SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
File Numbers: 333-28289 and 811-8255
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
-
Pre-Effective Amendment No. /_/
-- -
Post-Effective Amendment No. 1 /X/
--
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 1
(Check appropriate box or boxes)
THE WORLD FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
1500 Forest Avenue, Suite 223, Richmond, VA 23229
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (804) 285-8211
John Pasco, III, 1500 Forest Ave., Suite 223, Richmond, VA 23229
(Name and Address of Agent for Service)
Please send copies of communications to
Steven M. Felsenstein, Esq.
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Approximate Date of Proposed Public Offering: Upon effectiveness
of this registration statement.
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b).
[ ] on pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[ ] on pursuant to paragraph (a)(1).
[x] 75 days after filing pursuant to paragraph (a)(2).
[ ] on pursuant to paragraph (a)(2).
Registrant has elected to register an indefinite number of shares pursuant to
Rule 24f-2. The Registrant has not yet completed a fiscal year, and will file
its first Notice after December 31, 1997.
<PAGE>
CONTENTS OF POST-EFFECTIVE AMENDMENT
PART A
1. Prospectus of the Sand Hill Portfolio Manager Fund Series: Incorporated by
Reference from the Registrant's original Registration Statement, filed on
EDGAR on June 16, 1997 (accession number 0001040674-97-000005), as
effective AUGUST 1, 1997.
2. Joint Prospectus for the (i) CSI Fixed Income Fund series, and (ii)
the CSI Equity Fund series: Included herein.
PART B
1. Statement of Additional Information of the Sand Hill Portfolio Manager
Fund Series: Incorporated by Reference from the Registrant's original
Registration Statement, filed on EDGAR on June 16, 1997 (accession number
0001040674-97-000005), as effective AUGUST 1, 1997.
2. Joint Statement of Additional Information for the (i) CSI Fixed Income
Fund series, and (ii) CSI Equity Fund series: Included herein.
PART C
Included herein.
<PAGE>
CROSS-REFERENCE SHEET
Joint Prospectus for CSI Equity Fund and CSI Fixed Income Fund
Part A
Item No. Information Required in a Prospectus
1. Cover Page. Cover Page.
2. Synopsis. Prospectus Summary; Fund Expenses.
3. Condensed Financial Information. Financial Highlights.
4. General Description of Registrant.Prospectus Summary; Cover Page; General
Information About the Company;The Funds'
Investments and Policies; Additional
Information on Policies and Investments;
Special Risk Considerations; Investment
Restrictions.
5. Management of the Fund Prospectus Summary; The Company's
Management;General Information About the
Company; To Obtain More Information.
6. Management's Discussion of Fund
Performance Not Applicable.
6. Capital Stock and OtherSecurities.Prospectus Summary; Taxes;Dividends and
Capital Gains Distributions; General
Information About the Company; To Obtain
More Information.
7. Purchase of Securities Being
Offered. Prospectus Summary; How to Invest; How
Net Asset Value is Determined; Special
Shareholder Services; How to Transfer
Shares.
8. Redemption or Repurchase. How to Redeem Shares;Special Shareholder
Services; How to Transfer Shares.
9. Legal Proceedings. Not Applicable.
<PAGE>
Joint Statement of Additional Information for
CSI Equity Fund and CSI Fixed Income Fund
Part B
Item No. Information Required in a Statement of
Additional Information
10. Cover Page. Cover Page.
11. Table of Contents. Table of Contents.
12. General Information and History. Not Applicable.
13. Investment Objectives and
Policies. The World Funds,Inc.;Investment
Policies;Special Investment
Considerations for the
Funds; Investment Restrictions.
14. Management of the Registrant. Directors and Officers.
15. Control Persons and Principal
Holders of Securities. Directors and Officers.
16. Investment Advisory and Other
Services. Investment Advisor; Transfer Agent;
Administrator; Distribution.
17. Brokerage Allocation and Other
Practices. Portfolio Transactions.
18. Capital Stock and Other
Securities. General Information and History;
Dividends and Distributions.
19. Purchase, Redemption and Pricing
of Securities Being Offered. Special Shareholder Services; Valuation
and calculation of Net Asset Value.
20. Tax Status. Taxes.
21. Underwriters. Distribution.
22. Calculation of Performance Data. Performance.
23. Financial Statements. Financial Statements.
<PAGE>
Part C
Item No.
Other Information.
24. Financial Statements and Exhibits.
25. Persons Controlled By Or Under Common Control With Registrant.
26. Number of Holders of Securities.
27. Indemnification.
28. Business and Other Connections of Investment Advisor.
29. Principal Underwriters.
30. Location of Accounts and Records.
31. Management Services.
32. Undertakings.
<PAGE>
PART A
<PAGE>
CSI EQUITY FUND
AND
CSI FIXED INCOME FUND
PORTFOLIOS OF
THE WORLD FUNDS, INC.
A "SERIES" INVESTMENT COMPANY
1500 Forest Avenue PROSPECTUS
Suite 223 Dated , 1997
---------------
Richmond, Virginia 23229
Telephone: 1-800-527-9500
The World Funds, Inc. ("the "Company") is an open-end management
investment company commonly known as a "mutual fund." A "series" mutual fund
offers investors a choice of investment objectives, with each series having its
own separate and distinct portfolio of investments and operating much like a
separate mutual fund. This Prospectus offers shares of the following two series
(each, a "Fund") of the Company:
CSI Equity Fund (the "Equity Fund") seeks to achieve growth of capital by
investing in a portfolio composed of common stocks and securities
convertible into common stock, such as, warrants, convertible bonds,
debentures or convertible preferred stock.
CSI Fixed Income Fund (the "Fixed Income Fund") seeks current income by
investing in debt securities.
Both the Equity Fund and the Fixed Income Fund are diversified series for
purposes of the Investment Company Act of 1940, as amended. The Company is
currently composed of three series, one of which is offered in a separate
prospectus. Investors will be able to exchange all or part of their investment
from one Fund to another or to certain other mutual funds, under conditions set
by the Company.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
AMOUNTS INVESTED IN THE FUNDS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the Funds that
a prospective investor should know before investing. It should be read and
retained for future reference. More information about the Funds has been filed
with the Securities and Exchange Commission and is contained in the "Statement
of Additional Information," dated , 1997, which is available at
1
<PAGE>
no charge upon written request to the Company. The Funds'
Statement of Additional Information is incorporated herein by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
2
<PAGE>
TABLE OF CONTENTS Page
PROSPECTUS SUMMARY
FUND EXPENSES
THE WORLD FUNDS, INC.
CSI EQUITY FUND
Investment Objective
Investment Policies
Temporary Defensive Posture
CSI FIXED INCOME FUND
Investment Objective
Investment Policies
Repurchase Agreements
INVESTMENT RISKS
INVESTMENT RESTRICTIONS
PERFORMANCE TERMS AND COMPUTATIONS
THE COMPANY'S MANAGEMENT
Investment Advisor
Administrator
Custodian and Accounting Service Agents
Transfer and Dividend Disbursing Agent
Principal Underwriter/Distributor
HOW TO INVEST
HOW TO REDEEM SHARES
HOW TO TRANSFER SHARES
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
SPECIAL SHAREHOLDER SERVICES
HOW NET ASSET VALUE IS DETERMINED
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
TAXES
GENERAL INFORMATION ABOUT THE COMPANY
TO OBTAIN MORE INFORMATION
3
<PAGE>
P R O S P E C T U S S U M M A R Y
The following summary is qualified in its entirety by the more detailed
information appearing in the body of this Prospectus.
Investment Objectives
CSI Equity Fund (the "Equity Fund") seeks to achieve growth of capital by
investing in a portfolio composed of common stocks and securities
convertible into common stock, such as warrants, convertible bonds,
debentures or convertible preferred stock.
CSI Fixed Income Fund (the "Fixed Income Fund") seeks current income by
investing in debt securities.
In seeking to meet its objective, each Fund will invest on a
global basis. See "Investment Policies" on Page .
Principal Investments
The Funds' primary investments:
Equity Fund - Equity securities.
Fixed Income Fund - Debt securities.
See "Investment Policies" on Page .
Investment Advisor
CSI Capital Management, Inc. (the "Advisor") is the investment
advisor and manages the investments of each Fund according to
its investment objective and policies. See "The Company's
Management" on Page .
Distributions/Dividends
Available income is paid annually from the Equity Fund and quarterly from
the Fixed Income Fund. Capital gains, if any, are paid annually from each
Fund. See "Dividends and Capital Gains Distributions" on Page .
Reinvestment
Distributions may be reinvested automatically. See "Dividends
and Capital Gains Distributions" on Page .
Purchases
Initial purchase is $1,000 minimum. Subsequent purchases must
4
<PAGE>
be a minimum of $50. Shares of the Funds are offered for sale
without a sales charge through the distributor, First Dominion
Capital Corp. (see "How to Invest" on Page ).
Net Asset Value
Available by calling . See "How the Net
Asset Value is Determined" on Page .
Investment Risks
There can be no assurance that a Fund will achieve its investment
objective. An investor should note that both the Equity Fund and the Fixed
Income Fund may invest in foreign securities, and consequently may be
affected by currency fluctuations or exchange controls, foreign taxes,
differences in accounting procedures, less supervision and regulation of
security markets, political or social instability and other risks. See
"Investment Risks" on Page .
