SAND HILL PORTFOLIO MANAGER FUND
A "SERIES" OF THE WORLD FUNDS, INC.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
1-800-527-9525 (Toll Free)
PROSPECTUS
Dated August 19, 1997
This Prospectus offers shares of the Sand Hill Portfolio Manager Fund (the
"Fund"), a no-load diversified series of The World Funds, Inc. (the "Company"),
an open-end management investment company commonly known as a "mutual fund." The
Company is currently composed of one series.
The Fund seeks to maximize total return (consisting of realized and unrealized
appreciation plus income) consistent with allocating its investments among
equity securities (i.e., stocks), debt securities (i.e., bonds) and short term
investments.
The Fund is a newly-organized series that was formed to continue the operations
of the Sand Hill Portfolio Manager Fund series (the "Original Sand Hill Fund")
of another investment company pursuant to a Plan of Reorganization approved by
the shareholders of the Original Sand Hill Fund.
This Prospectus sets forth concisely the information about the Fund which a
prospective investor should know before investing. It should be read and
retained for future reference. More information about the Fund has been filed
with the Securities and Exchange Commission and is contained in the "Statement
of Additional Information," dated August 19, 1997, which is available at no
charge upon written request to the Fund. The Fund's Statement of Additional
Information is incorporated herein by reference.
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 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
PROSPECTUS SUMMARY................................................... 1
FUND EXPENSES........................................................ 2
FINANCIAL HIGHLIGHTS................................................. 4
1996 PERFORMANCE..................................................... 5
THE WORLD FUNDS, INC................................................. 5
INVESTMENT OBJECTIVE................................................. 5
WHY INVEST IN THE FUND?.............................................. 6
ASSET ALLOCATION POLICIES............................................ 6
ADDITIONAL INFORMATION ON INVESTMENTS, POLICIES AND RISKS............ 9
PERFORMANCE TERMS AND COMPUTATIONS................................... 13
THE FUND'S MANAGEMENT................................................ 14
HOW TO INVEST........................................................ 17
HOW TO REDEEM SHARES................................................. 18
HOW TO TRANSFER SHARES............................................... 20
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS........................... 21
SPECIAL SHAREHOLDER SERVICES......................................... 21
HOW NET ASSET VALUE IS DETERMINED.................................... 21
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................ 22
TAXES................................................................ 22
GENERAL INFORMATION ABOUT THE FUND................................... 24
TO OBTAIN MORE INFORMATION........................................... 25
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SAND HILL PORTFOLIO MANAGER FUND
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing in the body of this Prospectus.
Investment Objective: The investment objective of the Sand Hill Portfolio
Manager Fund (the "Fund") is to seek to maximize total return (consisting of
realized and unrealized appreciation plus income) consistent with allocating its
investments among equity securities (i.e., stocks), debt securities (i.e.,
bonds) and short term investments. As with any mutual fund, there is no
assurance that the Fund will achieve its objective. See "Investment Objective"
on Page .
Investment Advisor: Sand Hill Advisors, Inc. (the "Investment Advisor") is the
investment advisor of the Fund. See "The Fund's Management" on Page .
Distributions/Dividends: Paid annually from available capital gains and income.
See "Dividends and Capital Gains Distributions" on Page .
Reinvestment: Distributions may be reinvested automatically without a sales
charge. See "Dividends and Capital Gains Distributions" on Page .
Initial Purchase: $25,000 minimum (may be waived under certain circumstances.)
See "How to Invest" on Page .
Subsequent Purchases: $50 minimum. See "How to Invest" on Page .
Net Asset Value: The net asset value per share of the Fund is calculated on each
day that the New York Stock Exchange is open for trading. You may obtain the net
asset value per share of the Fund by calling 1-800-527-9525. See "How Net Asset
Value is Determined" on Page .
No Sales Charge or Redemption Fees: The Fund's shares are sold at their net
asset value per share, with no sales charges, Rule 12b-1 fees, redemption fees
(except for wire/telephone redemptions) or exchange fees.
Principal Risk Factors: The Fund invests in different types of securities issued
in the United States or abroad. Its performance will be influenced by various
factors, including market and economic conditions, company-specific developments
and the skill of the Investment Advisor in allocating investments among stocks,
bonds and other investments. See "Asset Allocation Policies" on page 5. The Fund
may invest in foreign securities, and therefore may be affected by changes in
exchange rates between foreign currencies and the U.S. dollar, different
regulatory standards and taxes, adverse social or political developments and
other factors. See "Foreign Securities and Depositary Receipts" on page 8.
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Reorganization: Pursuant to a Plan of Reorganization, the Original Sand Hill
Fund transferred all of its assets to the Fund in exchange for shares of common
stock of the Fund and the Fund's assumption of all liabilities of the Original
Sand Hill Fund (the "Reorganization"). On August 18, 1997, the effective date of
the Reorganization, Fund shares were distributed on a pro rata basis to the
Original Sand Hill Fund's shareholders.
FUND EXPENSES
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None*
Exchange Fees None
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*A shareholder placing a telephone redemption request will be charged $10 for
each such service.
Estimated Annual Fund Operating Expenses (as % of average daily net assets)
Management Fee (after fee waivers and/or
expense reimbursements)** 0.50%
12b-1 Fees None
Other Operating Expenses (before expense credits) 1.40%***
Total Fund Operating Expenses (after fee waivers
and/or expense reimbursements and before
expense credits) 1.90%
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**The Investment Advisor has voluntarily undertaken to waive its management fee,
otherwise payable at an annual rate of 1.00%, or to reimburse expenses of the
Fund, so that Total Fund Operating Expenses do not exceed an annual rate of
1.90% of average daily net assets.
*** Absent such expense credits, the Funds "Other Operating Expense" would have
been 0.50% higher during the fiscal year ended December 31, 1996.
The purpose of this table is to assist investors in understanding the various
costs and expenses that they will bear directly or indirectly. The expenses and
fees in the table are the estimated annualized expenses that are expected to be
incurred by the Fund for the fiscal period ending December 31, 1997 and are
based on the Original Sand Hill Fund's actual expenses for the fiscal year ended
December 31, 1996. Management expects that as the Fund increases in size its
Other Operating Expenses will decline as an annual percentage rate reflecting
economies of scale.
Example of Expenses
The following example illustrates the expenses that an investor would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return, and (2) redemption at the end of each time period. As noted in the table
above, the Fund
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charges no redemption fees (apart from small per transaction charges for wire
and/or telephone redemption services as noted above.)
1 Year 3 Years 5 Years 10 Years
$25 $78 $133 $284
These examples should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or lesser than those
shown.
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FINANCIAL HIGHLIGHTS
The Fund is a newly-organized series that succeeded to the operations of the
Original Sand Hill Fund on August 18, 1997, the effective date of the
Reorganization. Set forth below are the Original Sand Hill Fund's Financial
Highlights for the periods indicated which have been audited by Tait, Weller and
Baker, independent certified public accountants, whose unqualified report
thereon appears with the Original Sand Hill Fund's audited financial statements
in its Annual Report to Shareholders for the year ended December 31, 1996 (the
"Annual Report"). The accountant's report and the Original Sand Hill Fund's
audited financial statements and performance information are included in the
Fund's Statement of Additional Information.
For a share outstanding during the periods indicated:
Year Ended January 2, 1995*
December 31, to December
Per Share Operating Performance 1996 31,
1995
Net asset value, beginning period $11.11 $10.00
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Income from investment operations
Net investment income 0.14 0.06
Net investment realized and unrealized
gain on investments 2.02 1.10
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Total from investment operations 2.16 1.16
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Less distributions
Distributions from net investment income (0.15) (0.05)
Distributions from capital gains (0.33) --
------ --
Total distributions (0.48) (0.05)
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Net asset value, end of period $12.79 $11.11
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Total Return 19.57% 11.60%
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Ratios/Supplemental Data
Net assets, end of period (000's) $6,459 $4,025
Ratio to average net assets-(A)
Expense ratio (B) 2.50% 3.03%**
Expense ratio-net (C) 2.00% 1.90%**
Net investment income 1.29% 0.52%)**
Portfolio turnover rate 32.97% 40.96%
Average brokerage commission per share $0.0581
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* Commencement of operations.
** Annualized
(A) Management fee waivers reduced the expense ratios and increased the net
investment income ratio by 0.64% in 1996 and 1.00% in 1995.
(B) Expense ratio has been increased to include custodian fees which were
offset by custodian credits.
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(C) Expense ratio-net reflects the effect of the custodian fee credits the Fund
received.
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1996 PERFORMANCE
The Original Sand Hill Fund's total return for the year ended December 31, 1996
was 19.57%, as compared with the returns of the following relevant indices:
S&P 500 Index 22.99%
MSCI EAFE (international index) 4.40%
Salomon Treasury Bond Index 2.73%
U.S. Treasury Bills (cash surrogate) 5.50%
At the end of the year, the composition of the Original Sand Hill Fund was 56.0%
domestic stocks, 17.2% international stocks, 20.2% bonds and 6.6% cash. These
percentages roughly correspond to the weightings in the Original Sand Hill Fund
over the course of the year. The domestic stock portfolio consisted of 38
companies representing a cross-section of industries and market capitalizations.
Technology (15.9% of the total domestic stock portfolio), energy (12.9%),
consumer non-durable (12.2%), health care (11.4%) and financial companies
(10.5%) were the sectors with the highest weightings in the Original Sand Hill
Fund.
The international stock allocation consisted of the ADRs of 18 companies. The
international stocks in the Original Sand Hill Fund were represented by larger
companies from a variety of industries and countries. The international
allocation at the end of the year was as follows: Europe 46.1%, Southeast Asia
30.4%, Japan 15.3% and Latin America 8.2%.
THE WORLD FUNDS, INC.
The Fund is a no-load series of The World Funds, Inc. (the "Company"), an
open-end diversified management investment company incorporated in Maryland in
1997. The Company currently consists of one series, and the Board of Directors
of the Company may elect to add more series in the future. A minimum initial
investment of $25,000 is required to open a shareholder account in the Fund, and
each subsequent investment must be $50 or more.
INVESTMENT OBJECTIVE
The Fund seeks to maximize total return (consisting of realized and unrealized
appreciation plus income) consistent with allocating its investments among
equity securities (i.e., stocks), debt securities (i.e., bonds) and short term
investments. By allocating investments across broad asset classes, the
Investment Advisor seeks to achieve over time a high total return, yet
experience lower price volatility than might be inherent in a more limited asset
mix.
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The investment objective of the Fund may not be changed without the approval of
shareholders. Unless specifically stated otherwise, each of the Fund's other
investment policies may be changed by the Board of Directors, without
shareholder approval. There is no assurance that the investment objective can be
achieved.
Because the value of the securities in which the Fund may invest may fluctuate
from day-to-day, the value of an investment in the Fund will vary based upon the
Fund's investment performance. When you sell your shares of the Fund, they may
be worth more or less than their cost to you.
WHY INVEST IN THE FUND?
The Fund is designed for investors seeking maximum total return through a
professionally managed portfolio that provides a mix of domestic and foreign
stocks, bonds and short term investments. The purpose of an investment in the
Fund should be to seek representation in a wide selection of asset classes and
markets with specific allocations and securities selections set by an
experienced portfolio management organization.
The Fund provides an easy, efficient and low cost way of investing in a
carefully selected, continuously managed and diversified portfolio of equity
securities, debt securities and short term investments. (See "Equity Securities,
Debt Securities and Short Term Investments" on Page .
ASSET ALLOCATION POLICIES
The Fund seeks to take advantage of investment opportunities using a mix of
asset classes and markets throughout the world. Investments will be selected not
only based upon the Investment Advisor's evaluation of the merits of the
particular investment, but also based upon the Investment Advisor's evaluation
of the investment's relationship to other investments in the portfolio. National
economies and their investment markets change at varying rates and not
necessarily in tandem with one another. Many foreign markets do not have the
maturity, depth, or liquidity of the U.S. market. Therefore, the opportunity to
take advantage of their growth normally means acceptance of higher price
volatility than is usual in the U.S. The Investment Advisor believes that by
allocating investments among equity, debt and short term asset classes in
different markets, the Fund can seek to benefit from the faster growth of
several markets. In addition, investing assets in a number of markets may
provide less portfolio volatility than might otherwise result from investment in
a single market.
The Fund's investments are allocated among equity securities, debt securities
and short term investments, according to the Investment Advisor's anticipation
of risks and returns for each asset class. There are no limitations on the
amount of the Fund's assets which may be allocated to each of these three asset
classes. The Investment Advisor believes
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that, over time, common stocks produce the greatest return among these asset
classes. Therefore, common stocks will normally comprise a large percentage of
the invested assets. Bonds, or other evidences of indebtedness, will be used to
generate income, to seek capital gains and to dampen portfolio volatility. While
representation in markets and asset classes is the purpose of the Fund, the
Investment Advisor intends to retain the flexibility necessary to move among
asset classes and markets as changing conditions of the United States and
foreign economies warrant. Asset classes will be considered both for their total
return potential as well as for the defensive or strategic aspects they offer
the portfolio. In that sense, interest-earning short term investments will, in
varying degrees, be a component of the overall asset allocation.
Because the Fund invests in different types of securities in proportions which
will vary over time, investors should not expect the Fund to exhibit stable
asset allocations. Investors should also realize that the Fund's performance
will depend upon the skill of the Investment Advisor to anticipate the relative
risks and return of stocks, bonds and other securities and to adjust the
portfolio accordingly.
Equity Securities, Debt Securities and Short-Term Investments
The three major asset classes in which the Fund will invest, as defined by the
Investment Advisor, are equity securities, debt securities and short term
investments. Short term investments are debt securities with less than three
years to maturity, and are viewed as comprising a different type of investment
risk than longer term debt securities, that involve less risk of interest rate
volatility, but more risk of market value volatility.
Within each of these asset classes, the Fund may invest in foreign or domestic
securities.
Equity Securities consist of common stocks as well as warrants, rights, and
securities which are convertible into common stocks, such as convertible bonds.
The Investment Advisor uses valuation screens for the Fund's equity holdings
primarily involving an analysis of a company's cash flow return on investment.
Specifically, the Investment Advisor determines the cash flow of a company and
then applies a market derived discount rate to the cash flows. Next the
Investment Advisor determines the free cash flow that can be reinvested into the
company and applies the same market derived discount rate. The Investment
Advisor also identifies industries that are positioned to participate in strong
demographic, societal or economic trends and looks for companies within those
industries that have a particular competitive advantage or niche.
Stocks and other equity securities are subject to the risk that specific stocks
or the prices of equity securities in general will decline in value over short
or even extended periods of time.
