencies. A call option written on a foreign currency by the Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by the Fund's custodian) upon conversion or exchange of
other foreign currency held in its portfolio. A call option is also covered if
the Portfolio (a) maintains in a segregated account cash or other liquid assets
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 or other liquid assets in a
segregated account with the Fund's custodian.
The 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, the
Portfolio will collateralize the option by maintaining in a segregated account
with the Fund's custodian, cash or other liquid assets in an amount not less
than the value of the underlying foreign currency in U.S. dollars marked to
market daily.
- --------------------------------------------------------------------------------
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.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing
<PAGE>
-8-
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 the 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 the
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.
- --------------------------------------------------------------------------------
TAX ASPECTS OF OPTIONS, FUTURES,
FORWARD CONTRACTS AND SWAP AGREEMENTS
- --------------------------------------------------------------------------------
Some of the options, futures contracts or forward contracts entered
into by the Portfolio may be "Section 1256 contracts." Section 1256 contracts
held by the 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.
Generally, hedging transactions and certain other transactions in
options, futures, forward contracts and swap agreements undertaken by the
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 the
Portfolio. In addition, losses realized by the 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 the Portfolio are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by the Portfolio. Short-term capital gain is taxed as ordinary
income when distributed to shareholders.
<PAGE>
-9-
The Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If the 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 the 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 the Portfolio's assets may limit the
extent to which the Portfolio will be able to engage in these transactions.
RULE 144A SECURITIES
As indicated in the Prospectus, the Portfolio 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 the 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 the Portfolio
become illiquid due to the lack of sufficient qualified institutional buyers or
market or other conditions, the percentage of the 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 the Portfolio to maintain sufficient liquidity
for operating purposes and to meet redemption requests.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION CONCERNING TAXES
- --------------------------------------------------------------------------------
IN GENERAL
The Portfolio intends to qualify as a regulated investment company (a
"RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). Qualification as a RIC requires, among other things, that the
Portfolio: (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments
<PAGE>
-10-
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 (other than foreign currency options,
futures 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 RICs 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 RICs of any one issuer.
As a RIC, the Portfolio will not be subject to federal income tax on
its net investment income (i.e., its investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid) and "net capital gains" (the excess of the Portfolio's net
long-term capital gains over net short-term capital losses), if any, that it
distributes in each taxable year to its shareholders, provided that it
distributes 90% of its net investment income for such taxable year. However, the
Portfolio would be subject to corporate income tax (currently at a maximum rate
of 35%) on any undistributed net investment income and net capital gains. The
Portfolio expects to designate amounts retained as undistributed net capital
gains in a notice to its shareholders who (i) will be required to include in
income for United States federal income tax purposes, as long-term capital
gains, their proportionate shares of the undistributed amount, (ii) will be
entitled to credit their proportionate shares of the 35% tax paid by the
Portfolio on the undistributed amount against their federal income tax
liabilities and to claim refunds to the extent such credits exceed their
liabilities and (iii) will be entitled to increase their tax basis, for federal
income tax purpose, in their shares by an amount equal to 65% of the amount of
undistributed net capital gains included in the shareholder's income.
The Portfolio will be subject to a non-deductible 4% excise tax to the
extent that it does not distribute by the end of each calendar year: (a) at
least 98% of its ordinary income for such calendar year; (b) at least 98% of the
excess of its capital gains over its capital losses for the one-year period
ending, as a general rule, on October 31 of each year; and (c) 100% of the
undistributed income and gains from the preceding calendar year (if any)
pursuant to the calculations in (a) and (b). For this purpose, any income or
gain retained by the Portfolio that is subject to corporate tax will be
considered to have been distributed by year-end.
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 the
Portfolio will generally result in capital gain or loss to shareholders.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. If a shareholder sells or
otherwise disposes of a share of the 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. 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).