5
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that shareholders in
the Funds will incur.
Shareholder
Transaction Expenses Equity Fund Fixed Income Fund
Sales Load Imposed on Purchases None None
Sales Load Imposed on Reinvested
Dividends None None
Redemption Fees None* None*
Exchange Fees None** None**
* A shareholder electing to redeem shares via a telephone request will be
charged $10 for each such redemption request.
** A shareholder will be charged a $10 fee for each telephone
exchange.
Average Fund Operating Expenses
(as percentage of average daily
net assets) Equity Fund Fixed Income Fund
Management Fee 1.00% 1.00%
12b-1 Fee None None
Other Operating Expenses 0.50% 0.50%
----- -----
Total Fund Operating Expenses 1.50% 1.50%
The purpose of these tables is to assist investors in understanding the
various costs and expenses that they will bear directly or indirectly.
Management expects that, to the extent that the Funds increase in size, their
Other Operating Expenses will decline as an annual percentage rate reflecting
economies of scale.
Example
The following examples illustrate 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 Funds do
6
<PAGE>
not charge redemption fees (apart from small per transaction charges for
telephone redemption and/or exchange service fees).
Fund Name 1 Year 3 Years
- --------- ------ -------
Equity Fund 15 47
Fixed Income Fund 15 47
7
<PAGE>
THE WORLD FUNDS, INC.
The Equity Fund and the Fixed Income Fund are series of The World Funds,
Inc. (the "Company"), an open-end management investment company incorporated in
Maryland in 1997. The Company currently consists of three series, and the Board
of Directors may elect to add more series in the future. A minimum initial
investment of $1,000 is required to open a shareholder account in each Fund, and
each subsequent investment must be $50 or more.
The investment objective of each Fund is fundamental and may not be
changed without the approval of shareholders. The investment policies of each
Fund are not fundamental, however, and may be changed with the approval of the
Company's Board of Directors. All investments entail some risks and there is no
assurance that the investment objective of a Fund can be achieved.
See "Investment Risks" below.
CSI EQUITY FUND
Investment Objective. The investment objective of the Equity Fund is to
achieve growth of capital by investing in a portfolio composed of common stocks
and securities convertible into common stock, such as warrants, convertible
bonds, debentures or convertible preferred stock. In seeking to meet its
objective, the Fund will invest on a global basis.
Investment Policies. The Fund's assets will be invested on a global basis
to take advantage of investment opportunities both within the U.S. and overseas.
Investing outside the U.S. may present risks which you should consider before
investing in the Fund (see "Investment Risks" on Page ). The foreign securities
which the Fund purchases may be bought directly in their principal markets or
may be acquired through the use of depository receipts. The Fund may invest in
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, and evidence ownership of either foreign or domestic underlying
securities. Unsponsored ADRs and EDRs are issued 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.
The Fund generally will not attempt to protect against potential changes
in exchange rates, although the Fund may purchase and sell currencies to
facilitate securities transactions and may enter into forward currency contracts
to hedge against changes in currency exchange rates. A forward transaction may
minimize the risk of loss due to a decline in the value of the hedged currency,
however, it may also limit any potential gain which might result
8
<PAGE>
from an increase in the value of the currency. The Fund generally will not
attempt to protect against potential changes in exchange rates.
Under normal market conditions, the Fund will have at least 65% of its
assets invested in common stocks or securities convertible into common stocks.
The Fund's portfolio will be diversified. The Fund will not be limited to
investing in the securities of companies of any particular size, or to
securities traded in any particular market. No more than 25% of the Fund's
assets will be invested in issuer's which operate in any single industry.
Temporary Defensive Posture. When the Advisor believes that investments
should be deployed in a temporary defensive posture because of economic or
market conditions, the Fund may invest up to 100% of its assets in U.S.
Government securities (such as bills, notes, or bonds of the U.S. Government and
its agencies) or other forms of indebtedness such as bonds, certificates of
deposits or repurchase agreements (for the risks involved in investing in
repurchase agreements, see the Statement of Additional Information). When the
Fund is in a temporary defensive position, it is not pursuing its stated
investment policies. The Advisor decides when it is appropriate to be in a
defensive position. It is impossible to predict for how long such alternative
strategies will be utilized.
It is anticipated that portfolio turnover will not exceed 50% under normal
circumstances. A higher portfolio turnover rate may result in additional
brokerage commissions or expenses to the Fund.
CSI FIXED INCOME FUND
Investment Objective. The Fixed Income Fund seeks current income by
investing in debt securities. The Fund seeks to achieve its objective by
investing in obligations issued or guaranteed by the U.S. Government, its
agencies, authorities, and instrumentalities ("U.S. Government Securities"),
municipal securities, corporate debt securities, zero coupon bonds, as well as
obligations of governments, instrumentalities and corporations outside the U.S.
Investment Policies. Under normal market conditions, at least 65% of the
Fund's assets will be invested in securities rated, at the time of purchase, AA
or higher by Moody's Investors Services, Inc. ("Moody's"), or Standard & Poor's
Corporation ("S&P"), or unrated securities which the Advisor believes to be of
comparable quality. The Fund may invest in lower rated securities in order to
avail itself of the higher yields available with these securities, however, no
more than 5% of the Fund's total assets may be invested in securities rated
below investment grade or which are unrated but are of comparable quality as
determined by the Advisor. Securities
9
<PAGE>
rated below investment grade (i.e., below BBB by S&P or Baa by Moody's) entail
greater risks than investment grade debt securities and not more than 1% of the
Fund's assets may be invested in such securities. After 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.
The Fund does not intend to engage in a significant amount of short-term
trading, due to the fact that such practices would result in increased
commissions and transactions costs, but the Fund may dispose of a security
without regard to how long it has been held when such disposition is
appropriate. There are no restrictions on the maturity composition of the Fund.
The market values of fixed-income securities tend to vary inversely with
the level of interest rates (when interest rates rise, the market value of such
securities tends to decline and vice versa). Although under normal market
conditions longer term securities yield more than shorter term securities of
similar quality, they are subject to greater price fluctuations. Fluctuations in
the value of the Fund's investments will be reflected in its net asset value.
Repurchase Agreements. As a means of earning income for periods as short
as overnight, the Fixed Income Fund may without limit enter into repurchase
agreements, which will be required to be collateralized by U.S. government
securities in which it may otherwise invest, with selected banks and
broker/dealers. Under a repurchase agreement, a fund acquires a security,
subject to the seller's agreement to repurchase that security at a specified
time and price.
Repurchase agreements are considered to be loans under the 1940 Act. The
Fixed Income Fund may enter into repurchase commitments for investment purposes
for periods of 30 days or more. Such commitments involve investment risk similar
to that of debt securities in which it the Fund invests. Repurchase agreements
for periods in excess of seven days may be deemed to be illiquid. 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 the commencement of bankruptcy
or insolvency 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 collateral. Also,
the value of such securities may decline before it is able to dispose of them.
INVESTMENT RISKS
As stated above, the Equity Fund and the Fixed Income Fund have the
ability to invest outside the U.S. Investing in foreign securities involves
risks which are not normally associated with
10
<PAGE>
investing in U.S. securities, such as, exchange control regulations; costs
incurred in connection with conversions between various currencies; availability
of less financial information than comparable U.S. companies; lack of uniform
accounting, auditing and financial reporting requirements; less liquidity and
more volatility than securities listed on U.S. security markets; political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries; and various administrative difficulties such as
delays in clearing and settling portfolio transactions or in receiving payments
of dividends. It may be more difficult for the Fund's agents to keep currently
informed about corporate actions which may affect the prices of portfolio
securities.
An investment in the Equity Fund is subject to all of the risks of an
equity investment, including the risk of declines in the value of the equity
markets generally. In addition, the Equity Fund will invest a portion of its
assets in smaller companies that may involve greater risk than investments in
larger, more mature issuers. Smaller companies may have limited product lines,
markets or financial resources, and their securities may trade less frequently
and in more limited volume than those of larger, more mature companies. As a
result, the prices of their securities may fluctuate more than those of larger
issuers.
The Equity Fund may use forward currency contracts in an attempt to hedge
against changes in currency exchange rates. Hedging transactions involve special
risks. Although the Equity Fund may benefit from the use of such hedging
positions, unanticipated changes in interest or currency exchange rates may
result in poorer overall performance for the Equity Fund than if it had not
entered into the hedging position. If the correlation between a hedging position
and a portfolio position or anticipated portfolio transaction is not properly
constructed or protected, the desired protection may not be obtained and the
Equity Fund may be exposed to risk of financial loss. In addition, the Equity
Fund pays commissions and other costs in connection with such hedging
transactions.
The Funds are newly formed and have no operating history.
INVESTMENT RESTRICTIONS
The investments of each Fund are subject to investment limitations which
may not be changed without the approval of at least a majority of the
outstanding voting securities of that Fund, as that term is defined in the 1940
Act. (See the Statement of Additional Information for the specific definition.)
Certain of these policies are detailed below, while other policies which
prohibit or limit particular practices are set forth in the Statement of
Additional Information. The investment
11
<PAGE>
restrictions of each Fund specifically provide, except as noted otherwise, that
it may not:
* Purchase any security if, as a result of such purchase, less than 75% of
the assets of the Fund would consist of cash and cash items, U.S.