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Debt Securities consist of the following bonds, obligations and other evidences
of indebtedness denominated in U.S. or foreign currencies which are issued by
governments, companies or other issuers to borrow money from investors:
* obligations issued or guaranteed by the U.S. Government or a foreign
national government or the agencies, instrumentalities or political
subdivisions of the U.S. Government or of a foreign government;
* obligations issued or guaranteed by supranational organizations (e.g.,
European Investment Bank, Inter-American Development Bank, the World Bank
and other organizations);
* obligations of foreign or domestic corporations;
* long term debt securities issued by banks or bank holding companies; and
* other debt securities whose purchase is consistent with the investment
objective of the Fund.
Debt securities may pay fixed or variable rates of interest, may have varying
maturity dates at which the issuers must repay their debt, and have varying
degrees of risk. The market values of debt securities are influenced primarily
by credit risk (the risk that the issuer of the security will not maintain the
financial strength needed to pay principal and interest on its debt securities)
and interest rate risk (the risk that changes in prevailing interest rates will
increase or decrease the prices of outstanding debt securities.) Generally, the
market values of fixed-rate debt securities vary inversely with changes in
prevailing interest rates. When interest rates rise, fixed-rate debt securities
fall in market value. Conversely, when interest rates fall, fixed-rate debt
securities increase in market value.
There is no limit on the maturities of the debt securities that the Investment
Advisor will select. Rather, the Investment Advisor will select debt securities
for the Fund on the basis of, among other things, credit quality, yield,
potential for capital gains and the Investment Advisor's fundamental outlook for
currency and interest rate trends around the world.
The Fund will invest in investment grade debt securities, which are debt
securities that bear the rating BBB or higher by Standard & Poor's Ratings Group
("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's") or
unrated securities that the Investment Advisor deems to be of comparable
quality. However, the Fund reserves the right to invest its assets in lower
quality debt securities, which are commonly known as "junk bonds". It will do so
to avail itself of the higher yields available with these securities or to seek
to realize capital gains. The Fund does not currently intend to invest more than
5% of its assets in securities that are rated below investment grade or
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that are unrated but are of comparable quality as determined by the Investment
Advisor. If that policy should change, the Fund will revise its prospectus and
advise the Fund's shareholders.
After its purchase by the Fund, a debt security may cease to be rated or its
rating may be reduced. Neither event would require the elimination of the debt
security from the portfolio.
Short Term Investments are obligations denominated in U.S. or foreign currencies
consisting of bank deposits, bankers acceptances, certificates of deposit,
commercial paper, short-term government, government agency, supranational agency
and corporate obligations, and repurchase agreements. Depending on the
Investment Advisor's assessment of the prospects for the various asset classes,
all or a portion of the Fund's assets may be invested in high quality short-term
investments or cash to protect against adverse movements of interest rates or to
provide liquidity.
ADDITIONAL INFORMATION ON INVESTMENTS, POLICIES AND RISKS
The Fund may invest in the securities, and engage in the investment practices
described below, each of which may involve the specific risks which are
described. The Fund may not buy all of these securities or engage in all of
these investment practices at any one point in time or even over an extended
period of time. See the Statement of Additional Information for more detailed
information about these securities and investment practices, including
limitations designed to reduce related risks.
Foreign Securities and Depositary Receipts
Investing in foreign securities may involve special risks, such as:
Social or Political Risk. Social or political instability, limitations on
the removal of funds from foreign countries, expropriation, repudiation by
a foreign government of its debt, or confiscatory taxes could adversely
affect the value of the Fund's foreign investments.
Currency Risk. The U.S. dollar value of a foreign security could decrease when
the value of the U.S. dollar rises against the foreign currency in which
the security is denominated, and could increase when the U.S. dollar falls
against that currency.
Market Risk. Foreign securities may be less liquid and show greater price
volatility than domestic securities.
Regulatory Risk. Foreign issuers of securities are not generally subject to the
regulatory controls or the accounting and financial reporting standards
imposed
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on U.S. issuers. There is generally less publicly available information about
foreign securities than about domestic securities. Also, judgments may be
more difficult to enforce abroad.
The foreign securities the Fund purchases may be bought directly in their
principal markets abroad or they may be acquired through the use of depositary
receipts. The Fund may invest in both sponsored and unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other
similar depositary receipts. ADRs are issued by an American bank or trust
company and evidence ownership of underlying securities of a foreign company.
EDRs are issued in Europe, usually by foreign banks, that evidence ownership of
either foreign or domestic underlying securities. Unsponsored ADRs and EDRs are
organized without the participation of the issuer of the underlying securities.
As a result, information concerning the issuer may not be as current as for
sponsored ADRs and EDRs.
Convertible Securities
The Fund may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) that may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Through their conversion
feature, convertible securities provide an opportunity to participate in capital
appreciation resulting from an increase in the value of a convertible security's
underlying common stock. The value of a convertible security is influenced by
the market value of the underlying common stock and tends to increase as the
market value of the underlying stock rises, and tends to decrease as the market
value of the underlying stock declines. For purposes of considering convertible
securities for purchase by the Fund, the Investment Advisor evaluates
convertible securities by standards applicable to equity securities and not by
debt securities ratings.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of closed-end
investment companies. Because of restrictions on direct investment by U.S.
entities in certain countries, investment in other investment companies may be
the most practical or only manner in which the Fund can invest in the securities
markets of those countries. Investment in the shares of other investment
companies may involve duplicative investment advisory and administrative
expenses and is subject to limitations under the Investment Company Act of 1940,
as amended (the "1940 Act"). See The Statement of Additional Information for a
description of these limitations.
Zero Coupon Securities
The Fund may purchase zero coupon securities (each, a "Zero"). Zeroes pay no
income until maturity and are sold at substantial discounts from their stated
redemption price at
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maturity. When held to maturity, the entire return on Zeroes, comes from the
difference between the discounted issue price and the stated redemption price at
maturity. The annual accretion in value of the Zeroes will constitute annual
taxable income to the Fund which it is required to distribute to its
shareholders at least annually in order to comply with the Internal Revenue Code
of 1986, as amended (the "Code"), notwithstanding that the Fund will not have
received income until maturity or until the Zeroes are sold if they are sold
prior to maturity. If a Zero is sold prior to maturity, the amount of income
received will depend on the current market value of the Zero and the income
received may be less than the accretion in value to date of sale, between the
discounted issue price and the maturity value of the Zero. Zero coupon
securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
cash distributions of interest.
Repurchase Agreements
As a means of earning income for periods as short as overnight, the Fund may,
without limit, enter into repurchase agreements, which are collateralized by
U.S. government securities, with selected banks and broker/dealers. Under a
repurchase agreement, a fund acquires securities, subject to the seller's
agreement to repurchase the securities at a specified time and price. The Fund
requires the party obligated to repurchase the securities to provide it with
collateral for that obligation.
If the seller under a repurchase agreement becomes insolvent, the Fund's right
to dispose of the securities may be restricted. In the event of bankruptcy
proceedings with respect to the seller of the securities, before repurchase of
the securities under a repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the securities. Also, the value of such
securities may decline before the Fund is able to dispose of them. For federal
tax diversification purposes, repurchase agreements are treated as securities
issued by the seller and not cash, cash items or receivables or U.S.
Government securities.
When-Issued Securities
The Fund may purchase securities on a when-issued or forward delivery basis, for
payment and delivery at a later date. The price and yield are generally fixed on
the date of commitment to purchase. During the period between purchase and
settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price. The
Fund's net asset value reflects gains or losses on such commitments each day,
and the Fund segregates assets each day sufficient to meet the Fund's
obligations to pay for the securities.
Illiquid Securities
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Normally, the Fund will not invest more than 5% of its net assets in securities
which are illiquid or not readily marketable; however, the Fund is permitted to
invest up to 15% of its net assets in illiquid securities.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies, including the use of derivatives, as described below to hedge
various market risks (such as changes in security prices, interest rates and
currency exchange rates), or to enhance potential gain. Such strategies are
generally accepted as modern portfolio management techniques and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed put and call options on securities and securities indices,
and enter into various currency transactions such as currency forward contracts,
and options on currencies (collectively, all of the above are called "Strategic
Transactions").
Strategic Transactions involving derivatives may be used to attempt (1) to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, (2) to protect its unrealized gains in the
value of its portfolio securities, (3) to facilitate the sale of such securities
for investment purposes, (4) to establish a position in the options markets as a
temporary substitute for purchasing or selling particular securities, or (5) as
a means efficiently to change country and/or currency allocations.
The ability of the Fund to utilize these Strategic Transactions successfully
will depend on the Investment Advisor's ability to predict, which cannot be
assured, pertinent market movements. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Investment Advisor's view as to certain market movements is incorrect, the
risk that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in losses
to the Fund, force the sale or purchase of portfolio securities at inopportune
times or for prices higher than or lower than current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. In addition, options markets may not
be liquid in all circumstances. As a result, in certain markets, the Fund might
not be able to close out a transaction without incurring substantial losses, if
at all. Although the use of options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time hedging tends to limit any
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potential gain that might result from an increase in value of such position. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors, including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. Losses resulting from the use of Strategic Transactions will reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. The Strategic Transactions that
the Fund may use and the risks of these techniques are described more fully in
the Statement of Additional Information.
Other Securities
The Fund may also invest in other types of securities which will not constitute
the Fund's principal portfolio emphasis, such as, mortgage-backed securities,
asset-backed securities, indexed securities and warrants. Each of these types of
securities will, if used, comprise less than 5% of the Fund's total assets.
Please see the Statement of Additional Information for further details.
Fundamental Limitations
The Fund has adopted certain fundamental limitations which may not be changed
without a shareholder vote and which are designed to reduce its investment risk.
Some of these limitations are that the Fund may not:
* as to 75% of its assets, purchase the securities of any issuer
(other than obligations issued or guaranteed as to principal and
interest by the Government of the United States or any agency or
instrumentality thereof) if, as a result of such purchase, more than
5% of its total assets would be invested in the securities of such
issuer;
* purchase stock or securities of an issuer (other than obligations
issued or guaranteed as to principal and interest by the Government
of the United States or any agency or instrumentality thereof) if
such purchase would cause the Fund to own more than 10% of any class
of the outstanding stock or securities or more than 10% of any class
of voting securities of such issuer;
* borrow money, except through reverse repurchase agreements or from
banks for temporary or emergency purposes, and then only in an
amount not in excess of 20% of the value of the Fund's net assets at
the time the borrowing is made; or
* purchase the securities of any issuer (other than obligations issued or
guaranteed by the Government of the United States or any agency or
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instrumentality thereof) if, as a result of such purchase, more than
25% of the Fund's total assets would be invested in any one
industry.
These limitations apply at the time the Fund purchases securities for the
portfolio. See the Statement of Additional Information for other investment
limitations applicable to the Fund.
PERFORMANCE TERMS AND COMPUTATIONS
From time to time the Fund may advertise information regarding its performance.
All performance figures are historical, show the performance of a hypothetical
investment and are not intended to indicate future performance. Advertising may
include the following performance measurements.
"Yield" is the ratio of income per share derived from the portfolio investments
to the current maximum offering price expressed in terms of a percentage.
"Total return" is the total of all income and capital gains paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
"Average annual total return" refers to the average annual compound rate of
return of an investment in the Fund assuming that the investment has been held
for one year and the life of the Fund.
"Cumulative total return" represents the cumulative change in value of an
investment in the Fund for various periods. These calculations assume that
dividends and capital gains distributions were reinvested.
"Capital change" measures return from capital, including reinvestment of any
capital gains distributions but not reinvestment of dividends.
Performance will vary based upon, among other things, changes in market
conditions and the level of the Fund's expenses. Please refer to the Statement
of Additional Information for more information on performance.
THE FUND'S MANAGEMENT
The Company's Board of Directors is responsible for the supervision of the
general business of the Company and the Fund. The Directors act as fiduciaries
for shareholders under the laws of the State of Maryland. The Board appointed
John Pasco, III to serve as President of the Company and appointed Jane H.
Williams to serve as President of the Fund. The Fund employs the following
persons to provide it with investment advice and to conduct its on-going
business:
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Investment Advisor
Sand Hill Advisors, Inc. (the "Investment Advisor"), a registered investment
adviser, manages the investments of the Fund pursuant to an Investment Advisory
Agreement (the "Advisory Agreement"), dated August 19, 1997. The Advisory
Agreement is effective for an initial term of two years and thereafter may be
renewed annually by the Board of Directors of the Fund.
The Investment Advisor is a privately held corporation. In addition to the
assets of the Fund, the Investment Advisor manages other assets of approximately
$235 million as of the date of this Prospectus. The Investment Advisor has
approximately two years of experience managing a mutual fund portfolio, and has
approximately 14 years of experience managing investment portfolios for private
clients.
Ms. Jane H. Williams has been the portfolio manager of the Fund and the Original
Sand Hill Fund since its inception in January of 1995. Ms. Williams is also the
President of the Fund, Vice President of the Company, and Executive Vice
President and a Director of the Investment Advisor which was founded in
September of 1982 by Ms. Williams. Ms. Williams owns 35.46% of the stock of the
Investment Advisor.
Effective June 1, 1996, David W. Cost, Jr. began assisting Ms. Williams in the
day-to-day portfolio management of the Original Sand Hill Fund and now assists
in managing the Fund. Mr. Cost joined the Investment Advisor in 1993 and holds
the title of Manager, Equity Research. From July 1985 to May 1990, Mr. Cost held
a middle market commercial banker position with Union Bank in Los Angeles, CA
and he began working on his MBA in June 1990. He holds a BA from Dartmouth
College and an MBA from the University of California at Los Angeles. He received
his CFA designation in 1995.
Pursuant to the Advisory Agreement, the Investment Advisor provides the Fund
with investment management services, subject to the supervision of the Company's
Board of Directors, and with office space, and pays the ordinary and necessary
office and clerical expenses relating to investment research, statistical
analysis, supervision of its portfolio and certain other costs. The Investment
Advisor also bears the cost of fees, salaries and other remuneration of the
Company's Directors, officers or employees who are officers, Directors, or
employees of the Investment Advisor. The Fund is responsible for all other costs
and expenses, such as, but not limited to, brokerage fees and commissions in
connection with the purchase and sale of securities, legal, auditing,
bookkeeping and record keeping services, custodian and transfer agency fees and
other costs and fees of registration of, or filing of notice of, its shares for
sale under various state and Federal securities laws.