The 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
<PAGE>
-11-
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, the 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 Portfolio will be marked-to-market (i.e., treated as if it were sold
for fair market value) on the last business day of the Portfolio's 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 Portfolio.
The acceleration of income on Section 1256 positions may require the Portfolio
to accrue taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, the
Portfolio 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 Portfolio.
When the Portfolio holds 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.
The 30% limitation may restrict the Portfolio's 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
Portfolio, resulting in additional short-short income for the Portfolio.
The 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
RIC under Subchapter M of the Code.
If the Portfolio purchases shares in certain foreign investment
entities, called "passive foreign investment companies" ("PFICs"), the Portfolio
may be subject to U.S. federal income tax on a portion of any "excess
distribution" or gain from the disposition of shares even if the income is
distributed as a taxable dividend by the Portfolio to its shareholders.
Additional charges in the nature of interest may be imposed on either the
Portfolio or its shareholders with respect to deferred taxes arising from the
distributions or gains. If the Portfolio were to invest in a PFIC and (if the
Portfolio received the necessary information available from the PFIC, which may
be difficult to obtain) elected to treat the PFIC as a "qualified electing fund"
under the Code (a "QEF"), in lieu of the foregoing requirements, the Portfolio
might be required to include in income each year a portion of the ordinary
earnings and net capital gains of the PFIC, even if not distributed to the
Portfolio, and the amounts would be subject to the 90% and excise tax
distribution requirements described above. On April 1, 1992 the Internal Revenue
Service (The "IRS") proposed regulations providing a mark-to-market election for
regulated investment companies that would have effects similar to the QEF
election. These regulations would be effective for taxable years ending after
promulgation of the regulations as final regulations.
<PAGE>
-12-
BACKUP WITHHOLDING
The Portfolio 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. Any amounts
withheld under the backup withholding rules will be allowed as a refund or
credit against such shareholder's United States federal income tax provided the
required information is furnished to the IRS.
The foregoing discussion is only a brief summary of certain additional
tax considerations affecting the Portfolio 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 Portfolio, including the opportunity for gain and the risk of loss, the
plan's overall investment portfolio and its needs for diversification,
liquidity, current return relative to anticipated cash flow requirements, and
projected return relative to funding objectives.
The foregoing discussion is merely a summary of certain issues that a
fiduciary of an employee benefit plan investor should evaluate when considering
an investment in the Fund. Fiduciaries are urged to consult with their legal
advisers before investing plan assets in shares of the Portfolio.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
For information pertaining to the manner in which shares of the
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 the Portfolio, 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 the Portfolio, shares of the 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
<PAGE>
-13-
accepted by the 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 Portfolio will accept securities for their portfolios in exchange
for shares issued by them, but only if (1) such securities are, at the time of
the exchange, eligible to be included in the Portfolio whose shares are to be
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 the
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 the Portfolio
at the beginning of such period. Such commitment is irrevocable without the
prior approval of the SEC. Redemptions in excess of the above limits may be paid
in whole or in part in investment securities or in cash, as the Board of
Directors may deem advisable; however, payment will be made wholly in cash
unless the Board of Directors believes that economic or market conditions exist
which would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be valued
as set forth in the Fund's Prospectus under "Valuation of Shares" and redeeming
shareholders would normally incur brokerage expenses if they converted these
securities to cash.
No charge is made by the 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 the Portfolio.
- --------------------------------------------------------------------------------
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The Portfolio's net asset value per share is determined by dividing the
total market value of the 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 4:00 p.m., Eastern Standard 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
<PAGE>
-14-
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.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The following supplements the shareholder services set forth in the
Fund's Prospectus:
TRANSFER OF SHARES
Shareholders may transfer shares of the Portfolio to another person by
written request to the Minerva Fund, Inc., P.O. Box 182489, Columbus, Ohio
43218-2489. 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
- --------------------------------------------------------------------------------
The 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. The Portfolio
will not:
(a) invest in physical commodities or contracts on physical
commodities;
(b) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real
estate limited partnerships, and may purchase and sell marketable
securities which are secured by interests in real estate;
(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
<PAGE>
-15-
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 the 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 the Portfolio adopts a temporary defensive
position.