Government securities, securities of other investment companies, and
securities of issuers in which the Fund has not invested more than 5% of
its assets.
* Purchase stock or securities of an issuer (other than U.S. Government
securities or securities of other investment companies if such purchase
would cause the Fund to own more than 10% of any class of the outstanding
voting securities of such issuer.
* Act as an underwriter of securities of other issuers, except
(i) that each Fund may invest up to 10% of the value of its
total assets (at time of investment) in portfolio securities
which the Fund might not be free to sell to the public without
registration of such securities under the Securities Act of
1933, as amended, or any foreign law restricting distribution
of securities in a country of a foreign issuer; and (ii) to
the extent that a Fund may be deemed an underwriter in
connection with the disposition of portfolio securities of the
Fund.
* Buy or sell commodities or commodity contracts.
* Borrow money except as a temporary measure for extraordinary or emergency
purposes. Notwithstanding the foregoing, to avoid the untimely disposition
of assets to meet redemptions, a Fund may borrow up to 33 1/3% of the
value of its assets from banks to meet redemptions, provided that the Fund
may not make other investments while such borrowings are outstanding.
* Make loans, except that a Fund may enter into repurchase agreements
secured by the U.S. Government securities and, with respect to the Fixed
Income Fund, except to the extent that the entry into repurchase
agreements and the purchase of debt securities in accordance with its
investment objective and policies may be deemed to be loans.
* Invest more than 25% of its total assets in securities of
companies in the same industry.
Percentage limitations in the foregoing description of the Funds'
investments and policies and this "Investment Restrictions" section are
determined at the time a Fund makes a purchase or loan subject to such
percentage.
PERFORMANCE TERMS AND COMPUTATIONS
12
<PAGE>
From time to time each of the Funds 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.
"Distribution rate" is the amount of distribution per share made over a
twelve-month period divided by a current maximum offering price.
"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, five and ten-year periods, as applicable, and/or 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 Funds' expenses. Please refer to the Statement
of Additional Information for more information on Performance.
THE COMPANY'S MANAGEMENT
The Board of Directors of the Company is responsible for the supervision
of the general business of the Company. The Directors act as fiduciaries for
shareholders under the laws of the State of Maryland. The Board has appointed
John Pasco, III to serve as President of the Company. The Company employs the
following persons to provide it with investment advice and to conduct its
ongoing business:
Investment Advisor - CSI Capital Management, Inc. (the
"Advisor") manages the investment of the assets of each Fund
pursuant to an Investment Advisory Agreement (each, an "Advisory
13
<PAGE>
Agreement"). The Advisory Agreements are effective for a period of two years
from , 1997, and may be renewed thereafter as 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
applicable Fund, provided the continuance is also approved by a majority of the
Directors who are not "interested persons" of the Company or the Advisor by vote
cast in person at a meeting called for the purpose of voting on such approval.
As of June 30, 1997, the Advisor had approximately $110 million under
management, and acts as trustee supervising an additional $30 million in assets.
The address of the Advisor is One Montgomery Street, Suite 2525, San Francisco,
CA 94104.
Mr. Leland Faust, who has been President of the Advisor since 1978, is the
President of each of the Funds, and is the Advisor's portfolio manager for each
fund. The Advisor has no previous experience managing a mutual fund.
Pursuant to the Advisory Agreements, the Advisor provides the Funds with
investment management services, subject to the supervision of the Board of
Directors of the Company, and with office space for investment activities, and
pays the ordinary and necessary office and clerical expenses relating to
investment research, statistical analysis, supervision of the Funds' portfolios
and certain other costs. The 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 Advisor. Each Fund is responsible for
all other costs and expenses, such as, but not limited to, brokerage fees,
commissions and other transaction costs in connection with the purchase and sale
of securities, legal, auditing, bookkeeping and record keeping services,
custodian and transfer agency fees and fees and other costs of filing notice of
or registration of its shares for sale under various state and Federal
securities laws. All expenses of each Fund not specifically assumed by the
Advisor are assumed by the Fund.
Under the Advisory Agreement with each Fund, the Advisor is entitled to
monthly compensation accrued daily at an annual rate equal to 1% of the average
daily net assets of the Funds.
These fees are higher than those charged to many other investment
companies. The fees are paid monthly, within five business days after the end of
the month.
The Advisory Agreements contemplate the authority of the Advisor to place
orders for each of the Funds pursuant to its investment determinations either
directly with the issuer or with any broker or dealer. The Advisor may allocate
brokerage to an affiliated dealer in accordance with written policies and
14
<PAGE>
procedures adopted by the Company's Board of Directors. In placing orders with
brokers or dealers, the Advisor will attempt to obtain the best price and
execution for the Fund's orders. The Advisor may purchase and sell securities to
and from brokers and dealers who provide the 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 Advisor obtaining the best
price and execution for each Fund, the Board of Directors may authorize the
Advisor to allocate brokerage transactions to a broker in consideration of: (1)
payment of an obligation otherwise payable by the Funds, or (2) in consideration
of the sale of Fund shares.
Administrator - Commonwealth Shareholder Services, Inc. ("CSS"), serves as
Administrator to each Fund pursuant to Administrative Services Agreements. CSS
provides certain recordkeeping and shareholder servicing functions required of
registered investment companies, and will assist each Fund in preparing and
filing certain financial and other reports and performs certain daily functions
required for ongoing operations. CSS may furnish personnel to act as the
Company's officers to conduct the Company's business subject to the supervision
and instructions of the Company's Board of Directors. CSS also provides other
administrative and operational services required by the Funds on terms set and
for fees or reimbursements approved by the Company's Board of Directors.
The Administrative Services Agreements provide that CSS will be paid
monthly: (1) 0.20% of the average daily net assets of the Funds on the first $50
million, 0.15% per annum of the average daily net assets from $50 million to
$100 million, and 0.10% per annum of the average daily net assets over $100
million (which includes regulatory matters, backup of the pricing of shares of
each Fund, administrative duties in connection with the execution of portfolio
trades, and certain services in connection with Fund accounting); (2) an hourly
fee for shareholder servicing and state securities law matters; and (3) certain
out-of-pocket expenses. The address of CSS is 1500 Forest Avenue, Suite 223,
Richmond, VA 23229.
Custodian and Accounting Services Agents. Star Bank (the "Star Bank") is
the Company's custodian and accounting services agent. Star Bank collects income
when due and holds all of the portfolio securities and cash. Star Bank, as the
accounting services 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.
("FSI" or the "Transfer Agent") is the transfer and dividend
15
<PAGE>
disbursing agent for the Company. John Pasco, III, President of the Company,
owns one third of the stock of FSI, and, therefore, FSI may be deemed to be an
affiliate of the Company. FSI provides all the necessary facilities, equipment
and personnel to perform the usual and ordinary services of the transfer and
dividend disbursing agent, including administrative receipt and processing of
orders and payments for purchases of 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 the Company's shares and
all other confirmable transactions in shareholders' accounts, recording
reinvestment of dividends and distribution of the Company's shares. Under the
Agreement between the Company and FSI, as in effect on , 1997, FSI is
compensated pursuant to a schedule of services, and is reimbursed for
out-of-pocket expenses. The schedule for each Fund 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 effective , 1997.
Mr. John Pasco, III, who owns 100% of the outstanding stock of the
Distributor, is the President, Treasurer and a Director of the
Distributor. Mr. Pasco is also the Chairman and a Director of the
Company. The address of the Distributor is 1500 Forest Avenue,
Suite 223, Richmond, VA 23229.
HOW TO INVEST
Shares of the Funds may be purchased directly from the Distributor or
through brokers or dealers who are members of the National Association of
Securities Dealers, Inc. who are registered, if required, in the state where the
purchase is made and who have a sales agreement with the Distributor. After a
shareholder account is established, subsequent orders for shares may be mailed
directly to the Transfer Agent. The offering price per share is equal to the net
asset value per share next determined after receipt of a purchase order. A
minimum initial investment of $1,000 is required to open a shareholder account
in each Fund, and each subsequent investment must be $50 or more. Under certain
circumstances the Company or the Advisor may waive the minimum initial
investment for purchases by officers, Directors and employees of the Company and
its affiliated entities and for certain related advisory accounts and retirement
accounts (such as IRAs). The Distributor retains the right to refuse to accept
an order.
16
<PAGE>
When an investor acquires shares of a Fund from a securities broker or
dealer, the investor may be charged a transaction fee for shares purchased
and/or redeemed at net asset value through that broker or dealer.
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 Funds' shareholders. Under the open account
plan your shares are reflected in your open account. This service facilitates
the purchase, redemption or transfer of shares, eliminates the need to issue or
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 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 payable to the
applicable 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 numbers.
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 800-776-5455. 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 Funds' 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 of the Funds may be redeemed at any time and in any amount 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.
The Company'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
17
<PAGE>
will be made promptly, but no later than the seventh day following receipt of
the request in proper order. Please note that (1) the Transfer Agent cannot
accept redemption requests which specify a particular date for redemption, or
which specify any special conditions; and (2) 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
after purchase, you should make your purchase by Federal Funds wire, or by a
certified, treasurer's or cashier's check.
The Company 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 Company's Transfer Agent) with a signature guarantee (see "Signature
Guarantee") 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.