Under the Advisory Agreement, the Investment Advisor is entitled to be paid
monthly compensation that is accrued daily at an annual rate of 1.00% of the
average daily net assets of the Fund. This fee is higher than that paid by many
investment companies. If
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the assets of the Fund exceed $100,000,000, the Investment Advisor is entitled
to a fee for such assets computed at an annual rate of 0.75% on such excess. The
Advisory Agreement requires that the fee be paid monthly, within five (5)
business days after the end of the month. The Investment Advisor has undertaken
voluntarily to waive its advisory fee as described in "Fund Expenses" above. All
expenses not specifically assumed by the Investment Advisor are assumed by the
Fund. The address of the Investment Advisor is 3000 Sand Hill Road, Building 3,
Suite 150, Menlo Park, California 94025.
The Advisory Agreement contemplates the authority of the Investment Advisor to
place orders pursuant to its investment determinations for the Fund either
directly with the issuer or with any broker or dealer. In placing orders with
brokers or dealers, the Investment Advisor will attempt to obtain the best price
and execution for the Fund's orders. The Investment Advisor may purchase and
sell securities to and from brokers and dealers who provide the Investment
Advisor with research advice or statistical services, and may be authorized to
pay a commission for such transactions which is higher than the commission which
would be charged by another broker. From time to time, and subject to the
Investment Advisor obtaining the best price and execution for the Fund, the
Board of Directors may authorize the Investment Advisor to allocate brokerage
transactions to a broker in consideration of: (1) payment of an obligation
otherwise payable by the Fund or (2) in consideration of the sale of Fund
shares.
Administrator
Commonwealth Shareholder Services, Inc. ("CSS"), serves as administrator to the
Fund pursuant to an Administrative Services Agreement, dated August 19, 1997.
CSS provides certain recordkeeping, administrative and shareholder servicing
functions required of registered investment companies. CSS may furnish personnel
to act as the Fund's officers to conduct the Fund's business subject to the
supervision and instructions of the Board of Directors of the Company.
The Administrative Services Agreement provides that CSS will be paid monthly:
(1) the greater of .20% of the average daily net assets of the Fund or $15,000
per year for administration (which includes regulatory matters, backup of the
pricing of the Fund, administrative duties in connection with the execution of
portfolio trades, and certain services in connection with fund accounting); (2)
certain out-of-pocket expenses; and (3) an hourly fee for shareholder servicing
and blue sky matters. The address of CSS is 1500 Forest Avenue, Suite 223,
Richmond, VA 23229.
Custodian and Accounting Services Agent
Star Bank (the "Custodian") in Cincinnati, Ohio is the custodian and accounting
services agent for the Fund. The Custodian collects income when due and holds
all of the Fund's portfolio securities and cash. The Custodian is authorized to
appoint other entities to
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act as sub-custodians to provide for the custody of foreign securities which may
be acquired and held by the Fund outside the U.S. Such appointments are subject
to appropriate review by the Company's Board of Directors.
Star Bank, as the accounting service agent, maintains and keeps current the
books, accounts, records, journals or other records of original entry relating
to the Fund's business. The address of Star Bank is 425 Walnut Street, P.O. Box
1118, Cincinnati, Ohio 45201-1118.
Transfer and Dividend Disbursing Agent
Fund Services, Inc. (the "Transfer Agent" or "FSI") is the Fund's transfer and
dividend disbursing agent. John Pasco, III, Chairman of the Board of the Company
owns one third of the stock of FSI, and, therefore, FSI may be deemed to be an
affiliate of the Fund. FSI provides all the necessary facilities, equipment and
personnel to perform the usual and ordinary services of transfer and dividend
disbursing agent, including: receiving and processing orders and payments for
purchases of the Fund's shares, opening shareholder accounts, preparing
shareholder meeting lists, mailing proxy material, receiving and tabulating
proxies, mailing shareholder reports and prospectuses, withholding certain taxes
on non-resident alien accounts, disbursing income dividends and capital
distributions, preparing and filing U.S. Treasury Department Form 1099 (or
equivalent) for all shareholders, preparing and mailing confirmation forms to
shareholders for all purchases and redemptions of shares and all other
confirmable transactions in shareholders' accounts, and recording reinvestment
of dividends and distributions of the Company's shares. Under an Agreement
between the Company and FSI, dated August 19, 1997 FSI is compensated pursuant
to a schedule of services, and in reimbursement for out-of-pocket expenses. The
schedule calls for a minimum payment of $16,500 per year. The address of the
Transfer Agent is P.O. Box 26305, Richmond, VA 23260.
Principal Underwriter/Distributor
First Dominion Capital Corp. (the "Distributor") acts as the principal
underwriter for the Company pursuant to an agreement dated August 19, 1997. Mr.
John Pasco, III, who is President, Director and Treasurer of the Distributor,
owns 100% of the stock of the Distributor. The address of the Distributor is
1500 Forest Avenue, Suite 223, Richmond, VA 23229.
HOW TO INVEST
Purchases of the Fund's shares are made at the net asset value per share. A
minimum initial investment of $25,000 is required to open a shareholder account,
and each subsequent investment must be $50 or more. Under certain circumstances,
the Fund may waive the minimum initial investment for purchases by officers,
Directors and
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employees of the Company and its affiliated entities and for certain related
advisory accounts and retirement accounts. The offering price per share is equal
to the net asset value per share next determined after the receipt of a purchase
order.
To facilitate the handling of transactions with shareholders, the Company uses
an open account plan. The Transfer Agent will automatically establish and
maintain an open account for the Fund's shareholders. Under the open account
plan, your shares are reflected in your open account. This service facilitates
the purchase, redemption or transfer of shares, and eliminates the need to
safeguard certificates and reduces time delays in executing transactions. Stock
certificates are not required and are not normally issued. Stock certificates
for full shares will be issued, however, by the Transfer Agent upon written
request but only after payment for the shares is collected by the Transfer
Agent.
Purchase by Mail
For initial purchases, the account application form (the "Account Application")
which accompanies this prospectus should be completed, signed, and mailed to the
Transfer Agent, together with your check or other negotiable bank draft drawn on
and payable by a U.S. Bank and payable to the Sand Hill Portfolio Manager Fund.
For subsequent purchases, include with your check the tear-off stub from a prior
purchase confirmation, or otherwise identify the name(s) of the registered
owner(s) and the social security number(s).
Investing by Wire
You may purchase shares by requesting your bank to transmit "Federal Funds" by
wire directly to the Transfer Agent. To invest by wire please call the Transfer
Agent for instructions, then notify the Distributor by calling 1-800-527-9525.
Your bank may charge you a small fee for this service. The Account Application
which accompanies this Prospectus should be completed and promptly forwarded to
the Transfer Agent. This application is required to complete the Fund's records
in order to allow you access to your shares. Once your account is opened by mail
or by wire, additional investments may be made at any time through the wire
procedure described above. Be sure to include your name and account number in
the wire instructions you provide your bank.
HOW TO REDEEM SHARES
Shares may be redeemed at any time by mail or telephone. For your protection,
the Transfer Agent will not redeem your shares until it has received all
information and documents necessary for your request to be in "proper order."
(See "Signature Guarantees.") You will be notified promptly by the Transfer
Agent if your redemption request is not in proper order.
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The Fund's procedure is to redeem shares at the net asset value next determined
after receipt by the Transfer Agent of the redemption request in proper order as
described herein. Payment will be made promptly, but no later than the seventh
day following receipt of the request in proper order. Please note that the
Transfer Agent cannot accept redemption requests which specify a particular date
for redemption, or which specify any special conditions. If the shares you are
redeeming were purchased by you less than 15 days prior to the receipt of your
redemption request, the Transfer Agent must ascertain that your check in payment
of the shares you are redeeming has cleared prior to disbursing the redemption
proceeds. If you anticipate that you may need to redeem sooner than 15 days, you
should make your purchase by Federal Funds wire, or by a certified, treasurer's
or cashier's check. The Fund may suspend the right to redeem shares for any
period during which the New York Stock Exchange is closed or the Securities and
Exchange Commission determines that there is an emergency. In such circumstances
you may withdraw your redemption request or permit your request to be held for
processing at the net asset value per share next computed after the suspension
is terminated.
Redemption by Mail
To redeem shares by mail, send the following information to the Transfer Agent:
(1) a written request for redemption signed by the registered owner(s) of the
shares, exactly as the account is registered; (2) the stock certificates for the
shares you are redeeming, if any stock certificates were issued; (3) any
required signature guarantees (see "Signature Guarantees"); and (4) any
additional documents that might be required for redemption by corporations,
executors, administrators, trustees, guardians, etc. The Transfer Agent will
mail the proceeds to your currently registered address, payable to the
registered owner(s) unless you specify otherwise in your redemption request.
There is no charge to shareholders for redemptions by mail.
Redemption by Telephone
You may redeem your shares by telephone if you request this service on your
Account Application at the time you complete your initial Account Application.
If you do not request this service at that time, you must request approval of
telephone redemption privileges in writing (sent to the Fund's Transfer Agent)
with a signature guarantee (see "Signature Guarantees") before you can redeem
shares by telephone. Once your telephone authorization is in effect, you may
redeem shares by calling the Transfer Agent at (800) 628-4077. By establishing
this service, you authorize the Transfer Agent to act upon any telephone
instructions it believes to be genuine, to (1) redeem shares from your account
and (2) mail or wire redemption proceeds. There is no charge for establishing
this service, but the Transfer Agent will charge your account a $10.00 service
fee each time you make a telephone redemption. The amount of this service charge
may be changed at any time, without notice, by the Transfer Agent.
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You cannot redeem shares by telephone if you hold a stock certificate
representing the shares you are redeeming or if you paid for the shares with a
personal, corporate, or government check and your payment has been on the books
of the Fund for less than 15 days.
If it should become difficult to reach the Transfer Agent by telephone during
periods when market or economic conditions lead to an unusually large volume of
telephone requests, a shareholder may send a redemption request to the Transfer
Agent by overnight mail.
The Fund employs procedures reasonably designed to confirm the authenticity of
your instructions communicated by telephone and, if it does not, it may be
liable for any losses due to unauthorized or fraudulent transactions; however, a
shareholder authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which the Fund believes to
be genuine. When you request a telephone redemption or transfer, you will be
asked to respond to certain questions designed to confirm your identity as a
shareholder of record. Your cooperation with these procedures will protect your
account and the Fund from unauthorized transactions.
Redemption by Wire
If you request by mail or telephone that your redemption proceeds be wired to
you, please call your bank for instructions prior to writing or calling the
Transfer Agent. Be sure to include your name, Fund account number, your account
number at your bank and wire information from your bank in your request to
redeem by wire.
Signature Guarantees
To help to protect you and the Fund (and its agents) from fraud, signature
guarantees are required for: (1) all redemptions ordered by mail if you require
that the check be payable to another person or that the check be mailed to an
address other than the one indicated on the account registration; (2) all
requests to transfer the registration of shares to another owner; and (3) all
authorizations to establish or change telephone redemption service, other than
through your initial Account Application.
In the case of redemption by mail, signature guarantees must appear either: (a)
on the written request for redemption; or (b) on a separate instrument of
assignment (usually referred to as a "stock power") specifying the total number
of shares being redeemed.
The Fund may waive these requirements in certain instances.
The following institutions are acceptable signature guarantors: (a) participants
in good standing of the Securities Transfer Agents Medallion Program ("STAMP");
(b) commercial banks which are members of the Federal Deposit Insurance
Corporation ("FDIC"); (c) trust companies; (d) firms which are members of a
domestic stock
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exchange; (e) eligible guarantor institutions qualifying under Rule 17Ad-15 of
the Securities Exchange Act of 1934, as amended, that are authorized by charter
to provide signature guarantees; and (f) foreign branches of any of the above.
In addition, the Fund will guarantee your signature if you personally visit its
offices at 1500 Forest Avenue, Suite 223, Richmond, VA 23229. The Transfer Agent
cannot honor guarantees from notaries public, savings and loan associations, or
savings banks.
Small Accounts
Due to the relatively higher cost of maintaining small accounts, the Fund may
deduct $10.00 per year from accounts valued at less than $25,000 unless the
account value has dropped below $25,000 solely as a result of share value
depreciation. Shareholders will receive 60 days' written notice to increase the
account value above $25,000 before the fee is deducted.
HOW TO TRANSFER SHARES
If you wish to transfer shares to another owner, send a written request to the
Transfer Agent. Your request should include: (1) the name of the Fund and
existing account registration; (2) signature(s) of the registered owner(s); (3)
the new account registration, address, Social Security Number or taxpayer
identification number and how dividends and capital gains are to be distributed;
(4) any stock certificates which have been issued for the shares being
transferred; (5) signature guarantees (see "Signature Guarantees"); and (6) any
additional documents which are required for transfer by corporations,
administrators, executors, trustees, guardians, etc. If you have any questions
about transferring shares, call the Transfer Agent at (800) 628-4077.
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
Each time you purchase, redeem or transfer shares of the Fund, you will receive
a written confirmation. You will also receive a year-end statement of your
account if any dividends or capital gains have been distributed, and the Fund's
annual and semi-annual reports to shareholders.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following four services for its shareholders: Regular
Account allows shareholders to make voluntary additions and withdrawals to and
from their account as often as they wish; Invest-A-Matic Account - permits
automatic monthly investments into the Fund from your checking account on a
fixed or flexible schedule; Individual Retirement Accounts (IRA's); and Exchange
Privileges Account - allows the shareholder to exchange his or her shares for
shares of certain other funds having a different investment objective from the
Fund. More information on any of these services is available upon written
request to the Fund.
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HOW NET ASSET VALUE IS DETERMINED
The net asset value ("NAV") of the Fund's shares is determined as of the close
of trading on the New York Stock Exchange (currently 4:00 p.m., Eastern Time) on
each business day from Monday to Friday or on each day (other than a day during
which no Fund share was tendered for redemption and no order to purchase or sell
a Fund share was received by the Fund) in which there is a sufficient degree of
trading in the portfolio securities of the Fund that the current NAV of the
shares might be materially affected by changes in the value of such portfolio
security. The Fund's NAV is calculated at the 4:00 p.m. time set by the Board of
Directors based upon the Board's determination that this is the most appropriate
time to price the securities.
NAV per share is determined by dividing the total value of the Fund's assets,
less its liabilities, by the total number of shares then outstanding. Generally,
securities owned by the Fund are valued at market value.
The Fund's management may compute the NAV per share more frequently in order to
protect shareholders' interests.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends from net investment income, if any, are declared annually. The Fund
intends to distribute annually realized net capital gains, after utilization of
capital loss carryforwards, if any, to prevent application of a federal excise
tax. However, it may make an additional distribution any time prior to the due
date, including extensions, of filing its tax return, if necessary to accomplish
this result. Any dividends or net capital gain distributed pursuant to a
dividend declaration declared in October, November or December with a record
date in such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. Unless you elect otherwise, dividends and capital
gains distributions will be reinvested in additional shares of the Fund at no
charge. Changes in your election regarding receipt of dividends and
distributions must be sent to the Transfer Agent. Shareholders will be subject
to tax on all dividends and distributions whether paid to them or reinvested in
shares of the Fund. If an investment in Fund shares is made by a retirement
plan, all dividends and capital gains distributions must be reinvested into an
account of such plan.