In addition to the foregoing fundamental limitations, as a matter of
non-fundamental operating policy, the 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) 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, (i) 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 or,
(ii) it maintains in a segregated account on the books of the
Portfolio's custodian an amount that, when combined with the amount of
collateral deposited with the broker in connection with the short sale,
equals the current market value of the security sold short or such
other amount as the SEC or its staff may permit by rule, regulation,
order or interpretation. Transactions in futures contracts and options
are not deemed to constitute selling securities short;
(4) borrow money other than from banks;
(5) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33-1/3% of its total assets at fair market value, provided
that the Portfolio may segregate assets without limit in order to
comply with the requirements of Section 18(f) of the 1940 Act and
applicable rules, regulations or interpretation of the SEC and its
staff;
(6) invest more than an aggregate of 15% of the total assets of the
Portfolio, determined at the time of investment, in securities subject
to legal or contractual restrictions on resale or securities for which
there are no readily available markets, including repurchase agreements
having maturities of more than seven days and over-the-counter options,
provided that there is no limitation with respect to or arising out of
investment in (i) securities that have legal or contractual
restrictions on resale but have a readily available market or (ii)
securities that are not registered under the 1933 Act but which can be
sold to qualified institutional investors in accordance with Rule 144A
under the 1933 Act;
(7) invest for the purpose of exercising control over management of any
company; and
(8) 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.
<PAGE>
-16-
- --------------------------------------------------------------------------------
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 BISYS Fund Services Limited Partnership.
<TABLE>
<CAPTION>
DIRECTOR COMPENSATION
(for fiscal year ended September 30, 1996)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total
Aggregate Pension or Compensation
Name of Compensation Retirement Estimated Annual From Registrant
Person, From Benefits Accrued Benefits Upon and Fund Complex
Position Registrant Expenses As Part of Fund Retirement Paid to
Directors
James D. Schmid $5,000 0 N/A $5,000
Director
Carl T. Hagberg $6,000 0 N/A $6,000
Director
Raymond F. Miller $6,000 0 N/A $6,000
Director
Charles A. Parker $5,000 0 N/A $5,000
Director
</TABLE>
- --------------------------------------------------------------------------------
As of November 4, 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 the 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 counseling services to employee benefit plans
and other institutional investors. As of September 30, 1996, LTCB-MAS had assets
under management in excess of $750 million. LTCB, with over $300 billion in
assets as of September 30, 1996, is one of the 25 largest banks in the world.
MA&S provides investment counseling services primarily to institutional
investors and as of September 30, 1996, had assets under management in excess of
$37 billion. The selection on a day-to-day basis of appropriate investments for
the 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 Portfolio.
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
<PAGE>
-17-
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 the Portfolio and will supervise
the investment program of the Portfolio in accordance with the stated investment
objective and policies of the 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, the Portfolio will pay
LTCB-MAS an investment management fee calculated and accrued daily and paid
monthly, based on .50% of the Portfolio's average daily net assets for the
month.
For the fiscal year ended September 30, 1996 LTCB-MAS waived $81,937 of
its fee and for the fiscal years ended September 30, 1995 and September 30,
1994, LTCB-MAS waived its entire fee of $55,698 and $50,780, respectively, for
the Portfolio. In addition, for the fiscal years ended September 30, 1996,
September 30, 1995 and September 30, 1994 LCM voluntarily reimbursed expenses of
$13,124, $89,818 and $0, respectively, for the Portfolio.