18
<PAGE>
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 Company 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 Company 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 authorizing telephone redemption bears
the risk of loss which may result from unauthorized or fraudulent transactions
which the Company 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 help to protect your account and the Company 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 Company 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 on
either: (a) the written request for redemption; or (b) a separate instrument of
assignment (usually referred to as a "stock power") specifying the total number
of shares being redeemed. The Company 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
19
<PAGE>
domestic stock 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 (e.g., credit unions,
securities dealers and brokers, clearing agencies and national securities
exchanges); and (f) foreign branches of any of the above. In addition, the
Company 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 Company may deduct $10 per year from an account of a Fund if, as a
result of redemption or transfer of shares, the total investment remaining in
the account for the Fund has a value of less than $1,000. Shareholders will
receive 60 days' written notice to increase the account value above $1,000
before the fee begins to be deducted. A decline in the market value of your
account alone would not require you to bring your investment up to the minimum.
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 a 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 an
annual and a semi-annual report.
SPECIAL SHAREHOLDER SERVICES
The Company 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
20
<PAGE>
they wish;
Invest-A-Matic Account - permits automatic monthly investments into a 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 different investment
objectives provided the shares of the Fund the shareholder is exchanging into
are noticed for sale in the shareholder's state of residence. A shareholder's
account may be charged a $10.00 telephone exchange fee. An exchange is treated
as a redemption and a purchase, and may result in the realization of a gain or
loss on the transaction. More information on any of these services is available
upon written request to the Company.
HOW NET ASSET VALUE IS DETERMINED
The net asset value ("NAV") of the shares of each Fund is determined by
its pricing agent 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
Company) in which there is a sufficient degree of trading in the portfolio
securities that the current NAV of the shares might be materially affected by
changes in the value of such portfolio security. Each Fund's NAV is calculated
at such time as set by the Company's Board of Directors based upon the Board's
determination that this is the most appropriate time to price the securities.
NAV per share for each Fund is determined by dividing the total value of
the Fund's assets, less its liabilities, by the total number of shares of that
Fund then outstanding. Generally, securities owned by a Fund are valued at
market value.
Investments in securities traded on a national securities exchange or
included in the NASDAQ National Market System are valued at the last reported
sales price. Other securities traded in the over-the-counter market and listed
securities for which no sale is reported on that date are valued at the last
reported bid price.
Short-term debt securities (less than 60 days to maturity) are valued at
their fair market value using amortized cost pricing procedures set, and
determined to be fair, by the Board of Directors. Other assets for which market
prices are not readily available are valued at their fair value as determined in
good faith under procedures set by the Board of Directors.
21
<PAGE>
ADR's and EDR's will be valued at the closing price of the instrument last
determined prior to the valuation time unless the Company is aware of a material
change in value. Items 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.
The Company'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 for
the Equity Fund and quarterly for the Fixed Income Fund. Each of the Funds
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, a Fund 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 capital gains 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 a 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 distribution is decreased or eliminated, all or a portion
of the dividends declared by a 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 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
22
<PAGE>
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.
Each 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
Each Fund will seek to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company under the Code, a Fund is not liable for federal
income taxes on income or net capital gains that are distributed to its
shareholders or imputed to shareholders 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.
Each 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 could mean, for example, that the Fund may determine to hold an investment
longer than 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 Fund. The Company is a series corporation. Each
Fund is treated as a separate taxable entity under the Code.
Each Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities. These withholding taxes will reduce the
return on the shareholder's investment. If more than 50% of the value of a
Fund's 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 will notify its
shareholders of such election within 60 days of the close of its tax year.
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
23
<PAGE>
retirement accounts, will not benefit from this pass through.
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 COMPANY
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 Equity Fund, 50,000,000 shares to the Fixed Income Fund, and
50,000,000 shares to the Sand Hill Portfolio Manager Fund. The Board of
Directors can allocate the remaining authorized but unissued shares to any
series of the Company or may create additional series and allocate shares to
such series.
A share of a Fund has priority in the assets of that Fund in the event of
a liquidation. The shares of a 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 a Fund will be
redeemable from the assets of that Fund at any time, as described above.
Each outstanding share of a Fund 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 which 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 a
Fund shall vote separately on matters that affect only such Fund's interest. The
Funds' 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 may utilize
procedures described in the Statement of Additional Information to call a
meeting.
Limitation on Use of Name - The Advisory Agreement for each Fund
authorizes the Company to utilize the name "CSI." The Company
24
<PAGE>
agrees that if an Advisory Agreement is terminated it will submit to
shareholders a proposal that the related Fund redesignate its name to eliminate
any reference to the name "CSI" or any derivation thereof unless the Advisor
waives this requirement in writing.
TO OBTAIN MORE INFORMATION
For further information on the Funds, please contact
Commonwealth Shareholder Services, Inc., P.O. Box 8687, Richmond,
VA 23226, telephone: (800) .
Additional information may also be obtained by requesting a copy of the
Statement of Additional Information.
25
<PAGE>
Investment Advisor: CSI Capital Management, Inc.
One Montgomery Street, Suite 2525
San Francisco, CA 94104
Distributor: First Dominion Capital Corp.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Fund Counsel: Stradley Ronon Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
Marketing Services: For general information on the Funds and
marketing services, call the Distributor at
(800) 776-5455 toll free.
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Company'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-
For information on any series of the Company, investment
plans, or other shareholder services, call 1-800- during
normal business hours, or write the Company at 1500
Forest Avenue, Suite 223, Richmond, VA
23229.
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
26
<PAGE>
make such offer or solicitation in such jurisdiction.
27
<PAGE>
PART B
<PAGE>
THE WORLD FUNDS, INC.
CSI EQUITY FUND
CSI FIXED INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION DATED , 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
current Prospectus of the CSI Equity Fund and the CSI Fixed Income Fund, each, a
"Fund", dated , 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. The Prospectus of the Funds may be obtained at no charge upon
request to the Company. Please retain this Statement of Additional Information
for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE 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
PAGE
The World Funds, Inc.
Investment Objective
Investment Policies
CSI Equity Fund
CSI Fixed Income Fund
U.S. Government Securities
Municipal Securities
Corporate Debt Securities
Zero Coupon Securities
International Bonds
Repurchase Agreements
Currency Transactions
Investment Risks
Investment Restrictions
Taxes
Dividends and Distributions
Portfolio Transactions
Net Asset Value
Directors and Officers
Investment Advisor
Transfer Agent
Administrator
Eligible Benefit Plans
Distribution
Fund Expenses
Special Shareholder Services
General Information and History
Performance
Financial Statements
Appendix - Bond Ratings
<PAGE>
THE WORLD FUNDS, INC.
The Funds are series of The World Funds, Inc. (the "Company"), a Maryland
corporation which is an open-end, management investment company, commonly known
as a "mutual fund." Both the CSI Equity Fund (the "Equity Fund") and the CSI
Fixed Income Fund (the "Fixed Income Fund"), each a "Fund" are a no-load series
of the Company, and each Fund is a diversified series.
INVESTMENT OBJECTIVE
The investment objective of the Equity Fund is to achieve growth of
capital by investing in portfolio composed of common stocks and securities
convertible into common stock, such as, warrants, convertible bonds, debentures
or convertible preferred stock.
The investment objective of the Fixed Income Fund is to seek current
income by investing in debt securities.
Each Fund may invest a significant portion of its assets in foreign
securities, as described in the Prospectus and below.
All investments entail some market risk and there is no assurance that a
Fund's investment objective will be realized.
INVESTMENT POLICIES
The investment policies of each Fund are intended to provide the
flexibility to take advantage of opportunities while accepting only what CSI
Capital Management, Inc. (the "Advisor") believes to be reasonable risks.
Changes in portfolio securities are made on the basis of investment
considerations, and it is against the policy of management to make changes for
trading purposes.
CSI EQUITY FUND
Under normal market conditions, the Equity Fund will have at least 65% of
its assets invested in common stocks or securities convertible into common
stocks. The Fund may also acquire fixed income investments where these fixed
income securities are convertible into equity securities. The fixed income
securities in which the Fund may invest will be rated at the time of purchase
Baa or higher by Moody's Investors Service, Inc. ("Moody's"), or BBB or higher
by Standard and Poor's Ratings Group ("S&P"), or if they are foreign securities
which are not subject to standard credit ratings the fixed income securities
will be "investment grade" issues (in the judgement of the Advisor) based on
available information. Securities rated as BBB are regarded as having adequate
capacity to pay interest and repay principal.
<PAGE>
The Fund will select its non-equity investments from money market
investments (such as U.S. Government securities (see the description below)
issued by the U.S. Treasury, agencies or other instrumentalities) and other
evidences of indebtedness. 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 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
the 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.
The Fund may invest a significant portion of its assets overseas, and
therefore may be subject to some of the risks described in the section titled
"Investment Risks" below. The foreign securities which the Fund purchases may be
bought directly in their principal markets or may be acquired through the use of
depository receipts. The Fund may invest in 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 for foreign banks, and 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.
The Fund's investments will be subject to the market fluctuations and
risks which are inherent in all investments. The Advisor will seek to attain the
Fund's stated objective, however, there can be no assurance that the objective
will be achieved.
CSI FIXED INCOME FUND
In order to seek its objective of current income, the Fund will invest in
U.S. Government Securities, municipal securities, corporate debt securities,
zero coupon bonds, and international bonds.
-2-
<PAGE>
U.S. Government securities. 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 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
the 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.