Generally, dividends from net investment income are taxable to investors as
ordinary income. Certain gains or losses on the sale or retirement of
international securities held by the Fund, to the extent attributable to
fluctuations in currency exchange rates, as well as certain other gains or
losses attributable to exchange rate fluctuations, must be treated as ordinary
income or loss. Such income or loss may increase or decrease (or possibly
eliminate) the income available for distribution to shareholders. If, under the
rules governing the tax treatment of foreign currency gains and losses, the
income available for
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distribution is decreased or eliminated, all or a portion of the dividends
declared by the Fund may be treated for federal income tax purposes as a return
of capital, or in some circumstances, as capital gain. Generally, a
shareholder's tax basis in his/her Fund shares will be reduced to the extent
that an amount distributed to the shareholder is treated as a return of capital.
Long-term capital gains distributions, if any, are taxable as net long-term
capital gains when distributed regardless of the length of time shareholders
have owned their shares. Net short- term capital gains and any other taxable
income distributions are taxable as ordinary income.
The Fund sends detailed tax information about the amount and type of its
distributions to its shareholders by January 31 of the year following the
distributions.
TAXES
The Fund is the successor by a reorganization to a series of another investment
company. The Fund will be treated as a separate corporation and will seek to
qualify and maintain its qualification as a regulated investment company under
Subchapter M of the Code. Provided it maintains its qualification as a regulated
investment company under the Code, the Fund will not be liable for federal
income taxes on income distributed as dividends to its shareholders or on net
capital gains that are distributed to its shareholders or imputed to them under
the Code, or for any excise tax, to the extent its earnings are distributed as
provided in the Code, and assuming it meets the tax diversification test, 90%
gross income test and 30% gross income test as required by the Code.
The Fund will act and invest so as to comply with the requirements of Subchapter
M which are described in the Statement of Additional Information. This may mean,
for example, that the Fund will be required to hold an investment longer than it
otherwise would, or not engage in a hedging transaction which it otherwise
would, in order to avoid violating one of the tests outlined above. The
distribution to shareholders each year of investment income and capital gains
will represent taxable income to the shareholders, who will be advised of such
amounts by the Company.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the value of its assets at the close
of its taxable year consists of stock or securities in foreign corporations, it
may elect to pass through to its shareholders the amount of foreign withholding
taxes it paid. If this election is made, shareholders will be (i) required to
include in their gross income their pro rata share of foreign source income
(including any foreign taxes paid by the Fund), and (ii) entitled to either
deduct (as an itemized deduction in the case of individuals) their share of such
foreign taxes in computing their taxable income or to claim a credit for such
taxes against their U.S. income tax, subject to certain limitations under the
Code. The Fund
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<PAGE>
will notify its shareholders of such election within 60 days of the close of its
tax year, which is December 31. Shareholders may decide whether to utilize such
flow through amount as either a deduction or a tax credit; individual
shareholders will usually find that the credit is more favorable. Tax exempt
investors, such as pension plans and individual retirement accounts, will not
benefit from this pass through, and therefore the Fund may not be a suitable
investment for such investors.
On the account application, the shareholder must provide the shareholder's
taxpayer identification number ("TIN"), certify that it is correct and certify
that the shareholder is not subject to backup withholding under Internal Revenue
Service ("IRS") rules. If the shareholder fails to provide a correct TIN or the
proper certifications, the Fund will withhold 31% of all distributions and
redemption proceeds payable to the shareholder. The Fund will also begin backup
withholding on a shareholder's Fund account if the IRS instructs the Fund to do
so. The Fund reserves the right not to open a shareholder's account or, if an
account is already opened, to redeem a shareholder's shares at the current NAV,
less any taxes withheld, if the shareholder fails to provide a correct TIN,
fails to provide the proper certifications, or the IRS advises the Fund to begin
backup withholding on the shareholder's Fund account.
GENERAL INFORMATION ABOUT THE FUND
The Company is authorized to issue up to 250,000,000 shares of common stock, par
value $0.01 per share, of which the Company has presently allocated 50,000,000
shares to the Fund. The Board of Directors can allocate the remaining authorized
but unissued shares to the Fund or may create additional series and allocate
shares to such series. A share of the Fund has priority in the assets of the
Fund in the event of a liquidation. The shares of the Fund will be fully paid
and nonassessable, will have no preference over other shares of the Fund as to
conversion, dividends or retirement, and will have no preemptive rights. Shares
of the Fund will be redeemable from the assets of the Fund at any time, as
described in "How to Redeem Shares" above.
Each outstanding share of the Company is entitled to one vote for each full
share of stock and a fractional vote for fractional shares of stock. All
shareholders vote on matters that concern the Company as a whole. The Company is
not required to hold a meeting of shareholders each year, and may elect not to
hold a meeting in years when no meeting is necessary. The shareholders of the
Fund shall vote separately on matters which affect only the interests of the
Fund. The Company's shares do not have cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Directors can elect all of the Directors if they choose to do so. Shareholders
have the right to call a meeting to consider the removal of one or more of the
Directors and will be assisted in shareholder communications in such matter.
Limitation on Use of Name - The Advisory Agreement for the Fund authorizes the
Company to utilize the name "Sand Hill." The Company agrees that if the Advisory
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Agreement is terminated it will promptly redesignate the name of the Sand Hill
Portfolio Manager Fund to eliminate any reference to the name "Sand Hill" or any
derivation thereof unless the Investment Advisor waives this requirement in
writing.
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TO OBTAIN MORE INFORMATION
For further information on the Sand Hill Portfolio Manager Fund, please contact
Commonwealth Shareholder Services, Inc., P.O. Box 8687, Richmond, VA 23226,
telephone: (800) 527-9525. Additional information may also be obtained by
requesting a copy of the Fund's Statement of Additional Information.
Investment Advisor: Sand Hill Advisors, Inc.
3000 Sand Hill Road
Building 3, Suite 150
Menlo Park, CA 94025
Distributor: First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center
Suite 700
Philadelphia, PA 19102
General Information: For general information on the Fund and, call the
Distributor at (800) 776-5455 Toll Free.
Transfer Agent: For account information, wire purchases or
redemptions, call or write to the Fund's Transfer
Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260-6305
(800) 628-4077 Toll Free
More Information: For 24-hour, 7-days-a-week price information, call
1-800-527-9525.
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those contained
in this Prospectus, in connection with the offer made by this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund or the Distributor. This Prospectus does
not constitute an offer by the Fund or the Distributor to sell or a solicitation
of an offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction.
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THE WORLD FUNDS, INC.
SAND HILL PORTFOLIO MANAGER FUND
Statement of Additional Information Dated August 19, 1997
The World Funds, Inc. (the "Company") is an open-end management investment
company commonly known as a "mutual fund." This Statement of Additional
Information is not a Prospectus but supplements the information contained in the
Prospectus of the Sand Hill Portfolio Manager Fund (the "Fund"), dated August
19, 1997. It should be read in conjunction with the Prospectus and has been
designed to provide you with further information which is not contained in the
Prospectus. A Prospectus of the Fund may be obtained at no charge upon request
to the Fund. Please retain this Statement of Additional Information for future
reference.
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 COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS STATEMENT OF ADDITIONAL INFORMATION. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Investment Objective and Policies..................................... 1
Special Investment Considerations..................................... 1
Investment Techniques................................................. 2
Asset Allocation Categories..................................... 2
Zero Coupon Securities.......................................... 3
Investment Companies............................................ 3
Depositary Receipts............................................. 4
Warrants........................................................ 4
Mortgage-Backed and Asset-Backed Securities..................... 4
Strategic Transactions.......................................... 4
Convertible Securities.......................................... 9
Repurchase Agreements........................................... 9
Illiquid Securities............................................. 10
Restricted Securities........................................... 10
Indexed Securities.............................................. 10
Investment Restrictions............................................... 11
Taxes................................................................. 13
Dividends and Distributions........................................... 17
Portfolio Transactions................................................ 17
Net Asset Value....................................................... 18
Directors and Officers................................................ 20
Investment Advisor.................................................... 21
Transfer Agent........................................................ 22
Administrator...................................... .................. 22
Distribution.......................................................... 22
Expenses of the Fund................................ ................. 22
Special Shareholder Services.......................................... 23
General Information and History....................................... 24
Performance........................................................... 25
Financial Statements.................................................. 27
APPENDIX.............................................................. 28
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THE WORLD FUNDS, INC.
SAND HILL PORTFOLIO MANAGER FUND
Statement of Additional Information
The Fund is a series of the Company, a Maryland corporation which is an
open-end, management investment company, commonly known as a "mutual fund." The
Fund is a no-load diversified series of the Company.
Investment Objective and Policies
The Fund's investment objective is to seek to maximize total return
(consisting of realized and unrealized appreciation plus income) consistent with
allocating its investments among equity securities (i.e., stocks), debt
securities (i.e., bonds) and short term investments.
The asset allocation and investment policies of the Fund are described in
the Fund's Prospectus. The following discussion supplements the information in
the Fund's Prospectus with respect to the types of securities in which the Fund
may invest and the investment techniques it may use in pursuit of its investment
objective.
Special Investment Considerations
Investors should recognize that the Fund may invest in both domestic and
foreign securities. Investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in United States securities and which may favorably or
unfavorably affect the performance of the Fund. As foreign companies are not
generally subject to the same uniform standards, practices and requirements with
respect to accounting, auditing and financial reporting as are domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the United States and, at times,
volatility of price can be greater than in the United States. Furthermore,
foreign markets have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of a fund are uninvested and no return is earned thereon. Inability to
dispose of portfolio securities due to settlement problems either could result
in losses to a fund due to subsequent declines in value of the portfolio
security or, if a fund has entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
securities exchanges and bid-to- asked spreads in foreign bond markets are
generally higher than negotiated commissions on U.S. exchanges and bid-to-asked
spreads in the U.S. bond market, although the Fund will endeavor to achieve the
most favorable net results on its portfolio transactions. Further, a fund may
encounter difficulties or be unable to pursue legal remedies and obtain
judgments in foreign courts. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers and
listed companies than in the United States. Communications between the United
States and foreign countries may be less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. In addition, 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 United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States economy in such respects as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. Sand Hill Advisors, Inc. (the "Investment Advisor") seeks
to mitigate the risks associated with the foregoing considerations through
continuous professional management.
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Investments in foreign securities usually will involve currencies of
foreign countries. Because of the considerations discussed above, the value of
the assets of the Fund, as measured in U.S. dollars, may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations, and the Fund may incur costs in connection with conversions
between various currencies. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a fund at one
rate, while offering a lesser rate of exchange should the fund desire to resell
that currency to the dealer. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward contracts
to purchase or sell foreign currencies. The Fund may, for hedging purposes,
purchase foreign currencies in the form of bank deposits.
Because the Fund may be invested in both U.S. and foreign securities
markets, changes in its share price may have a low correlation with movements in
the U.S. markets. The Fund's share price will reflect the movements of the
markets in which it is invested and of the currencies in which the investments
are denominated; the strength or weakness of the U.S. dollar against foreign
currencies may account for part of the Fund's investment performance. Foreign
securities such as those purchased by the Fund may be subject to foreign
government taxes which could reduce the yield on such securities, although a
shareholder of the Fund may, subject to certain limitations, be entitled to
claim a credit or deduction for U.S. federal income tax purposes for his or her
proportionate share of such foreign taxes paid by the Fund (see "Taxes"). U.S.
and foreign securities markets do not always move in step with each other and
the total returns from different markets may vary significantly.
The Fund cannot guarantee a gain or eliminate the risk of loss. The Fund's
net asset value per share will increase or decrease with changes in the market
price of the Fund's investments, and there is no assurance that the Fund's
investment objective will be achieved.
Investment Techniques
Asset Allocation Categories. The Fund invests in three major categories of
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investments: equity securities, debt securities and short-term investments.
Each of these categories may include securities of domestic or foreign issuers.
Equity securities consist of common stocks, securities which are
convertible into common stocks, such as convertible bonds, preferred stocks,
depositary receipts, securities of investment companies, rights and warrants.
The Investment Advisor allocates the Fund's equity investments to industries it
believes will benefit from major trends and to individual stocks which exhibit
superior prospects for enhancing the Fund's total return.
Debt securities consist of bonds, notes, convertible bonds, asset-backed
and mortgage-backed securities, government and government agency securities,
zero coupon securities, and other debt securities whose purchase is consistent
with the Fund's investment objective. The Fund's investments may include
international bonds that are denominated in foreign currencies, including the
European Currency Unit. International bonds are defined as bonds issued in
countries other than the United States. The Fund's investments may include debt
securities issued or guaranteed by supranational organizations, corporate debt
securities, bank or holding company debt securities.
The Fund may purchase "investment-grade" bonds, which are those rated Baa
or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Ratings Group ("S&P"), or unrated securities which the
Investment Advisor believes are of comparable quality. The Fund may also invest
up to 10% of its assets in lower rated securities or securities which are
unrated but are of comparable quality as determined by the Investment Advisor.
Bonds rated Baa or BBB may have speculative elements as well as investment-grade
characteristics. The Fund may invest in debt securities which are rated as low
as C by Moody's or D by S&P. Securities rated D may be in default with respect
to payment of principal or interest. See the Appendix for a description of bond
ratings.
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Short-term investments are debt obligations. For purposes of the Fund's
asset allocation policies, short-term investments are differentiated from debt
securities. Short-term investments are generally used to protect the Fund
against adverse movements of interest rates or currency exchange rates or to
provide the Fund with liquidity. Debt securities, on the other hand, are
generally used to seek superior total return by taking advantage of yield
differentials between different securities.
Zero Coupon Securities. The Fund may invest in zero coupon securities as
described in the Prospectus. Zero coupon securities which are convertible into
common stock offer the opportunity for capital appreciation as increases (or
decreases) in market value of such securities closely follows the movements in
the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks as they usually are issued with short maturities (15 years or less) and
are issued with options and/or redemption features exercisable by the holder of
the obligation entitling the holder to redeem the obligation and receive a
defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including Treasury
Income Growth Receipts (TIGRS-TM) and Certificate of Accrual on Treasuries
(CATS-TM). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates, or other evidences of ownership of the U.S.