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 the Portfolio in conformity with the stated investment
objective and policies of the Portfolio. MA&S will place purchase and sale
orders for the 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 the Portfolio has an investment
counseling relationship with LTCB-MAS, LTCB-MAS may reduce the investment
counseling 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 consummation of 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 the
Portfolio; in such event, continuance shall be effected only if approved by the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio. The Investment Management Agreement and the Investment Services
Agreement are automatically terminated if assigned, and may be terminated by the
Portfolio without penalty, at any time, (1) either by vote of the Board of
Directors or by vote of the outstanding voting securities of the 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.
<PAGE>
-18-
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
the Portfolio, based on the Portfolio's relative net assets. The 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 Portfolio for total annual operating expenses in excess
of 1.00% of average net assets for a period of at least one year from the date
of this Statement of Additional Information.
- --------------------------------------------------------------------------------
DISTRIBUTOR FOR THE FUND
- --------------------------------------------------------------------------------
BISYS Fund Services Limited Partnership, with its principal office at
3435 Stelzer Road, Columbus, Ohio 43219, distributes the shares of the Fund.
Under a distribution agreement (the "Distribution Agreement"), BISYS Fund
Services Limited Partnership, as agent of the Fund, agrees to use its best
efforts as sole distributor of the Fund's shares. BISYS Fund Services Limited
Partnership 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 the Portfolio and directs MA&S to use its best efforts to obtain the best
execution with respect to all transactions for the Portfolio.
In doing so, the 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 Portfolio amounted to $84,462,
$14,369 and $-0-, respectively, for the fiscal years ended September 30, 1996,
September 30, 1995 and September 30, 1994.
Since shares of the Portfolio 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 Portfolio or who act as agents in the purchase
of shares of the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by MA&S. If purchases or sales of
securities consistent with the investment policies of the 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
- --------------------------------------------------------------------------------
BISYS Fund Services Limited Partnership provides the Fund with
administrative and fund accounting services pursuant to Administration and
Accounting Agent Agreements each dated as of October 1, 1996. The services
provided by and the fees payable to BISYS Fund Services Limited Partnership for
such services are
<PAGE>
-19-
described in the Prospectus. The Administration and Accounting Agent Agreements
continue in effect until October 1, 1997 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.
The Portfolio's predecessor Administrator was Furman Selz LLC ("Furman
Selz"). For the fiscal year ended September 30, 1996, Furman Selz received
$42,231 in administrative fees of which $26,982 was voluntarily waived. In
addition, Furman Selz was entitled to an annual fee of $30,000 for performing
fund accounting services of which $10,000 was voluntarily waived. For the fiscal
year ended September 30, 1995, Furman Selz received $17,154 in administrative
fees and $30,000 for performing fund accounting services. For the fiscal year
ended September 30, 1995 the Fund paid $45,000 in fund accounting fees which
included out-of-pocket expenses. For the fiscal year ended September 30, 1994,
Furman Selz waived its entire administrative fee of $15,234 for the Portfolio.
In addition, for the fiscal year ended September 30, 1994, Furman Selz waived
$19,777 of its fund accounting fee.
BISYS Fund Services, Inc. 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, BISYS
Fund Services, Inc. has agreed, among other things, to: (i) issue and redeem
shares of the Portfolio; (ii) transmit all communications by the Portfolio to
its shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Directors concerning the Portfolio's operations. Under the Transfer Agency
Agreement, BISYS Fund Services, Inc. is entitled to a fee of $15 per account per
year. The Transfer Agency Agreement continues in effect until October 1, 1997
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. The Portfolio's predecessor Transfer Agent and Dividend
Disbursing Agent was Furman Selz LLC. For the fiscal years ended September 30,
1996 and September 30, 1995 the Portfolio paid $9,027 and $8,500, respectively,
in Transfer Agency fees which numbers include out-of-pocket expenses. For the
fiscal year ended September 30, 1994, the Portfolio paid $8,481 in Transfer
Agency fees.