Municipal Securities. Tax-exempt municipal securities are debt obligations
issued by or on behalf of the governments of states, territories or possessions
of the United States, the District of Columbia and their political subdivisions,
agencies and instrumentalities, certain interstate agencies and certain
territories of the United States, the interest on which, in the opinion of bond
counsel or other counsel to the issuer of such securities, is exempt from
federal income tax. The two principal classifications of municipal securities
are "general obligation" and "revenue" securities. "General obligation"
securities are secured by the issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. "Revenue" securities are
usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classification of municipal securities there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, and municipal leases. Variable
rate securities bear rates of interest that are adjusted periodically according
to formula intended to reflect market rates of interest and include securities
whose rates vary inversely with changes in market rates of interest. Municipal
notes include tax, revenue and bond anticipation notes of short maturity,
generally less than three years, which are issued to obtain temporary funds for
various public purposes. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
-3-
<PAGE>
facilities.
Corporate Debt Securities. The Fund may invest in Corporate
debt securities which are rated AA or higher by Moody's Investors
Services, Inc. ("Moody's"), or Standard & Poor's Corporation
("S&P") at the time of purchase, or unrated securities which the
Advisor believes to be of comparable quality.
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
-4-
<PAGE>
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").
International Bonds. 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 a foreign national government, its agencies,
instrumentalities or political subdivisions, debt securities issued or
guaranteed by supranational organizations, corporate debt securities, bank or
holding company debt securities and other debt securities including those
convertible into common stock. The Fund will invest in very high investment
grade instruments that will bear the rating of A or higher by Standard & Poor's
Ratings Group ("S&P") or A or higher by Moody's Investor Service, Inc.
("Moody's") at the time of purchase, or unrated securities which the Advisor
believes to be of comparable quality. However, the Fund reserves the right to
invest its assets in lower rated securities (including unrated securities which
the Advisor believes to be of such lower quality). (See the Appendix for Bond
Ratings).
The Fund does not engage in a significant amount of short-term trading due
to the fact that such practices would result in increased commissions and
transactions costs, but reserves the right to dispose of any security when
deemed appropriate for the Fund.
Repurchase Agreements. The Fixed Income Fund may enter into repurchase
agreements with member banks of the Federal Reserve System, any foreign bank or
with any domestic or foreign broker/dealer which is a reporting government
securities dealer or its equivalent which may be a foreign bank whose
creditworthiness is equal to the standards set for the Fund's direct investment
in debt obligations, if the creditworthiness of the bank or broker/dealer has
been determined by the Advisor to be at least as high as that of other
obligations the Fund may purchase.
A repurchase agreement provides a means for a Fund to earn income on funds
for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a debt security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and
-5-
<PAGE>
price. Securities subject to a repurchase agreement are held in a segregated
account and the value of such securities is kept at least equal to the
repurchase price plus any accrued interest on a daily basis. The repurchase
price may be higher than the purchase price, the difference being income to the
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to the Fund together with the repurchase price on repurchase. In
either case, the income to the Fund is unrelated to the interest rate on the
Obligation itself. Obligations will be physically held by the Fund's custodian
or in the Federal Reserve Book Entry system. 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.
For purposes of the Investment Company Act of 1940, as amended (the "1940
Act"), a repurchase agreement is deemed to be a loan from a fund to the seller
of the Obligation subject to the repurchase agreement and is therefore subject
to the fund's investment restrictions applicable to loans. It is not clear
whether a court would consider the Obligation purchased by a fund subject to a
repurchase agreement as being owned by the fund or as being collateral for a
loan by the fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, a fund may encounter
delay and incur costs before being able to sell the security. Delays may involve
loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and a fund has not perfected a security
interest in the Obligation, the fund may be required to return the Obligation to
the seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, a fund would be at risk of losing some or all of the
principal and income involved in the transaction.
As with any unsecured debt instrument purchased for the Fund, the
Advisor seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the security. However,
if the market value of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Fund will
direct the seller of the Obligation to deliver additional securities so that the
market value of all securities subject to the repurchase agreement will equal or
exceed the repurchase price. It is possible that the Fund will be unsuccessful
in seeking to enforce the seller's contractual obligation to deliver additional
securities. A repurchase agreement with foreign banks may be available with
-6-
<PAGE>
respect to government securities of the particular foreign
jurisdiction, and such repurchase agreements involve risks
similar to repurchase agreements with U.S. entities.
If the Fixed Income Fund enters into repurchase agreements, it will do so
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 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.
The Fund's investments will be subject to the market fluctuations and
risks which are inherent in all investments. The Advisor will seek to attain the
Fund's stated objective, however, there can be no assurance that the objective
will be achieved.
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. 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
-7-
<PAGE>
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. 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.
INVESTMENT RISKS
Investors should recognize that the Funds may invest in both domestic and
foreign securities and that 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 in 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
-8-
<PAGE>
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 the 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 a Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. Furthermore, 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 domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The Advisor seeks to mitigate the risks associated with the foregoing
considerations through continuous professional management.
Investments in foreign securities usually will involve currencies of
foreign countries. Because of the considerations discussed above, the value of
the assets of a 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 a 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 Funds will conduct their 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 the forward or
futures contracts (or option
-9-
<PAGE>
thereon) to purchase or sell foreign currencies.
Foreign securities 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 Funds (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.
Securities rated BB by S&P or Ba by Moody's and below are commonly known
as "high-yield," "high-risk" or "junk bonds" and involve a high degree of
speculation with respect to the payment of principal and interest.
INVESTMENT RESTRICTIONS
The policies set forth below that are fundamental policies of the Funds
and, along with the investment objective of each Fund, may not be changed
without approval of a majority of the outstanding voting securities of such
Fund. As used in this Statement of Additional Information a "majority of the
outstanding voting securities of a 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, each of the Funds will not:
1. Invest in companies for the purpose of exercising control;
2. Invest in securities of other investment companies except by
purchase in the open market involving only customary
broker's commissions, or as part of a merger, consolidation,
or acquisition of assets;
3. Purchase or sell commodities or commodity contracts.
4. Invest in interests in oil, gas, or other mineral
explorations or development programs;
5. Purchase securities on margin, except that it may utilize
such short-term credits as may be necessary for clearance of
purchases or sales of securities;
6. Issue senior securities; (except that the Fund may engage in transactions
such as those permitted by SEC release IC- 10666.)
-10-
<PAGE>
7. Act as an underwriter of securities of other issuers, except that each
Fund may invest up to 10% of the value of its total assets (at time of
investment) in portfolio securities which the Fund might not be free to
sell to the public without registration of such securities under the
Securities Act of 1933, as amended, or any foreign law restricting
distribution of securities in a country of a foreign issuer;
8. Concentrate its investments in any industry;
9. Participate on a joint or a joint and several basis in any
securities trading account;
10. Engage in short sales;
11. Purchase or sell real estate, provided that liquid
securities of companies which deal in real estate or
interests therein will not be deemed to be investment in
real estate;
12. Purchase any security if, as a result of such purchase, less than 75% of
the assets of the Fund would consist of cash and cash items, U.S.
Government securities, securities of other investment companies, and
securities of issuers in which the Fund has not invested more than 5% of
its assets.
13. Purchase stock or securities of an issuer (other than the obligations 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 voting securities of such issuer;
14. Except as specified below, the Funds may only borrow money
for temporary or emergency purposes and then only in an
amount not in excess of 5% of the lower of value or cost of
its total assets, in which case the Fund may pledge,
mortgage or hypothecate any of its assets as security for
such borrowing but not to an extent greater than 5% of its
total assets. A Fund may borrow money to avoid the untimely
disposition of assets to meet redemptions, in an amount up
to 33 1/3% of the value of its assets, provided that the
Fund maintains asset coverage of 300% in connection with
borrowings, and the Fund may not make other investments
while such borrowings are outstanding;
15. Except for the Fixed Income Fund, make loans, except that it may enter
into repurchase agreements secured by the U.S.
Government or Agency securities.
The Directors of the Company have voluntarily adopted certain
non-fundamental policies and restrictions which are observed in the conduct of
the Funds' affairs. These represent
-11-
<PAGE>
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.
As a matter of non-fundamental policy, neither the Equity Fund or the
Fixed Income Fund may:
1. Invest more than 15% of its net assets in illiquid
securities;
2. Engage in arbitrage transactions;
3. Purchase or sell options;
If a percentage restriction on investment or utilization of assets as set
forth under "Investment Restrictions" and "Investment Policies" sections above
is adhered to at the time an 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.
TAXES
Each Fund will seek to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
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. Subchapter M
requires that a Funds realize less than 30% of its annual gross income from the
sale or other disposition of stock, securities and certain options, futures and
forward contracts held for less than three months. The Equity Fund intends to
distribute at least annually all of its investment company taxable income and
the Fixed Income Fund intends to distribute its investment company taxable
income at least quarterly and each Fund will distribute annually its 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 each Fund's total
assets must be represented by cash and cash items including receivables (for
these purposes, currency and demand deposits denominated in a currency other
than the U.S.
-12-
<PAGE>
dollar will not be considered cash, a cash item or a receivable), 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).
Each 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.
Each 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) 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.)