Treasury securities, has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the Division of Investment
Management of the SEC no longer considers such privately stripped obligations to
be U.S. Government securities, as defined in the 1940 Act; therefore, the Fund
intends to adhere to this staff position and will not treat such privately
stripped obligations to be U.S. Government securities for the purpose of
determining the Fund's "diversification."
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "Taxes").
Investment Companies. The Fund may invest up to 10% of its assets in
shares of closed-end investment companies. Investments in such investment
companies are subject to limitations under the Investment Company Act of 1940,
as amended (the "1940 Act"). Investment in closed-end funds is subject to the
willingness of investors to sell their shares in the open market and the Fund
may have to pay a substantial premium to acquire shares of closed-end funds in
the open market. The yield of such securities will be reduced by the operating
expenses of such companies. Under the 1940 Act limitations, the Fund may not own
more than 3% of the total outstanding voting stock of any other investment
company nor may it invest more than 5% of its assets in any one investment
company or invest more than 10% of its assets in securities of all investment
companies combined. An investor in the Fund should recognize that he may invest
directly in other investment companies and that, by investing in investment
companies indirectly through the Fund, he will bear not only his proportionate
share of the Fund's expenses (including operating costs and investment advisory
and administrative fees) but also, indirectly, similar expenses of the
underlying investment company. Finally, an investor should recognize that, as a
result of the Fund's policies of investing in other investment companies, he may
receive taxable capital gains distributions
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to a greater extent than would be the case if he invested directly in the
underlying investment companies.
Depositary Receipts. The Fund may utilize depositary receipts, as
described in the Prospectus. For purposes of determining the country of origin,
depositary receipts and closed-end investment companies which invest primarily
in foreign securities will be deemed to be foreign securities.
Warrants. The Fund may invest up to 5% of its net assets in warrants,
provided that no more than 2% of its net assets may be invested in warrants that
are not listed on the New York Stock Exchange or the American Stock Exchange. A
warrant is a long-term option issued by a corporation that generally gives the
investor the right of buying a specified number of shares of the underlying
common stock of the issuer at a specified exercise price at any time on or
before an expiration date. If the Fund does not exercise or dispose of a warrant
prior to its expiration, it will expire worthless.
Mortgage-Backed and Asset-Backed Securities. Mortgage-backed securities
include, but are not limited to, securities issued by the Government National
Mortgage Association and The Federal Home Loan Mortgage Association.
Mortgage-backed securities represent ownership in specific pools of mortgage
loans. Unlike traditional bonds which pay principal only at maturity,
mortgage-backed securities make unscheduled principal payments to the investor
as principal payments are made on the underlying loans in each pool. Like other
fixed-income securities, when interest rates rise, the value of a
mortgage-backed security will decline. However, when interest rates decline, the
value of a mortgage-backed security with prepayment features may not increase as
much as other fixed-income securities.
Asset-backed securities participate in, or are secured by and payable
from, a stream of payments generated by particular assets, such as credit card,
motor vehicle or trade receivables. They may be pass-through certificates which
are similar to mortgage-backed commercial paper, which is issued by an entity
organized for the sole purpose of issuing the commercial paper and purchasing
the underlying assets. The credit quality of asset-backed securities depends
primarily on the quality of the underlying assets and the level of any credit
support provided. The weighted average lives of mortgage-backed and asset-backed
securities are likely to be substantially shorter than their stated final
maturity dates would imply because of the effect of scheduled and unscheduled
principal prepayments. Pay-downs of mortgage-backed and asset-backed securities
may result in income or loss being realized earlier than anticipated for tax and
accounting purposes.
Strategic Transactions. The Fund may, but is not required to, utilize
various other investment strategies described below which use derivative
investments to hedge various market risks (such as changes in interest rates,
currency exchange rates, and securities prices) or to enhance potential gain.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed put and call options on securities or
securities indices, and enter into various currency transactions such as
currency forward contracts, or options on currencies (collectively, all the
above are called "Strategic Transactions"). Strategic Transactions may be used
to attempt to protect against possible changes in the market value of securities
held in, or to be purchased for, the Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, or to establish a position in the options
markets as a temporary substitute for purchasing or selling particular
securities. Any or all of these investment techniques may be used at any time
and there is no particular strategy that dictates the use of one technique
rather than another, as use of any Strategic Transaction is a function of
numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Advisor's
ability to predict pertinent market movements, which cannot be assured. The Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Investment Advisor's
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view as to certain market movements is incorrect, the risk that the use of such
Strategic Transactions could result in losses greater than if they had not been
used. Use of put and call options may result in losses to the Fund, force the
sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, limit the amount of appreciation the Fund can
realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. Although the use of options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time it tends to limit any potential gain
which might result from an increase in value of such position. Losses resulting
from the use of Strategic Transactions would reduce net asset value, and
possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of the Fund's assets in special accounts,
as described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, currency or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. The purchase of a put
option will constitute a short sale for federal tax purposes. The purchase of a
put at a time when the substantially identical security held long has not
exceeded the long term capital gain holding period could have adverse tax
consequences. The holding period of the long position will be cut off so that
even if the security held long is delivered to close the put, short term gain
will be recognized. If substantially identical securities are purchased to close
the put, the holding period of the securities purchased will not begin until the
closing date. The holding period of the substantially identical securities not
delivered to close the short sale will commence on the closing of the short
sale.
A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, securities index, currency or other instrument might be intended to
protect the Fund against an increase in the price of the underlying security.
An American style put or call option may be exercised at any time during
the option period while a European style put or call option may be exercised
only upon expiration or during a fixed period prior thereto. The Fund is
authorized to purchase and sell exchange listed options only. Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options are each settled
for the net amounts, if any, by which the option is "in the money" (i.e., where
the value of the underlying instrument exceeds, in the case of a call option, or
is less than, in the case of a put option, the exercise price of the option) at
the time the option is exercised. Frequently, rather than taking or making
delivery of the underlying security through the process of exercising the
option, listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
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The Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell exchange-listed call options on securities
that are traded in U.S. and foreign securities exchanges and on securities
indices and currencies. All calls sold by the Fund must be "covered" (i.e., the
Fund must own the securities subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell exchange-listed put options on securities
(whether or not it holds the above securities in its portfolio), and on
securities indices and currencies. The Fund will not sell put options if, as a
result, more than 25% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options. In selling put options,
there is a risk that the Fund may be required to buy the underlying security at
a disadvantageous price above the market price. For tax purposes, the purchase
of a put is treated as a short sale which may cut off the holding period for the
security so it is treated as generating gain on securities held less than three
months or short term capital gain (instead of long term) as the case may be.
Options on Securities Indices and Other Financial Indices. The Fund may
also purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call or is
less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments making up the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
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Currency Transactions. The Fund may engage in currency transactions with
counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. The Fund's
currency transactions may include forward currency contracts and exchange listed
options on currencies. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract.
The Fund's dealings in forward currency contracts will be limited to
hedging involving either specific transactions or portfolio positions. Specific
transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or the receipt
of income therefrom. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted in
that currency.
The Fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which a fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Investment Advisor considers that the Austrian
schilling is linked to the German deutschemark (the "D-mark"), the Fund holds
securities denominated in schillings and the Investment Advisor believes that
the value of schillings will decline against the U.S. dollar, the Investment
Advisor may enter into a contract to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that a fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, it will comply with the asset segregation
requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Risks of Strategic Transactions Outside the United States. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities,
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currencies and other instruments. The value of such positions also could be
adversely affected by: (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in a fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions,
in addition to other requirements, require that a fund segregate liquid high
grade assets with its custodian to the extent fund obligations are not otherwise
"covered" through the ownership of the underlying security, financial
instruments or currency. In general, either the full amount of any obligation by
a fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by a fund will require the
fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a fund on an index will require the
fund to own portfolio securities which correlate with the index or segregate
liquid high grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by a fund requires the
fund to segregate liquid, high grade assets equal to the exercise price.
Except when a fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a fund to buy or sell currency
will generally require the fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the fund's obligations or to
segregate liquid high grade assets equal to the amount of the fund's obligation.
OCC issued and exchange listed index options will generally provide for
cash settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the Fund,
or the in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Fund sells a call option on an
index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. OCC issued and exchange listed
options sold by the Fund other than those generally settle with physical
delivery, and the Fund will segregate an amount of assets equal to the full
value of the option.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
forward contract, it could purchase a put option on the same forward contract
with a strike price as high or higher than the price of the contract held. Other
Strategic Transactions may also be offered in combinations. If the offsetting
transaction terminates at the time of or after the primary transaction no
segregation is required, but if it terminates prior to such time, assets equal
to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for qualification
as a regulated investment company. (See "Taxes.")
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<PAGE>
Convertible Securities. The Fund may invest in convertible securities,
that is, bonds, notes, debentures, preferred stocks and other securities which
are convertible into common stock. Investments in convertible securities can
provide an opportunity for capital appreciation and/or income through interest
and dividend payments by virtue of their conversion or exchange features. The
Fund will limit its purchases of convertible securities to debt securities
convertible into common stocks.
The convertible securities in which the Fund may invest are either fixed
income or zero coupon debt securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The exchange ratio for any particular convertible security may be adjusted from
time to time due to stock splits, dividends, spin-offs, other corporate
distributions or scheduled changes in the exchange ratio. Convertible debt
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide
for a stream of income (or in the case of zero coupon securities, accretion of
income) with generally higher yields than common stocks. Of course, like all
debt securities, there can be no assurance of income or principal payments
because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment on all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities. Convertible securities may be issued as fixed income
obligations that pay current income or as zero coupon notes and bonds, including
Liquid Yield Option Notes ("LYONs").
Repurchase Agreements. The Fund may enter into repurchase agreements
(which enables it to employ its assets pending investment) during very short
periods of time. Ordinarily these agreements permit the Fund to maintain
liquidity and earn higher rates of return than would normally be available from
other short-term money-market instruments.
Under a repurchase agreement, a fund buys a money-market instrument and
obtains a simultaneous commitment from the seller to repurchase the investment
at a specified time and at an agreed upon yield to the fund. The seller is
required to pledge cash and/or collateral which is equal to at least 100 percent
of the value of the commitment to repurchase. The collateral is held by the
fund's custodian. The Fund will only enter into repurchase agreements involving
U.S. Government securities in which it may otherwise invest. Repurchase
agreements are considered securities issued by the seller for purposes of the
diversification test under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and not cash, a cash item or a U.S. Government security.
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States
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<PAGE>
Government, and by various instrumentalities which have been established or
sponsored by the United States 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. An instrumentality of the U.S.
Government is a government agency organized under Federal charter with
government supervision.
It is the Fund's practice to enter into repurchase agreements with
selected banks and securities dealers, depending upon the availability of the
most favorable yields. The Fund will always seek to perfect its security
interest in the collateral. If the seller of a repurchase agreement defaults,
the Fund may incur a loss if the value of the collateral securing the repurchase
agreement declines. The Investment Advisor monitors the value of the collateral
to ensure that its value always equals or exceeds the repurchase price and also
monitors the financial condition of the issuer of the repurchase agreement. If
the seller defaults, the Fund may incur disposition costs in connection with
liquidating the collateral of that seller. If bankruptcy proceedings are
commenced with respect to the seller, realization upon the collateral by the
Fund may be delayed or limited.
Illiquid Securities. Normally, the Fund will not invest more than 5% of
its net assets in securities which are illiquid or not readily marketable;
however, the Fund is permitted to invest up to 15% of its net assets in such
securities. Illiquid securities are securities that cannot be sold in the
ordinary course of business at approximately the prices at which they are
carried on the Fund's books. The Fund will treat as illiquid repurchase
agreements with maturities in excess of seven days. Illiquid securities do not
include those securities that meet the requirements of Rule 144A under the
Securities Act of 1933, and that have been determined to be liquid by the
Investment Advisor under the supervision of the Fund's Board of Directors.
In determining the liquidity of the Fund's portfolio securities, the
Investment Advisor will consider all appropriate factors, such as: the frequency
of trading in the security; the number of dealers in, and potential purchasers
of, the security; dealer undertakings to maintain a market in the security;
whether the security is subject to demand or tender features which enhance its
marketability; and the nature of the marketplace for trading. If market
quotations are not available, illiquid securities are valued at fair value as
determined in good faith by the Fund's Board of Directors or a committee
thereof.
Restricted Securities. The Fund may invest in restricted securities.
Generally, "restricted securities" are securities which have legal or
contractual restrictions on their resale. In some cases, these legal or
contractual restrictions may impair the liquidity of a restricted security; in
others, the legal or contractual restrictions may not have a negative effect on
the liquidity of the security. Restricted securities which are deemed by the
Investment Advisor to be illiquid will be included in the Fund's policy which
limits investments in illiquid securities.
Indexed Securities. The Fund may purchase securities whose prices are
indexed to the prices of other securities, securities indices, currencies, or
other financial indicators. Indexed securities, or structured notes, are usually
debt securities whose value at maturity or coupon rate is determined by
reference to a specific instrument or index. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices.
The performance of indexed securities depends to a great extent on the
performance of the security, index, currency or other instrument to which they
are indexed, and may also be influenced by changes in interest rates. Indexed
securities are subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer's
credit-worthiness deteriorates. Recent issuers of indexed securities have
included
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<PAGE>
banks, corporations, and certain U.S. government agencies. Indexed securities
may be more volatile than their underlying instruments.
Investment Restrictions
The policies set forth below are fundamental policies of the Fund and may
not be changed without approval of a majority of the outstanding voting
securities of the Fund. As used in this Statement of Additional Information a
"majority of the outstanding voting securities of the Fund" means the lesser of
(1) 67% or more of the voting securities present at such meeting, if the holders
of more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy; or (2) more than 50% of the outstanding voting securities
of the Fund.