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 the Portfolio; (ii) hold and disburse portfolio
securities on account of the Portfolio; (iii) collect and receive all income and
other payments and distributions on account of the 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 Portfolio's 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 Portfolio, 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 the 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, 1997 and from year
to year thereafter if such continuance is approved at least annually by the
Fund's Board of Directors and by a majority of the Directors who are not parties
to such Agreement or "interested persons" (as defined in the 1940 Act) of any
party, and such Agreement may be terminated by either party on 60 days' written
notice. LTCB Trust Company is a wholly owned subsidiary of LTCB. For the fiscal
years ended September 30, 1996, September 30, 1995 and September 30, 1994
<PAGE>
-20-
LTCB Trust Company received $36,300, $16,044 and $14,102, respectively, for the
Portfolio for their services as Custodian.
- --------------------------------------------------------------------------------
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 the Portfolio, or any
portfolio that may be commenced in the future (e.g., approval of advisory
contracts), means the vote of the lesser of (i) 67% of the shares of the
Portfolio represented at a meeting if the holders of more than 50% of the
outstanding shares of the Portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the 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 the Portfolio will be 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 will be credited
with a proportionate share of any general assets of the Fund not belonging to a
particular portfolio and will be charged with the direct liabilities in respect
of that portfolio and with a share of the general liabilities of the Fund which
will normally be 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 will be entitled to receive the assets attributable to that portfolio
that are available for distribution, and a proportionate distribution, based
upon the relative net assets of the portfolios, of any general assets not
attributable to a portfolio that are available for distribution. Shareholders
are not entitled to any preemptive rights.
Subject to the provisions of the Fund's Articles of Incorporation,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets of the Fund, with
respect to a particular portfolio will be conclusive.
As of November 4, 1996, the following persons owned of record and
beneficially 5% or more of the Fund:/
SHARES OWNED PERCENTAGE
The Sumitomo Trust 1,817,485.594 38.83%
and Banking Co. Ltd.
16157-003
11-5 Nihonbashi-Honcho
4 Chome, Chuo-Ku, Tokyo
- ----------
The Sumitomo Trust and Banking Co. Ltd ("Sumitomo") is listed above as
owning beneficially 25% or more of the outstanding shares of the
Portfolio and may be presumed to "control" (as that term is defined in
the 1940 Act) the Portfolio. As a result, Sumitomo would have the
ability to vote a majority of the shares of the Portfolio on any matter
requiring the approval of shareholders. Sumitomo is a custodian for
Japanese pension fund clients.
<PAGE>
-21-
Marine Midland Bank Trustee FBO 598,846.378 12.79%
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 598,846.378 12.79%
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
Yasuda Trust and Banking Co. Ltd. 422,372.000 9.02%
Tokkin 9756
Fund Administration
2-1 Yaesu 1-Chome,
Chuo-Ku, Tokyo
The Mitsui Trust 412,289.961 8.81%
1-1 Nihonbashi-Muromachi
2-Chome, Chuo-Ku, Tokyo 103
The Toyo Trust 300,393.303 6.42%
7-2 Nihonbashi-Koamicho
Chuo-Ku, Tokyo 103
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 the 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 the Portfolio by an investor may have the effect of reducing the per share
net asset value of the 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 the 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
<PAGE>
-22-
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.
- --------------------------------------------------------------------------------
PERFORMANCE CALCULATIONS
- --------------------------------------------------------------------------------
The Fund may from time to time quote various performance figures to
illustrate the past performance of the Portfolio. Performance quotations by
investment companies are subject to rules adopted by the SEC, which require the
use of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the SEC methods for computing performance follows.
TOTAL RETURN
The 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 Portfolio 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, 1996, the total return for the
Portfolio was 16.37%. Total return is an aggregate and has not been annualized,
and reflects voluntary fee waivers. For the period October 1, 1993 (commencement
of operations) through September 30, 1996, the cumulative total return for the
Portfolio was 13.79%
The performance of the 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
- --------------------------------------------------------------------------------
The Portfolio may from time to time use one or more of the following
unmanaged indices for performance comparison purposes:
<PAGE>
-23-
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.
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.