Each 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 investment company taxable income for
the calendar year, at least 98% of the excess of its capital gains over 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
a Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Funds for reinvestment, requiring
federal income taxes to be paid thereon by the Funds, the Funds intend to elect
to treat such capital gains as having been distributed to shareholders. As a
result,
-13-
<PAGE>
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 Funds 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. Any loss realized upon the redemption of
shares held at the time of redemption for six months or less from the date of
their purchase will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain during such six-month
period.
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;
-14-
<PAGE>
$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 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.
Distributions by each Fund result in a reduction in the net asset value of
such Fund's 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,
from an investment standpoint, 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 capital upon the
distribution, which will nevertheless be taxable to them.
Each 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 Funds to foreign countries (which
taxes relate primarily to investment income). The Funds 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 Funds invest in stock of certain foreign investment
companies, the Funds 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
-15-
<PAGE>
distribution or gain so allocated to any taxable year of the Funds, other than
the taxable year of the excess distribution or disposition, would be taxed to
the Funds 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 Funds to the extent
distributed by the Funds as a dividend to its shareholders.
Each 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
Funds 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 Funds 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 Funds may
make an election with respect to those foreign investment companies which
provide the Funds with the required information.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a 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 futures and 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 face value ("original issue discount") is considered to be
income to the Fixed Income 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
-16-
<PAGE>
in order to maintain the Fund's qualification as a regulated investment company
and to avoid federal income tax.
Each 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 each Fund may be subject to state and local taxes on
distributions received from a Fund and on redemptions of a 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.
Non-U.S. Shareholders. 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,
-17-
<PAGE>
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 a 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 received.
DIVIDENDS AND DISTRIBUTIONS
As stated previously, it is the policy of the Equity Fund to distribute
substantially all of its net investment income annually and the policy of the
Fixed Income Fund to distribute substantially all of its net investment income
quarterly and each Fund will distribute its 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 Advisor, in placing orders for the purchase and
sale of each Fund's securities, to seek to obtain the best price and execution
for its 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 Advisor, the Advisor then arranges for execution of the
-18-
<PAGE>
transaction in a manner deemed to provide the best price and
execution for the Fund.
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 a Fund may obtain better prices or executions on a commission basis or by
dealing with other than a primary market maker.
The Fund may authorize the Advisor, when placing Fund transactions, to
allocate a portion of the Fund's brokerage to persons or firms providing the
Advisor with investment recommendations, statistical, research or similar
services useful to the Advisor's investment decision making process. 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. It also may authorize the Advisor to cause the Fund to pay a
commission higher than that charged by another broker in consideration of such
research services. Such services are one of the many ways the Advisor can keep
abreast of the information generally circulated among institutional investors by
broker-dealers. While this information is useful in varying degrees, its value
is indeterminable. Such services received on the basis of transactions for a
Fund may be used by the 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 formula, agreement or undertaking to do so, and when it
can be done consistent with the policy of obtaining best price and execution, a
Fund may consider sales of its shares as a factor in the selection of brokers to
execute portfolio transactions. The Advisor is not authorized, when placing
portfolio transactions for a Fund, to pay a brokerage commission in excess of
that which another broker might have charged for executing the same transaction
solely on account of 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 clients managed by the Advisor are
simultaneously engaged in the purchase or sale of the same
-19-
<PAGE>
security, the transactions are allocated in a manner deemed equitable to each
client. 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 a Fund is
concerned. In other cases, however, it is believed that the ability of such 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 Advisor's
organization, outweigh the disadvantages that may be said to exist from this
treatment of transactions.
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 a Fund's portfolio whenever
necessary, in the Advisor's opinion, to meet the Fund's objective. The Advisor
anticipates that the average annual portfolio turnover rate of each of the Funds
will be less than 50%.
NET ASSET VALUE
Each 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. Each 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 each 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.
NAV per share is determined by dividing the total value of a Fund's
securities and other assets, less liabilities (including proper accruals of
taxes and other expenses), by the total number
-20-
<PAGE>
of shares then outstanding, and rounding the result to the nearer
cent.
Each Fund may compute its NAV per share more frequently if necessary to
protect shareholders' interests.
Generally, securities owned by each Fund are valued at market value. In
valuing a 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 Company as the primary
market.
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 last reported bid
price for such securities in the over-the-counter market. Other unlisted
securities (and listed securities subject to restriction on sale) will be valued
at their fair value as determined in good faith by the Board of Directors. Open
futures contracts are valued at the most recent settlement price, unless such
price does not reflect the fair value of the contract, in which case such
positions will be valued by or under the direction of 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
-21-
<PAGE>
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;
debt securities are valued by appraising them at prices supplied by a pricing
agent approved by the Company, 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, futures
contracts and options on futures 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 NAV; 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 Company's pricing service,
or lacking a report by the service, at the value of the underlying currencies at
the prevailing currency rates.
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.
The value of a security which is subject to legal or contractual delays in
or restrictions on resale by a Fund shall be taken to be the fair value thereof
as determined in accordance with procedures established by the Company'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 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 a
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
-22-
<PAGE>
determination of the NAV of a 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.) 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 a Fund's NAV is not calculated. Each Fund
calculates NAV 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 may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculations. If events materially affecting the value of a
portfolio security occur between the time when its price is determined and the
time when a Fund's NAV is calculated, such a security will be valued at fair
value as determined in good faith by the Board of Directors.
Any purchase order may be rejected by the Distributor or by the Company.
DIRECTORS AND OFFICERS
The following is a list of the Company's Directors and Officers, their
birth date 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 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. Chairman,
Director, and Treasurer of Vontobel Funds, Inc., a
registered investment company. Mr. Pasco is also a
certified public accountant.
Samuel Boyd, Jr. (9/18/40)
Director
-23-
<PAGE>
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. Director of Vontobel Funds, Inc., a
registered investment 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. Director of
Vontobel Funds, Inc., a registered investment company. 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. Director of Vontobel Funds,
Inc., a registered investment company.
*Jane H. Williams (6/28/48)
Vice President of the Company and President of the Sand Hill
Portfolio Manager Fund series
3000 Sand Hill Road, Suite 150, Menlo Park, CA 94025
Ms. Williams is the Executive Vice President of Sand Hill
Advisors, Inc. since 1982.
*Leland H. Faust (8/30/46)
Vice President of the Company and President of the CSI
Equity Fund and the CSI Fixed Income Fund
One Montgomery Street, Suite 2525, San Francisco, CA 94104
President of CSI Capital Management, Inc. since 1978. Mr.
Faust is also a Partner in the law firm Taylor & Faust.
*F. Byron Parker, Jr. (1/26/43)
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since
1986. Secretary of Vontobel Funds, Inc., a registered
investment company. Partner in the law firm Mustian &
Parker.
* Persons deemed to be "interested" persons of the Company, CSI
Capital Management, Inc. or First Dominion Capital Corp. under
-24-
<PAGE>
the 1940 Act.
INVESTMENT ADVISOR
CSI Capital Management, Inc. (the "Advisor") manages the
investment of the assets of the Funds pursuant to Investment
Advisory Agreements (each, an "Advisory Agreement"). The
Advisory Agreements are effective for a period of two years from
, 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 Company, provided the continuance is also approved by a
majority of the Directors who are not "interested persons" of the Company or the
Advisor by vote cast in person at a meeting called for the purpose of voting on
such approval. Each Advisory Agreement is terminable without penalty on sixty
days notice by the Company's Board of Directors or by the Advisor. Each Advisory
Agreement provides that it will terminate automatically in the event of its
assignment. The address of the Advisor is One Montgomery Street,. Suite 2525,
San Francisco, CA 94104.
The Advisor is compensated at the annual rate of 1% of the average daily
net assets of each Fund as described in the Prospectus of the Funds.
The Advisory Agreements contemplate the authority of the Advisor to place
orders pursuant to its investment determinations for each Fund either directly
with the issuer or with any broker or dealer. In placing orders with brokers or
dealers, the Advisor will attempt to obtain the best price and execution of its
orders. The Advisor may purchase and sell securities to and from brokers and
dealers who provide a Fund with research advice and other services, or who sell
shares of the Fund. See "Portfolio Transactions" above.
TRANSFER AGENT
Fund Services, Inc. (the "Transfer Agent" or "FSI") is the
Company's transfer and disbursing agent, pursuant to a Transfer
Agent Agreement, dated , 1997. Pursuant to
the Transfer Agent Agreement the minimum annual fee for each Fund
is $16,500.
John Pasco, III, President of the Company and an officer and shareholder
of Commonwealth Shareholder Services, Inc (the Administrator of the Funds) 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.
-25-
<PAGE>
ADMINISTRATOR
Commonwealth Shareholder Services, Inc. is the Company's administrator
pursuant to Administrative Services Agreements (the "Service Agreements"). The
Service Agreements are described in the Funds' Prospectus. Each of the Service
Agreements continues in effect from year to year for a term 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 Administrator, approve the extension at
least annually.
ELIGIBLE BENEFIT PLANS
An eligible benefit plan is an arrangement available to the employees of
an employer (or two or more affiliated employers) having not less than 10
employees at the plan's inception, or such an employer on behalf of employees of
a trust or plan for such employees, their spouses and their children under the
age of 21 or a trust or plan for such employees, which provides for purchases
through periodic payroll deductions or otherwise. There must be at least 5
initial participants with accounts investing or invested in shares of one or
more of the Funds and/or certain other funds.