As a matter of fundamental policy, the Fund may not:
1. as to 75% of its assets, purchase the securities of any issuer (other than
obligations issued or guaranteed as to principal and interest by the
Government of the United States or any agency or instrumentality thereof)
if, as a result of such purchase, more than 5% of its total assets would
be invested in the securities of such issuer;
2. purchase stock or securities of an issuer (other than obligations issued
or guaranteed as to principal and interest by the Government of the United
States or any agency or instrumentality thereof) if such purchase would
cause the Fund to own more than 10% of any class of the outstanding stock
or securities or more than 10% of any class of voting securities of such
issuer;
3. borrow money, except through reverse repurchase agreements or from banks
for temporary or emergency purposes, and then only in an amount not in
excess of 20% of the value of the Fund's net assets at the time the
borrowing is made (borrowings in excess of 5% will be subject to 300%
asset coverage requirements of the 1940 Act), provided that the Fund will
not purchase portfolio securities when its borrowings exceed 5% of its
total assets;
4. purchase the securities of any issuer (other than obligations issued or
guaranteed by the Government of the United States or any agency or
instrumentality thereof) if, as a result of such purchase, more than 25%
of the Fund's total assets would be invested in any one industry;
5. act as an underwriter of securities issued by others, except to the extent
that it may be deemed an underwriter in connection with the disposition of
portfolio securities of the Fund;
6. make loans to other persons, except (a) loans of portfolio securities, and
(b) to the extent that the entry into repurchase agreements and the
purchase of debt securities in accordance with its investment objective
and investment policies may be deemed to be loans;
7. issue senior securities, except as appropriate to evidence indebtedness
which it is permitted to incur, and except for shares of the separate
classes or series of the corporation of which the Fund is a series;
provided that the segregation of assets or other collateral arrangements
with respect to currency-related contracts, futures contracts, options or
other permitted investments, including deposits of initial and variation
margin, are not considered to be the issuance of senior securities for
purposes of this restriction, and obligations for which the Fund segregates
assets in accordance with securities regulatory requirements will not be
deemed to be senior securities;
8. purchase or sell real estate (except that the Fund may invest in (i)
securities of companies which deal in real estate, or mortgages, and (ii)
securities secured by real estate or interests therein, and that the Fund
reserves freedom of action to hold and to sell real estate acquired as a
result of the Fund's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities.
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<PAGE>
The Fund has voluntarily adopted certain policies and restrictions which
are observed in the conduct of its affairs. These represent intentions of the
Directors based upon current circumstances. They differ from fundamental
investment policies in that they may be changed or amended by action of the
Directors without requiring prior notice to or approval of shareholders.
The following policies are not fundamental policies and may be changed
without shareholder approval. The Fund does not currently intend to:
(a) purchase or sell futures contracts or options thereon;
(b) make short sales of securities;
(c) make loans of portfolio securities;
(d) purchase or sell real estate limited partnership interests;
(e) purchase or retain securities of any open-end investment company; purchase
securities of closed-end investment companies except by purchase in the
open market where no commission or profit to a sponsor or dealer results
from such purchase; however, the Fund may acquire investment company
securities in connection with a plan of merger, consolidation,
reorganization or acquisition of assets; in any event, the Fund may not
purchase more than 3% of the outstanding voting securities of another
investment company, may not invest more than 5% of its assets in another
investment company, and may not invest more than 10% of its assets in other
investment companies;
(f) borrow, pledge, mortgage or hypothecate its assets in excess, together with
permitted borrowings, of 1/3 of its total assets;
(g) purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts, if any, shall
not constitute purchasing securities on margin.
(h) invest more than 15% of its net assets in securities which are
illiquid or not readily marketable, including repurchase agreements
which are not terminable within 7 days (normally, no more than 5% of
the Fund's net assets will be invested in such securities).
*(i) purchase put options or write covered call options if, as a
result, more than 25% of the Fund's total assets would be
hedged with options;
*(j) write put options if, as a result, the Fund's total
obligations upon exercise of written put options would exceed
25% of the Fund's total assets;
*(k) purchase call options if, as a result, the current value of
options premiums for call options purchased by the Fund would
exceed 5% of the Fund's total assets;
(l) purchase warrants, valued at the lower of cost or market, in excess
of 5% of the value of the Fund's net assets; provided that no more
than 2% of the Fund's net assets may be warrants that are not listed
on the New York Stock Exchange or the American Stock Exchange.
*NOTE: items (i), (j) and (k) above do not apply to options attached to,
or purchased as a part of, their underlying securities.
If a percentage restriction on investment or utilization of assets as set
forth under "Investment Restrictions" and "Other Investment Policies" above is
adhered to at the time an
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<PAGE>
investment is made, a later change in percentage resulting from changes in the
value or the total cost of the Fund's assets will not be considered a violation
of the restriction.
In order to satisfy certain state regulatory requirements the Fund has
agreed that, so long as its shares are offered for sale in such state(s), it
will not:
1. invest in interests in oil, gas, or other mineral exploration or
development programs;
2. invest more than 5% of its total assets in the securities of any issuers
which have (together with their predecessors) a record of less than three
years continuous operations;
3. purchase or retain any securities if (i) one or more officers or directors
of the Fund or its investment advisor individually own or would own,
directly or beneficially, more than 1/2 of 1 per cent of the securities of
such issuer, and (ii) in the aggregate such persons own or would own more
than 5% of such securities.
Taxes
The Fund will seek to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code
is required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax (assuming the Fund meets the 90% and 30% of
gross income tests and the tax diversification test of Subchapter M) to the
extent that it distributes annually its investment company taxable income and
net realized capital gains in the manner required under the Code. The Fund
intends to distribute at least annually all of its investment company taxable
income and net realized capital gains and therefore generally does not expect to
pay federal income taxes.
In order to meet the tax diversification test, at the close of each
quarter of its fiscal year, (i) at least 50% of the value of the Fund's total
assets must be represented by cash and cash items including receivables, U.S.
Government securities, and securities of other regulated investment companies,
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the value of its total assets, and to not more than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and the securities of other
regulated investment companies.)
The Fund will meet the 90% of gross income test if 90% of its gross income
is derived from dividends, interest, payments with respect to certain securities
loans, and gain from the sale or disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to its business of investing
in such stock, securities, or currencies. The Fund will meet the 30% of gross
income test provided that less than 30% of its gross income for the fiscal year
is derived from the sale or disposition of any of the following held for less
than three months: stock or securities, options, futures, or forward contracts
(other than such contracts on foreign currencies), and foreign currencies (or
options, futures, or forward contracts on foreign currencies ("hedging
instruments")) but only if such currencies (and hedging instruments) are not
directly related to the Fund's principal business of investing in stock or
securities (or options and futures with respect to stock or securities.)
The Fund is subject to a 4% nondeductible excise tax on amounts required
to be but which are not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over
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<PAGE>
capital losses (adjusted for certain ordinary losses prescribed by the Code)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income generally includes dividends, interest,
net short-term capital gains in excess of net long-term capital losses, and net
foreign currency gains, if any, less expenses. Realized net capital gains for a
fiscal year are computed by taking into account any capital loss carryforward of
the Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim his/her share of federal income taxes paid by the
Fund on such gains as a credit against his/her own federal income tax liability,
and will be entitled to increase the adjusted tax basis of his/her Fund shares
by the difference between his/her pro rata share of such gains and his/her tax
credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the Fund have been held by such
shareholders. Such distributions are not eligible for a dividends-received
deduction for corporate investors.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and realized net
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another fund, may
result in tax consequences (gain or loss) to the shareholder and are also
subject to information reporting requirements.
An individual may make a deductible IRA contribution of up to $2,000 or,
if less, the amount of the individual's earned income for any taxable year if
(i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,000 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,000 and
$50,000; $25,000 for a single individual, with a phase-out for adjusted gross
income between $25,000 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000, or 100% of taxable
compensation if less, to an IRA (up to $2,250 to IRAs for an individual and his
or her nonearning spouse, for years prior to 1997) for that year. Starting in
1997, even a spouse who does not earn compensation can contribute up to $2,000
per year to his or her own IRA. The deductibility of such contributions will be
determined under the same rules as for contributions made by individuals with
earned income. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
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<PAGE>
Distributions by the Fund result in a reduction in the net asset value of
its shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of their invested capital upon the distribution, which will
nevertheless be taxable to them.
The Fund intends to qualify for and may make the election permitted under
Section 853 of the Code so that shareholders may (subject to limitations) be
able to claim a credit or deduction on their federal income tax returns for, and
may be required to treat as part of the amounts distributed to them, their pro
rata portion of qualified taxes paid by the Fund to foreign countries (which
taxes relate primarily to investment income). The Fund may make an election
under Section 853 of the Code, provided that more than 50% of the value of the
total assets of the Fund at the close of the taxable year consists of securities
in foreign corporations. The foreign tax credit available to shareholders is
subject to certain limitations imposed by the Code.
If the Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may be able to make an election, in lieu of being taxable in the
manner described above, to include annually in income its pro rata share of the
ordinary earnings and net capital gain of the foreign investment company,
regardless of whether it actually received any distributions from the foreign
company. These amounts would be included in the Fund's investment company
taxable income and net capital gain which, to the extent distributed by the Fund
as ordinary or capital gain dividends, as the case may be, would not be taxable
to the Fund. In order to make this election, the Fund would be required to
obtain certain annual information from the foreign investment companies in which
it invests, which in many cases may be difficult to obtain. The Fund may make an
election with respect to those foreign investment companies which provide the
Fund with the required information.
Certain forward foreign currency contracts, and all listed nonequity
options written or purchased by the Fund (including options on debt securities,
options on securities indices and options on broad-based stock indices) will be
governed by Section 1256 of the Code. Absent a tax election to the contrary,
gain or loss attributable to the lapse, exercise or closing out of any such
position generally will be treated as 60% long-term and 40% short-term capital
gain or loss, and on the last trading day of the Fund's fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e., treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss. Under Section 988 of the Code, discussed below, foreign currency
gains or losses from foreign currency related forward contracts and similar
financial instruments entered into or acquired by the Fund will be treated as
ordinary income or loss.
Subchapter M requires that the Fund realize less than 30% of its annual
gross income from the sale or other disposition of stock, securities and certain
options, and forward contracts held for less than three months. The Fund's
options and forward transactions may increase the amount of gains realized by
the Fund that are subject to this 30% limitation. Accordingly, the amount of
such transactions that the Fund may undertake may be limited.
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<PAGE>
Positions of the Fund which consist of at least one stock and at least one
stock option or other position with respect to a related security which
substantially diminishes a Fund's risk of loss with respect to such stock could
be treated as a "straddle" which is governed by Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for any
"qualified covered call options" on stock written by the Fund.
Positions of the Fund which consist of at least one position not governed
by Section 1256 and at least one forward contract or nonequity option governed
by Section 1256 which substantially diminishes the Fund's risk of loss with
respect to such other position will be treated as a "mixed straddle." Although
mixed straddles are subject to the straddle rules of Section 1092 of the Code,
certain tax elections exist for them which reduce or eliminate the operation of
these rules. The Fund will monitor its transactions in options and may make
certain tax elections in connection with these investments.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues interest or other
receivables, or accrues expenses or other liabilities, denominated in a foreign
currency and the time the Fund actually collects such receivables, or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
A portion of the difference between the issue price of zero coupon
securities and their stated redemption price at maturity ("original issue
discount") is considered to be income to the Fund each year, even though the
Fund will not receive cash interest payments from these securities. The original
issue discount imputed income will comprise a part of the Fund's investment
company taxable income which must be distributed to shareholders in order to
maintain the Fund's qualification as a regulated investment company and to avoid
federal income tax.
The Fund will be required to report to the IRS all distributions of
investment company taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. Under the backup withholding provisions of Section 3406 of
the Code, distributions of investment company taxable income and capital gains
and proceeds from the redemption or exchange of the shares of a regulated
investment company may be subject to withholding of federal income tax at the
rate of 31% in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law.
Withholding may also be required if the Fund is notified by the IRS or a broker
that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld. Amounts withheld
are applied against the shareholder's tax liability and a refund may be obtained
from the Internal Revenue Service, if withholding results in overpayment of
taxes. A shareholder should contact the Fund or the Transfer Agent if the
shareholder is uncertain whether a proper Taxpayer Identification Number is on
file with the series.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each investor should consult his or her own tax adviser as to the applicability
of these taxes.
In January of each year the Company's Transfer Agent issues to each
shareholder a statement of the federal income tax status of all distributions.
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The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. corporations, partnerships, trusts and estates. Each shareholder who is
not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of Fund shares. Each shareholder who is not a U.S. person should also
consider the U.S. estate tax implications of holding Fund shares at death. The
U.S. estate tax may apply to such holdings if an investor dies while holding
shares of a Fund. Each investor should consult his or her own tax adviser about
the applicability of these taxes. Distributions of net investment income to
non-resident aliens and foreign corporations that are not engaged in a trade or
business in the U.S. to which the distribution is effectively connected, will be
subject to a withholding tax imposed at the rate of 30% upon the gross amount of
the distribution in the absence of a Tax Treaty providing for a reduced rate or
exemption from U.S. taxation. Distributions of net long-term capital gains
realized by the Fund are not subject to tax unless the distribution is
effectively connected with the conduct of the shareholder's trade or business
within the United States, or the foreign shareholder is a non-resident alien
individual who was physically present in the U.S. during the tax year for more
than 182 days.
The foregoing is a general abbreviated summary of present Federal income
taxes on dividends and distributions. Shareholders should consult their tax
advisers about the application of the provisions of the tax law described in
this Statement of Additional Information in light of their particular tax
situations and about any state and local taxes applicable to dividends and
distributions.
Dividends and Distributions
As stated previously, it is the policy of the Fund to distribute
substantially all of its net investment income and net realized capital gains,
if any, shortly before the close of the fiscal year (December 31st).
All dividend and capital gains distributions, if any, will be reinvested
in full and fractional shares based on net asset value (without a sales charge)
as determined on the ex-dividend date for such distributions. Shareholders may,
however, elect to receive all such payments, or the dividend or distribution
portion thereof, in cash, by sending written notice to this effect to the
Transfer Agent. This written notice will be effective as to any subsequent
payment if received by the Transfer Agent prior to the record date used for
determining the shareholders' entitlement to such payment. Such an election will
remain in effect unless or until the Transfer Agent is notified by the
shareholder in writing to the contrary.
Portfolio Transactions
It is the policy of the Investment Advisor, in placing orders for the
purchase and sale of the Fund's securities, to seek to obtain the best price and
execution for securities transactions taking into account such factors as price,
commission, where applicable (which is negotiable in the case of U.S. national
securities exchange transactions but which is generally fixed in the case of
foreign exchange transactions), size of order, difficulty of execution and skill
required of the executing broker/dealer. After a purchase or sale decision is
made by the Investment Advisor, the Investment Advisor then arranges for
execution of the transaction in a manner deemed to provide the best price and
execution for the Fund.
The Fund has authorized the Investment Advisor to allocate a portion of
its brokerage commissions to persons or firms providing the Investment Advisor
with investment recommendations, statistical, research or similar services
useful to the Investment Advisor's investment decision making process for the
Fund or other clients. The term "investment recommendations, statistical,
research or similar services" means advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities, and
furnishing analysis and reports concerning issuers, industries, securities,
economic factors and trends, and portfolio strategy. Such services are one of
the many ways the Fund's Investment Advisor can keep abreast of the information
generally circulated among institutional investors by broker-
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dealers. While this information is useful in varying degrees, its value is
indeterminable. Such services received on the basis of transactions for the Fund
may be used by the Investment Advisor for the benefit of other clients, and the
Fund may benefit from such transactions effected for the benefit of other
clients. While there is no specific agreement or formula to do so, and subject
to obtaining best price and execution the Fund may consider sales of its shares
as a factor in the selection of brokers to execute portfolio transactions. The
Investment Advisor generally does not, when placing portfolio transactions for
the Fund, pay a brokerage commission in excess of that which another broker
might have charged for executing the same transaction on account of the receipt
of research, market or statistical information. Except for implementing the
policy stated above, there is no intention to place portfolio transactions with
particular brokers or dealers or groups thereof.