The initial purchase by the eligible benefit plan and prior purchases by
or for the benefit of the initial participants of the plan must aggregate not
less than $5,000 and subsequent purchases must be at least $50 per account and
must aggregate at least $250. Purchases by the eligible benefit plan must be
made pursuant to a single order paid for by a single check or federal funds wire
and may not be made more often than monthly. A separate account will be
established for each employee, spouse or child for which purchases are made. The
requirements for initiating or continuing purchases pursuant to an eligible
benefit plan may be modified and the offering to such plans may be terminated at
any time without prior notice.
DISTRIBUTION
Shares of the Funds are sold at NAV 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 Distributor, and is
its President, Treasurer and a Director.
-26-
<PAGE>
FUND EXPENSES
Each Fund will pay its expenses not assumed by the 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 to each 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 each Fund's Advisory Agreement, the 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 Funds' expense ratios can be expected
to be higher than investment companies investing in domestic securities since
the cost of maintaining the custody of foreign securities and the rates of
advisory fees paid by the Funds are higher.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the Prospectus, each 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: A shareholder may redeem shares or
-27-
<PAGE>
transfer into another fund if this service is requested at the time the
shareholder completes the initial Account Application. If it is not elected at
that time, it may be elected at a later date by making a request in writing to
the Transfer Agent and having the signature on the request guaranteed.
Each Fund employs reasonable procedures designed to confirm the
authenticity of 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 authorizing telephone redemption bears
the risk of loss which may result from unauthorized or fraudulent transactions
which the Fund believes to be genuine. When requesting a telephone redemption or
transfer, the shareholder will be asked to respond to certain questions designed
to confirm the shareholder's identity as a shareholder of record. Cooperation
with these procedures helps to protect the 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 a checking
account for investment into the Fund. This does not require a commitment for a
fixed period of time. A shareholder may change the monthly investment, skip a
month or discontinue the 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 a shareholder has received a lump sum distribution from another
qualified retirement plan, all or part of that distribution may be rolled over
into your Fund IRA. A rollover contribution is not subject to the limits on
annual IRA
-28-
<PAGE>
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.
Each plan's custodian charges nominal fees in connection with plan establishment
and maintenance. These fees are detailed in the plan documents. A shareholder
may wish to consult with an attorney or other tax advisor for specific advice
concerning tax status and plans.
Exchange Privilege: Shareholders may exchange their shares for shares of
any other series of the Company, provided the shares of the fund the shareholder
is exchanging into are noticed for sale in the shareholder's state of residence.
Each account must meet the minimum investment requirements (currently $1,000).
Exchange Privilege Authorization Forms are available by calling the Company. A
special authorization form must have been completed and must be on file with the
Transfer Agent. To make an exchange, an exchange order must comply with the
requirements for a redemption or repurchase order and must specify the value or
the number of shares to be exchanged. An exchange will take effect as of the
next determination of the Fund's NAV per share (usually at the close of business
on the same day). The Transfer Agent will charge the shareholder's account a
$10.00 service fee each time there is an exchange. The Company reserves the
right to limit the number of exchanges or to otherwise prohibit or restrict
shareholders from making exchanges at any time, without notice, should the
Company determine that it would be in the best interest of its shareholders to
do so. For tax purposes an exchange constitutes the sale of the shares of the
Fund from which you are exchanging and the purchase of shares of the Fund into
which you are exchanging. Consequently, the sale may involve either a capital
gain or loss to the shareholder for federal income tax purposes. The exchange
privilege is available only in states where it is legally permissible to do so.
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 Equity Fund, 50,000,000 shares to the Fixed Income Fund, and
50,000,000 shares to the Sand Hill Portfolio Manager Fund. The Board of
Directors can allocate the remaining authorized but unissued shares to any
series of the Company, 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
-29-
<PAGE>
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 NAV 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.
The investment advisory fees payable to the Advisor by each Fund will be
based upon the separate assets of each Fund. The shareholders of each of the
Funds have the right to vote with respect to the investment advisor of such
Fund, respectively.
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.
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 communication in such
matter. 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.
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 Company and the Advisor governing personal securities
activities and investments of those persons and has instituted procedures to its
Code of
-30-
<PAGE>
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, a 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.
Generally, 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 a Fund be accompanied by certain standardized performance
information computed as required by the Commission. Current yield and total
return quotations used by a 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:
Yield = 2 [(a-b + 1) 6-1]
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
-31-
<PAGE>
the period.
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 a 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 a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare the Fund's
NAV or performance relative to a
-32-
<PAGE>
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 NAV 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.
Sales literature referring to the use of a Fund as a potential investment
for IRAs, Business Retirement Plans, and other tax-advantaged retirement plans
may quote a total return based upon compounding of dividends on which it is
presumed no federal income tax applies.
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 a 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
-33-
<PAGE>
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. - analyzes price, yield, risk, and total return
for equity funds.
(h) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Barron's, Financial Times, Investor's Business Daily, New York
Times, The Wall Street Journal, and Money magazines - publications that 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, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for option trading.
(k) Morgan Stanley Capital International EAFE Index - an arithmetic, market
value-weighted average of the performance of over 1,000 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
(l) J.P. Morgan Traded Global Bond Index - is an unmanaged index of government
bond issues and includes Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, The Netherlands, Spain, Sweden, United Kingdom and United States
gross of withholding tax.
(m) IFC Global Total Return Composite Index - An unmanaged index of common
stocks that includes 18 developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa
-34-
<PAGE>
(net of dividends reinvested).
(n) Nomura Research, Inc. Eastern Europe an Equity Index comprised of those
equities which are traded on listed markets in Poland, the Czech Republic,
Hungary and Slovakia (returns do not include dividends).
In assessing such comparisons of yield, 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 a 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 its
performance as compared to such other averages.
FINANCIAL STATEMENTS
The books of each Fund will be audited at least once each year by Tait,
Weller and Baker, of Philadelphia, PA, independent public accountants.
-35-
<PAGE>
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
-36-
<PAGE>
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 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,
lending 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.
-37-
<PAGE>
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 indicate 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 categories 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 which indicates BB the
lowest degree of speculation and CC 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.
-38-
<PAGE>
Investment Advisor: CSI Capital Management, Inc.
One Montgomery Street
Suite 2525
San Francisco, CA 94104
Distributor: First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Fund Counsel: Stradley Ronon Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
Marketing Services: For general information on the Funds and
marketing services, call the Distributor at
(800) toll free.
Transfer Agent: For account information, wire purchase
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- .
--------------------
For information on any series of the
Company, investment plans, or other
shareholder services, call the Company
at during normal
---------------
business hours, or write the Company at
1500 Forest Avenue, Suite 223, Richmond,
VA 23229
-39-
<PAGE>
215683.3
-40-
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
(1) Financial Highlights for Registrant's Sand
Hill Portfolio Manager Fund is Incorporated
by Reference to the Registrant's original
Registration Statement as filed on EDGAR on June 16,
1997.
(2) For Registrant's Sand Hill Portfolio Manager Fund series
- Incorporated by Reference to the Registrant's original
Registration Statement as filed on EDGAR on June 16,
1997.
* Report of Independent Auditors dated
January 17, 1997
* Schedule of Portfolio Investments as of
December 31, 1996 (audited)
* Statement of Assets and Liabilities at
December 31, 1996 (audited)
* Statement of Operations for the years
ended December 31, 1995 and 1996
(audited)
* Financial Highlights (audited)
* Notes to Financial Statements dated
December 31, 1996 (audited)
For Registrant's CSI Fixed Income Fund and CSI Equity
Fund - not applicable.
(b) Exhibits.
(1) (a) Articles of Incorporation of Registrant,
Incorporated by Reference from the Registration
Statement, filed with the SEC on June 16, 1997.
(b) Articles Supplementary of the Registrant (creating
the CSI Equity Fund series and the CSI Fixed
Income Fund series) is filed herewith as Exhibit
A.
(2) By-Laws of Registrant, Incorporated by Reference from
the Registration Statement, filed with the SEC on June
16, 1997.
<PAGE>
(3) Not Applicable.
(4) (a) Specimen of certificate of common stock for
the Sand Hill Portfolio Manager Fund is
Incorporated by Reference from the Registration
Statement filed June 16,
1997.
(b) Specimen of certificate of common stock for the
CSI Equity Fund series is filed herewith as
Exhibit B.
(c) Specimen of certificate of common stock for the
CSI Fixed Income Fund series is filed herewith as
Exhibit C.
(5) (a) The proposed form of Investment Advisory
Agreement between Sand Hill Advisors,
Inc. and the Registrant on behalf of the
Sand Hill Portfolio Manager Fund is
Incorporated by Reference from the
Registrant Statement filed June 16,
1997.
(b) The proposed form of Investment Advisory
Agreement between CSI Capital
Management, Inc. and the Registrant on
behalf of the CSI Equity Fund is filed
herewith as Exhibit D.
(c) The proposed form of Investment Advisory
Agreement between CSI Capital
Management, Inc. and the Registrant on
behalf of the CSI Fixed Income Fund is
filed herewith as Exhibit E.
(6) The proposed form of Distribution Agreement
between First Dominion Capital Corp. and the
Registrant is Incorporated by Reference from
the Registration Statement filed June 16,
1997.
(7) Not Applicable.