When two or more accounts managed by the Investment Advisor are
simultaneously engaged in the purchase or sale of the same security, the
transactions are allocated in a manner deemed equitable to each account. It is
recognized that in some cases the procedure could have a detrimental effect on
the price or volume of the security as far as the Fund is concerned. In other
cases, however, it is believed that the ability of the Fund to participate in
volume transactions will be beneficial for the Fund. It is the opinion of the
Board of Directors of the Company that these advantages, when combined with the
other benefits available because of the Investment Advisor's organization,
outweigh the disadvantages that may be said to exist from this treatment of
transactions.
Exchange-listed securities are generally traded on their principal
exchange unless another market offers a better result. Securities traded only in
the over-the-counter market may be executed on a principal basis with primary
market makers in such securities except for fixed price offerings and except
where the Fund may obtain better prices or executions on a commission basis or
by dealing with other than a primary market maker.
The Sand Hill Portfolio Manager Fund series (the "Original Sand Hill
Fund") of another investment company, Vontobel Funds, Inc. , paid $7,070 and
$7,086 in brokerage commissions for the years ended December 31, 1995 and 1996,
respectively.
Average annual portfolio turnover rate is the ratio of the lesser of sales
or purchases to the monthly average value of the portfolio securities owned
during the year, excluding from both the numerator and the denominator all
securities with maturities at the time of acquisition of one year or less. A
higher rate involves greater transaction expenses to a fund and may result in
the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for the Fund's portfolio whenever
necessary, in the Investment Advisor's opinion, to meet the Fund's objective.
The Investment Advisor anticipates that the Fund's average annual portfolio rate
will be less than 100%.
Net Asset Value
The Fund's net asset value ("NAV") per share is calculated daily from
Monday through Friday on each business day on which the New York Stock Exchange
(the "Exchange") is open. The Exchange is currently closed on weekends and on
the following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving Day and Christmas
Day, and the preceding Friday or subsequent Monday when any of these holidays
falls on a Saturday or Sunday, respectively. The Fund's NAV is calculated at the
time set by the Board of Directors based upon a determination of the most
appropriate time to price the Fund's securities.
The Board of Directors has determined that the Fund's NAV be calculated as
of the close of trading of the Exchange (currently 4:00 p.m., Eastern Time) on
each business day from Monday to Friday or on each day (other than a day during
which no security was tendered for redemption and no order to purchase or sell
such security was received by the Fund) in which there is a sufficient degree of
trading in the Fund's portfolio securities that the current NAV of the Fund's
shares might be materially affected by changes in the value of such portfolio
security.
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NAV per share is determined by dividing the total value of the Fund's
securities and other assets, less liabilities (including proper accruals of
taxes and other expenses), by the total number of shares then outstanding, and
rounding the result to the nearer cent.
The Fund may compute its NAV per share more frequently if necessary to
protect shareholders' interests.
Generally, securities owned by the Fund are valued at market value. In
valuing the Fund's assets, portfolio securities, including ADRs and EDRs, which
are traded on the Exchange, will be valued at the last sale price prior to the
close of regular trading on the Exchange. Lacking any sales, the security will
be valued at the last bid price prior to the close of regular trading on the
Exchange. ADRs and EDRs for which such a value cannot be readily determined on
any day will be valued at the closing price of the underlying security adjusted
for the exchange rate. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated in accordance
with procedures approved by the Board of Directors of the Fund as the primary
market. Securities will be valued using quotations on the exchange and lacking
any sales, securities will be valued at the last reported bid price prior to the
Fund's valuation time, unless the Fund is aware of a material change in the
value prior to the time it values its securities.
Unlisted securities which are quoted on the NASD's National Market System,
for which there have been sales of such securities, shall be valued at the last
sale price reported on such system. If there are no such sales, the value shall
be the high or "inside" bid, which is the bid supplied by the NASD on its NASDAQ
Screen for such securities in the over-the-counter market. The value of such
securities quoted on the NASDAQ System, but not listed on the NASD's National
Market System, shall be valued at the high or "inside" bid. Unlisted securities
which are not quoted on the NASDAQ System and for which the over-the-counter
market quotations are readily available will be valued at the current bid prices
for such securities in the over-the-counter market. Other unlisted securities
(and listed securities subject to restriction on sale) may be valued at their
fair value as determined in good faith by the Board of Directors.
The value of a security traded or dealt in upon an exchange may be valued
at what the Company's pricing agent determines is fair market value on the basis
of all available information, including the last determined value, if the
pricing agent determines that the last bid does not represent the value of the
security, or if such information is not available. For example, the pricing
agent may determine that the price of a security listed on a foreign stock
exchange that was fixed by reason of a limit on the daily price change does not
represent the fair market value of the security. Similarly, the value of a
security not traded or dealt in upon an exchange may be valued at what the
pricing agent determines is fair market value if the pricing agent determines
that the last sale does not represent the value of the security, provided that
such amount is not higher than the current bid price.
Notwithstanding the foregoing, money market investments with a remaining
maturity of less than sixty days shall be valued by the amortized cost method
described below; debt securities are valued by appraising them at prices
supplied by a pricing agent approved by the Fund, which prices may reflect
broker-dealer supplied valuations and electronic data processing techniques and
are representative of market values at the close of the Exchange; options on
securities listed or admitted to trading on a national exchange shall be valued
at their last sale on such exchange prior to the time of determining net asset
value; or if no sales are reported on such exchange on that day, at the mean
between the most recent bid and asked price; and forward contracts shall be
valued at their last sale as reported by the Fund's pricing service, or lacking
a report by the service, at the value of the underlying currencies at the
prevailing currency rates.
The value of an illiquid security which is subject to legal or contractual
delays in or restrictions on resale by the Fund shall be taken to be the fair
value thereof as determined in accordance with procedures established by the
Fund's Board, on the basis of such relevant factors as the following: the cost
of such security to the Fund, the market price of unrestricted securities of the
same class at the time of purchase and subsequent changes in such market price,
potential expiration or release of the restrictions affecting
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such security, the existence of any registration rights, the fact that the Fund
may have to bear part or all of the expense of registering such security, and
any potential sale of such security to another investor. The value of other
property owned by the Fund shall be determined in a manner which, in the
discretion of the pricing agent of the Fund, most fairly reflects fair market
value of the property on such date.
Following the calculation of security values in terms of currency in which
the market quotation used is expressed ("local currency"), the pricing agent
shall, prior to the next determination of the NAV of the Fund's shares,
calculate these values in terms of United States dollars on the basis of the
conversion of the local currencies (if other than U.S. dollars) into United
States dollars at the rates of exchange prevailing at the value time as
determined by the pricing agent.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange is open). In addition, European or Far Eastern securities trading
generally or in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Fund's net asset value is not
calculated. The Fund calculates net asset value per share, and therefore,
effects sales, redemptions and repurchases of its shares, as of the close of the
Exchange once on each day on which that Exchange is open. Such calculation does
not take place contemporaneously with the determination of the prices of all of
the portfolio securities used in such calculation. If events materially
affecting the value of a portfolio security occur between the time when its
closing price is determined and the time when the Fund's net asset value is
calculated, such a security will be valued at fair value as determined in good
faith by the Board of Directors.
U.S. Treasury bills, and other short-term obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, with original or
remaining maturities in excess of 60 days are valued at the mean of
representative quoted bid and asked prices for such securities or, if such
prices are not available, are valued at the mean of representative quoted bid
and asked prices for securities of comparable maturity, quality and type.
Short-term securities, with 60 days or less to maturity, are amortized to
maturity based on their cost if acquired within 60 days of maturity or, if
already held, on the 60th day, based on the value determined on the 61st day.
Any purchase order may be rejected by the Distributor or by the Fund.
The Company has reserved the right to redeem in-kind but does not intend
to do so under normal circumstances.
Directors and Officers
The following is a list of the Company's Directors and Officers, their
dates of birth and a brief statement of their present positions and principal
occupations during the past five years.
*John Pasco, III (4/10/45)
Chairman, Director, and Treasurer
1500 Forest Ave, Suite 223; Richmond, VA 23229
Mr. Pasco is Treasurer and Director of Commonwealth Shareholder Services,
Inc., the Company's Administrator, since 1985. Director, President and
Treasurer of Commonwealth Capital Management, Inc. (a registered Investment
Advisor) since 1983. Director and shareholder of Fund Services, Inc., the
Company's Transfer and Disbursing Agent, since 1987 and shareholder of
Commonwealth Fund Accounting, Inc. which provides bookkeeping services to
Star Bank. Mr. Pasco is also a certified public accountant.
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<PAGE>
Samuel Boyd, Jr. (9/18/40)
Director
10808 Hob Nail Court, Potomac, MD 20854
Mr. Boyd is currently the Manager of the Customer Services Operations and
Accounting Division of the Potomac Electric Power Company. Mr. Boyd is also
a certified public accountant.
William E. Poist (6/11/39)
Director
5272 River Road, Bethesda, MD 20816
Mr. Poist is a financial and tax consultant through his firm Management
Consulting for Professionals. Mr. Poist is also a certified public
accountant.
Paul M. Dickinson (11/11/47)
Director
8704 Berwickshire Drive, Richmond, VA 23229
Mr. Dickinson is currently the President of Alfred J. Dickinson, Inc.,
Realtors.
*Jane H. Williams (6/28/48) Vice President of the Company and President of
the Sand Hill Portfolio Manager Fund 3000 Sand Hill Blvd. Suite 150, Menlo
Park, California 94025-7111.
Ms. Williams is Executive Vice President and a Director of Sand Hill
Advisors, Inc. which was founded in September 1982 by Ms. Williams.
*F. Byron Parker, Jr. (1/26/43)
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since 1986. Partner in
the law firm Mustian & Parker.
* Persons deemed to be "interested" persons of the Company under the 1940 Act.
During the fiscal year ended December 31, 1996, the Directors of the
Company received compensation from the Company, as follows:
Compensation Table
- ------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement From Registrant
Aggregate Benefits AccrEstimated Annual and Fund
Name of Person, Compensation As Part of FunBenefits UponComplex Paid to
Position From Registrant Expenses Retirement Directors
John Pasco, III $0 N/A N/A $0
Director
Samuel Boyd, Jr. $0 N/A N/A $8,000
Director
William E. Poist $0 N/A N/A $8,000
Director
Paul M. Dickinson $0 N/A N/A $8,000
Director
The directors and officers of the Company, as a group, do not own 1% or
more of the Fund.
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To the best knowledge of the Fund, as of May 30, 1997 the following
persons own of record or beneficially 5% or more of the Fund's shares, and own
such shares in the amounts indicated: (1) Marianne Conley (5.97%); (2) Arthur
and Anna Kull (9.37%); and (3) National
Financial Services (20.50%).
Investment Advisor
Sand Hill Advisors, Inc. (the "Investment Advisor") manages the investment
of the assets of the Fund pursuant to an Investment Advisory Agreement (the
"Advisory Agreement"). The Advisory Agreement will be effective for a period of
two years from August 19, 1997 and may be renewed thereafter only so long as
such renewal and continuance is specifically approved at least annually by the
Company's Board of Directors or by vote of a majority of the outstanding voting
securities of the Fund, provided the continuance is also approved by a majority
of the Directors who are not "interested persons" of the Company or the
Investment Advisor by vote cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement is terminable without penalty on
sixty days notice by the Company's Board of Directors or by the Investment
Advisor. The Advisory Agreement provides that it will terminate automatically in
the event of its assignment.
The Company has designated Jane H. Williams, Executive Vice President and
a Director of the Investment Advisor, as a Vice President of the Company and
President of the Fund.
Under the Advisory Agreement the monthly compensation paid to the
Investment Advisor is accrued daily at an annual rate of 1.00% of the average
daily net assets of the Fund. If the average daily net assets of the Fund exceed
$100,000,000, the fee for such assets will be computed at the annual rate of
0.75% on such excess. The fee is paid monthly within five (5) business days
after the end of the month. The Advisor received $27,452 from the Original Sand
Hill Fund and waived $27,452 of its fee in the year ended December 31, 1995 and
received $53,649 from the Original Sand Hill Fund and waived $34,043 of its fee
in the year ended December 31, 1996.
The Advisory Agreement contemplates the authority of the Investment
Advisor to place orders pursuant to its investment determinations for the Fund
either directly with the issuer or with any broker or dealer. In placing orders
with brokers or dealers, the Investment Advisor will attempt to obtain the best
price and execution of its orders. The Investment Advisor may purchase and sell
securities to and from brokers and dealers who provide the Fund with research
advice and other services, or who sell shares of the Fund. See "Portfolio
Transactions" above.
The address of the Investment Advisor is 3000 Sand Hill Road, Building
Three, Suite 150, Menlo Park, California 94025.
Transfer Agent
Fund Services, Inc. ("FSI") is the Company's Transfer and Disbursing
Agent, pursuant to a Transfer Agent Agreement. The Transfer Agent Agreement is
dated August 19, 1997. John Pasco, III, Chairman of the Board of the Company and
an officer and shareholder of Commonwealth Shareholder Services, Inc. (the
Administrator of the Fund) owns one third of the stock of FSI, and, therefore,
FSI may be deemed to be an affiliate of the Company and Commonwealth Shareholder
Services Inc.
Pursuant to the Transfer Agent Agreement the minimum annual fee for the
Fund is $16,500. In 1996 the Original Sand Hill Fund paid FSI $24,190.
Administrator
Commonwealth Shareholder Services, Inc. is the Company's Administrator
pursuant to an Administrative Services Agreement (the "Service Agreement"),
which is dated August 19, 1997. The Service Agreement is described in the Fund's
Prospectus. This agreement continues in effect from year to year for a period of
one year only if the Board of Directors, including a majority of the directors
who are not interested persons of the Company or the
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Administrator, approve the extension at least annually. In 1996, the Original
Sand Hill Fund paid $17,681 in administrative fees.
Distribution
Shares of the Fund are sold at net asset value on a continuous basis,
without a sales charge.
First Dominion Capital Corp. (the "Distributor"), 1500 Forest Avenue,
Suite 223, Richmond, VA 23229, is the Company's principal underwriter pursuant
to a Distribution Agreement between the Company and the Distributor. John Pasco,
III, Chairman of the Board of the Company owns 100% of the stock of the
Distributor, and is its President, Treasurer and a Director.
Expenses of the Fund
The Fund will pay its expenses not assumed by the Investment Advisor,
including, but not limited to, the following: custodian; stock transfer and
dividend disbursing fees and expenses; taxes; expenses of the issuance and
redemption of Fund shares (including stock certificates, registration and
qualification fees and expenses); legal and auditing expenses; and the cost of
stationery and forms prepared exclusively for the Fund.
The allocation of the general expenses of the Fund is made on a basis that
the Company's Board of Directors deems fair and equitable, which may be based on
the relative net assets of the series of the Company or the nature of the
services performed and relative applicability to each series of the Company.
Under the Advisory Agreement, the Investment Advisor has agreed to
reimburse the Fund if the annual ordinary operating expenses of the Fund exceeds
the most stringent limits prescribed by any state in which the Fund's shares are
offered for sale. This expense limitation is calculable based on the aggregate
net assets of the Fund. Expenses which are not subject to this limitation are
interest, taxes and extraordinary expenses. Expenditures, including costs
incurred in connection with the purchase or sale of portfolio securities, which
are capitalized in accordance with generally accepted accounting principles
applicable to investment companies, are accounted for as capital items and not
as expenses. Reimbursement, if any, will be on a monthly basis, subject to
year-end adjustment and limited to the amount of the advisory fee due from the
Fund.
Investors should understand that the Fund's expense ratio can be expected
to be higher than investment companies investing in domestic securities since
the cost of maintaining the custody of foreign securities paid by the Fund is
higher.
Special Shareholder Services
As described briefly in the Prospectus, the Fund offers the following
shareholder services:
Regular Account: The regular account allows for voluntary investments to
be made at any time. Available to individuals, custodians, corporations, trusts,
estates, corporate retirement plans and others, investors are free to make
additions and withdrawals to or from their account as often as they wish. Simply
use the Account Application provided with the Prospectus to open your account.
Telephone Transactions: You may redeem shares or transfer into another
fund by telephone if you request this service at the time you complete the
initial Account Application. If you do not elect this service at that time, you
may do so at a later date by putting your request in writing to the Transfer
Agent and having your signature guaranteed.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if it does not,
it may be liable for any losses due to unauthorized or fraudulent transactions.
As a result of this policy, a shareholder
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<PAGE>
authorizing telephone redemption bears the risk of loss which may result from
unauthorized or fraudulent transactions which the Fund believes to be genuine.
When you request a telephone redemption or transfer, you will be asked to
respond to certain questions designed to confirm your identity as a shareholder
of record. Your cooperation with these procedures will protect your account and
the Fund from unauthorized transactions.
Invest-A-Matic Account: Any shareholder may utilize this feature, which
provides for automatic monthly investments into your account. Upon your request,
the Transfer Agent will withdraw a fixed amount each month from your checking
account for investment into your account. This does not require you to make a
commitment for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Invest-A-Matic Plan as desired by notifying the
Transfer Agent. This feature requires a separate Plan application, in addition
to the Account Application. To obtain an application, or to receive more
information, please call the offices of the Company.
Individual Retirement Account (IRA) - All wage earners under 70-1/2, even
those who participate in a company sponsored or government retirement plan, may
establish their own IRA. You can contribute 100% of your earnings up to $2,000
(or $2,250 with a spouse who is not a wage earner, for years prior to 1997).
Starting in 1997, even a spouse who does not earn compensation can contribute up
to $2,000 per year to his or her own IRA. The deductibility of such
contributions will be determined under the same rules as for contributions made
by individuals with earned income. A special IRA program is available for
corporate employers under which the employers may establish IRA accounts for
their employees in lieu of establishing corporate retirement plans. Known as
SEP-IRA's (Simplified Employee Pension-IRA), they free the corporate employer of
many of the recordkeeping requirements of establishing and maintaining a
corporate retirement plan trust.
If you have received a lump sum distribution from another qualified
retirement plan, you may rollover all or part of that distribution into your
Fund IRA. Your rollover contribution is not subject to the limits on annual IRA
contributions. By acting within applicable time limits of the distribution you
can continue to defer Federal Income Taxes on your lump sum contribution and on
any income that is earned on that contribution.
How to Establish Retirement Accounts: Please call the Company to obtain
information regarding the establishment of individual retirement plan accounts.
The plan custodian charges nominal fees in connection with plan establishment
and maintenance. These fees are detailed in the plan documents. You may wish to
consult with your attorney or other tax advisor for specific advice concerning
your tax status and plans.
General Information and History
The Company is authorized to issue up to 250,000,000 shares of common
stock, par value $0.01 per share, of which it has presently allocated 50,000,000
shares to the Fund. The Board of Directors can allocate the remaining authorized
but unissued shares to the Fund, or may create additional series and allocate
shares to such series. Each series is required to have a suitable investment
objective, policies and restrictions, to maintain a separate portfolio of
securities suitable to its purposes, and to generally operate in the manner of a
separate investment company as required by the 1940 Act.
If additional series were to be formed, the rights of existing series
shareholders would not change, and the objective, policies and investments of
each series would not be changed. A share of any series would continue to have a
priority in the assets of that series in the event of a liquidation.
The shares of each series when issued will be fully paid and nonassessable,
will have no preference over other shares of the same series as to conversion,
dividends, or retirement, and will have no preemptive rights. The shares of any
series will be redeemable from the assets of that series at any time at a
shareholder's request at the current net asset value of that series determined
in accordance with the provisions of the 1940 Act and the rules thereunder. The
Company's general corporate expenses (including administrative expenses) will be
allocated among the series in proportion to net assets or as determined in good
faith by the Board.
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<PAGE>
The investment advisory fees payable to Sand Hill Advisors, Inc. by the Fund
and the expense limitation guarantee formula of the Fund will be based upon the
assets of the Fund.
Voting and Control - Each outstanding share of the Company is entitled to
one vote for each full share of stock and a fractional share of stock. All
shareholders vote on matters which concern the corporation as a whole. Election
of Directors or ratification of the auditor are examples of matters to be voted
upon by all shareholders. The Company is not required to hold a meeting of
shareholders each year. The Company intends to hold annual meetings when it is
required to do so by the Maryland General Corporate Law or the 1940 Act. Each
series shall vote separately on matters (1) when required by the General
Corporation Law of Maryland, (2) when required by the 1940 Act and (3) when
matters affect only the interest of the particular series. An example of a
matter affecting only one series might be a proposed change in an investment
restriction of one series. The shares will not have cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of directors can elect all of the directors if they choose to do so.
Limitation on Use of Name - The Advisory Agreement for the Fund authorizes
the Company to utilize the name "Sand Hill." The Company agrees that if the
Advisory Agreement is terminated it will promptly redesignate the name of the
Sand Hill Portfolio Manager Fund to eliminate any reference to the name "Sand
Hill" or any derivation thereof unless the Investment Advisor waives this
requirement in writing.
Code of Ethics - The Company has adopted a Code of Ethics which imposes
certain restrictions on the authority of portfolio managers and certain other
personnel of the Fund and its advisors governing personal securities activities
and investments of those persons and has instituted procedures to its Code of
Ethics to require such investment personnel to report such activities to the
compliance officer. The Code is reviewed and updated annually.
Performance
Current yield and total return are the two primary methods of measuring
investment performance. Occasionally, however, the Fund may include its
distribution rate in sales literature. Yield, in its simplest form, is the ratio
of income per share derived from the Fund's portfolio investments to the current
maximum offering price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. Total return, on the other
hand, is the total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the change in the
value of the original investment, expressed as a percentage of the purchase
price. The distribution rate is the amount of distributions per share made by
the Fund over a twelve-month period divided by the current maximum offering
price.
Performance quotations by investment companies are subject to certain
rules adopted by the Securities and Exchange Commission (the "Commission").
These rules 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 Commission. Current yield and total return quotations used by
the Fund are based on the standardized methods of computing performance mandated
by the Commission.
Yield. As indicated below, current yield is determined by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders
during the 30 day base period. According to the Commission formula:
6
Yield = 2 [(a-b + 1) -1]
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
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c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Total Return. The Original Sand Hill Fund's average annual total
returns for the periods indicated are as follows:
One-Year Period
Ended From Inception to
Fund Name 12/31/96 12/31/96
Sand Hill Portfolio Manager Fund 19.57% 15.51%
As the following formula indicates, the average annual total return is
determined by multiplying a hypothetical initial purchase order of $1,000 by the
average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and reinvested)
for the stated period less any fees charged to all shareholder accounts and
annualizing the result. The calculation assumes the maximum sales load is
deducted from the initial $1,000 purchase order and that all dividends and
distributions are reinvested at the public offering price on the reinvestment
dates during the period. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year or since inception period
and the deduction of all applicable charges and fees. According to the
Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5, or 10 year periods (or fractional portion
thereof).
Sales literature pertaining to the Fund may quote a distribution rate in
addition to the yield or total return. The distribution rate is the amount of
distributions per share made by the Fund over a twelve-month period divided by
the current maximum offering price. The distribution rate differs from the yield
because it measures what the Fund paid to shareholders rather than what the Fund
earned from investments. It also differs from the yield because it may include
dividends paid from premium income from option writing, if applicable, and
short-term capital gains in addition to dividends from investment income. Under
certain circumstances, such as when there has been a change in the amount of
dividend payout, or a fundamental change in investment policies, it might be
appropriate to annualize the distributions paid over the period such policies
were in effect, rather than using the distributions paid during the past twelve
months.
Occasionally, statistics may be used to specify the Fund's volatility or
risk. Measures of volatility or risk are generally used to compare the Fund's
net asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market as represented by the Standard & Poor's 500 Stock Index. A beta of more
than 1.00 indicates volatility greater than the market, and a beta of less than
1.00 indicates volatility less than the market. Another measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability of
net asset value or total return around an average, over a specified period of
time. The premise is that greater volatility connotes greater risk undertaken in
achieving performance.
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Regardless of the method used, past performance is not necessarily
indicative of future results, but is an indication of the return to shareholders
only for the limited historical period used.
Comparisons and Advertisements
To help investors better evaluate how an investment in the Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss yield, total return, or Fund volatility as reported by various financial
publications. Advertisements may also compare yield, total return, or volatility
(as calculated above) to yield, total return, or volatility as reported by other
investments, indices, and averages. The following publications, indices, and
averages may be used:
(a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks.
Comparisons of performance assume reinvestment of dividends.
(b) Standard & Poor's 500 Stock Index or its component indices -an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices -unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available. Comparisons
of performance assume reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Analysis,
and Lipper Mutual Fund Indices - measures total return and average current yield
for the mutual fund industry. Ranks individual mutual fund performance over
specified time periods assuming reinvestment of all distributions, exclusive of
sales charges.
(f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(g) Mutual Fund Source Book and other material, published by Morningstar, Inc. -
provides proprietary ratings and analyzes price, yield, risk, and total return
for equity funds.
(h) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, and Money magazines - rate fund performance over specified time
periods.
(i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services, in major expenditure groups.
(j) Standard & Poor's 100 Stock Index - an unmanaged index based on the price of
100 blue-chip stocks, including 92 industrials, 1 utility, 2 transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for option trading.
In assessing such comparisons of yield, total return, or volatility, an
investor should keep in mind that the composition of the investments in the
reported indices and averages in not identical to the Fund's portfolio, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its figures. In addition there can be no assurance that the
Fund will continue this performance as compared to such other averages.
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Financial Statements
Set forth below are the Original Sand Hill Fund's audited financial
statements for the fiscal year ended December 31, 1997.
The books of the Fund will be audited at least once each year by Tait,
Weller and Baker, of Philadelphia, PA, independent public accountants.
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND RATINGS:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1,2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, modified 2 indicated a mid-range rating, and the modifier 3
indicates that the issue ranks at the lower end of the rating category.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations, i.e.
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements, their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
MOODY'S SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity
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are excluded unless explicitly rated. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment ability of rated issuers:
Prime-1 - Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established access
to range of financial markets and assured sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime 3 - Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation, indicating an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from highest rated issues only to a small degree.
Plus(+) or Minus(-) - The ratings from AA to CCC may be modified by the
addition of a plus or a minus sign, which shows relative standing within
the major rating categories.
A - Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB is the lowest and
CC is the highest degree of speculation. While such debt will have some quality
and protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
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Investment Advisor: Sand Hill Advisors, Inc.
3000 Sand Hill Road
Building Three, Suite 150
Menlo Park, CA 94025
Distributor: First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
Two Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Transfer Agent: For account information, wire purchases or redemptions,
call or write to the Fund's Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260-6305
(800) 628-4077 Toll Free
More Information: For 24-hour, 7-days-a-week price information call
1-800-527-9525.
For information on the Fund, investment plans, or other
shareholder services, call the Company at 1-800-527-9525
during normal business hours, or write the Company at
1500 Forest Avenue, Suite 223, Richmond, VA 23229
In order to meet the tax diversification test, at the close of each quarter of
its fiscal year, (i) at least 50% of the value of the Fund's total assets must
be represented by cash and cash items including receivables, U.S. Government
securities, and securities of other regulated investment companies, and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the value of its total assets, and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and the securities of other regulated investment
companies.)
The Fund will meet the 90% of gross income test if 90% of its gross income is
derived from dividends, interest, payments with respect to certain securities
loans, and gain from the sale or disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to its business of investing
in such stock, securities, or currencies. The Fund will meet the 30% of gross
income test provided that less than 30% of its gross income for the fiscal year
is derived from the sale or disposition of any of the following held for less
than three months: stock or securities, options, futures, or forward contracts
(other than such contracts on foreign currencies), and foreign currencies (or
options, futures, or forward contracts on foreign currencies ("hedging
instruments")) but only if such currencies (and hedging instruments) are not
directly related to the Fund's principal business of investing in stock or
securities (or options and futures with respect to stock or securities.)
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THE WORLD FUNDS, INC.
1500 Forest Avenue, Suite 223 * P.O. Box 8687 * Richmond, Va. 23229
(800) 527-9525 * (804) 285-8211 * Fax (804) 285-8251
August 20, 1997
Filing Desk
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: The World Funds, Inc.
File Number 333-28289
Filed Pursuant to Rule 497(e)
Gentlemen:
Transmitted herewith for electronic filing, please find enclosed pursuant
to Rule 497(e), a copy of the Prospectus and Statement of Additional Information
for the Sand Hill Portfolio Manager Fund series of The World Funds, Inc.
Sincerely,
/s/ John Pasco, III
John Pasco, III
Chairman
<PAGE>