(8) (a) The proposed from of Custody Agreement between
Star Bank, N.A. and the Registrant on behalf of
the Sand Hill Portfolio Manager Fund is
Incorporated by Reference from the Registration
Statement filed June 16, 1997.
<PAGE>
(b) Proposed form of Custodian Agreement between Star
Bank, N.A. and the Registrant on behalf of the CSI
Equity Fund and the CSI Fixed Income Fund is filed
herewith as Exhibit F.
(9) (a) The proposed form of Transfer Agency
Agreement between Fund Services, Inc.
and the Registrant is Incorporated by
Reference from the Registration
Statement filed June 16, 1997.
(b) The proposed form of Administrative Services
Agreement between Commonwealth Shareholder
Services, Inc. and the Registrant on behalf of the
Sand Hill Portfolio Manager Fund is Incorporated
by Reference from the Registration Statement filed
on June 16, 1997.
(c) Proposed form of Administrative Services
Agreement between Commonwealth
Shareholder Services, Inc. and the
Registrant on behalf of the CSI Equity
Fund is filed herewith as Exhibit G.
(d) Proposed form of Administrative Services
Agreement between Commonwealth
Shareholder Services, Inc. and the
Registrant on behalf of the CSI Fixed Income Fund
is filed herewith as Exhibit H.
(e) Proposed form of Fund Accounting
Agreement between Star Bank, N.A. and
the Registrant on behalf of the Sand
Hill Portfolio Manager Fund is
Incorporated by Reference from the
Registration Statement filed June 16,
1997.
(f) Proposed form of Fund Accounting
Servicing Agreement between Star Bank,
N.A. and the Registrant on behalf of the
CSI Equity Fund series and the CSI Fixed
Income Fund series is filed herewith as
Exhibit I.
(g) The proposed form of Fund Expense
Agreement between Commonwealth
Shareholder Services, Inc. and the
Registrant is Incorporated by Reference from the
Registration Statement filed on June 16, 1997.
<PAGE>
(10) Opinion of Counsel (to be filed with
Registrant's Rule 24f-2 Notice).
(11) Not Applicable.
(12) Not applicable.
(13) Not applicable.
(14) IRA Service Agreement between Star Bank, N.A.
and the Registrant is Incorporated by
Reference from the Registration Statement
filed June 16, 1997.
(15) Not Applicable.
(16) Not Applicable.
(17) Not Applicable.
(18) Not applicable.
(19) Powers-of-Attorney for Samuel Boyd, Jr.,
William E. Poist, and Paul M. Dickinson and
Secretary's Certificate, Incorporated by
Reference from the Registration Statement
filed with the SEC on June 16, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES: As of August 1, 1997:
Number of
Title of Class Record Holders
Sand Hill Portfolio Manager Fund 0
CSI Fixed Income Fund 0
CSI Equity Fund 0
ITEM 27. INDEMNIFICATION.
The Registrant is incorporated under the General Corporation Law
(the "GCL") of the State of Maryland. The Registrant's Articles of Incorporation
provide for indemnification of directors, officers and other agents of the
corporation to the fullest extent permitted under the GCL. The Articles limit
such indemnification so as to comply with the prohibition against indemnifying
such persons under Section 17 of the 1940 Act for certain conduct set forth in
that section ("Disabling Conduct"). Contracts between the Fund and various
service providers include provisions for indemnification, but
<PAGE>
also forbid the Registrant to indemnify affiliates for Disabling
Conduct.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
Sand Hill Advisors, Inc, the investment advisor to the Sand Hill
Portfolio Manager Fund series, provides investment advisory services
consisting of portfolio management for a variety of individuals and
institutions and as of December 31, 1996, had approximately $235
million in assets under management.
For information as to any other business, profession, vocation or
employment of a substantial nature in which each director, officer
or partner of Sand Hill Advisors, Inc. is or has been, at any time
during the past two fiscal years, engaged for his own account or in
the capacity of director, officer, employee, partner or trustee,
reference is made to the Advisor's Form ADV (File #801-17601),
currently on file with the Commission as required by the Investment
Advisors Act of 1940, as amended.
CSI Capital Management, Inc., the investment advisor to the CSI
Equity Fund series and the CSI Fixed Income Fund series, provides
investment advisory services consisting of portfolio management for
a variety of individuals and institutions and as of June 30, 1997,
had approximately $110 million in assets under management, and acts
as trustee supervising an additional $30 million in assets.
For information as to any other business, profession, vocation or
employment of a substantial nature in which each director, officer
or partner of CSI Capital Management, Inc. is or has been, at any
time during the past two fiscal years, engaged for his own account
or in the capacity of director, officer, employee, partner or
trustee, reference is made to the Advisor's Form ADV (File #
801-14549), currently on file with the Commission as required by the
Investment Advisors Act of 1940, as amended.
ITEM 29. PRINCIPAL UNDERWRITER.
(a) Vontobel Funds, Inc.
(b)
Positions and Positions and
Name and Principal Offices With Offices with
Business Address Underwriter Registrant
John Pasco, III President, Chief Chairman,
<PAGE>
1500 Forest Avenue Financial Officer, President, &
Suite 223 Treasurer, Director Teasurer
Richmond, VA 23229
Mary T. Pasco Director Assistant
1500 Forest Avenue Secretary
Suite 223
Richmond, VA 23229
Lori J. Martin Vice President None
1500 Forest Ave. & Assistant Sec.
Suite 223
Richmond, VA 23229
F. Byron Parker, Jr. Secretary Secretary
Mustian & Parker
Two Paragon Place
Suite 100
6802 Paragon Place
Richmond, VA 23230
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books or other documents of the Registrant required to
be maintained by ss.31(a) of the Investment Company Act of 1940, as
amended, and the rules promulgated thereunder are kept in several
locations:
(a) Shareholder account records (including share ledgers,
duplicate confirmations, duplicate account statements, and
applications forms) of each series of the Registrant are
maintained by its transfer agent, Fund Services, Inc., at 1500
Forest Avenue, Suite 111, Richmond, VA 23229.
(b) With respect to the Sand Hill Portfolio Manager
Fund series: Investment records including
research information, records relating to the
placement of brokerage transactions, memorandums
regarding investment recommendations for
supporting and/or authorizing the purchase or sale
of assets, information relating to the placement
of securities transactions, and certain records
concerning investment recommendations are
maintained at the series' investment advisor, Sand
Hill Advisors, Inc., at 3000 Sand Hill Road,
Building 3, Suite 150, Menlo Park, CA 94025.
(c) With respect to the CSI Equity Fund series and the
CSI Fixed Income Fund series: Investment records
including research information, records relating
<PAGE>
to the placement of brokerage transactions, memorandums
regarding investment recommendations for supporting and/or
authorizing the purchase or sale of assets, information
relating to the placement of securities transactions, and
certain records concerning investment recommendations are
maintained at the series' investment advisor, CSI Capital
Management, 1 Montgomery Street, Suite 2525, San Francisco, CA
94104.
(d) Accounts and records for portfolio securities and other
investment assets of each series, including cash, are
maintained in the custody of the Registrant's custodian bank,
Star Bank N.A., 425 Walnut Street, P.O. Box 1118, Cincinnati,
Ohio 45201-1118.
(d) Accounting records, including general ledgers,
supporting ledgers, pricing computations, etc. of
each series are maintained by the Registrant's
accounting services agent, Star Bank N.A., 425
Walnut Street, P.O. Box 1118, Cincinnati, Ohio
45201-1118
(e) Administrative records, including copies of the
charter, by-laws, minute books, agreements,
compliance records and reports, certain
shareholder communications, etc., are kept at the
Registrant's principal office, at 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, by the
Registrant's Administrator, Commonwealth
Shareholder Services, Inc., whose address is the
same as Registrant's.
(f) Records relating to distribution of shares of the Registrant
are maintained by the Registrant's distributor, First Dominion
Capital Corp. at 1500 Forest Avenue, Suite 223, Richmond, VA
23229.
ITEM 31. MANAGEMENT SERVICES. There are no management-related
service contracts not discussed in Parts A or B of this
Form.
ITEM 32. UNDERTAKINGS.
(b) Registrant hereby undertakes to file a Post-Effective
Amendment, using financial statements which need not be
certified, within four to six months from the effective date
of the Registrant's 1933 Act Registration Statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Richmond, and the Commonwealth of Virginia on the 1st
day of August, 1997.
THE WORLD FUNDS, INC.
Registrant
By /s/ John Pasco, III
John Pasco, III, Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated below.
(Signature) (Title) (Date)
/s/ John Pasco, III Director, Chairman August 1, 1997
John Pasco, III & Treasurer
/s/ Samuel Boyd, Jr.* Director August 1, 1997
Samuel Boyd, Jr.
/s/ Paul M. Dickinson* Director August 1, 1997
Paul M. Dickinson
/s/ William E. Poist* Director August 1, 1997
William E. Poist
/s/John Pasco, III
John Pasco, III
Attorney-in-Fact*
* Pursuant to Powers of Attorney on File
<PAGE>
EXHIBIT INDEX
Exhibit A Articles Supplementary
Exhibit B Specimen Stock Certificate for the CSI Equity Fund
Exhibit C Specimen Stock Certificate for the CSI Fixed
Income Fund
Exhibit D Form of Investment Advisory Agreement for the CSI
Equity Fund
Exhibit E Form of Investment Advisory Agreement for the CSI
Fixed Income Fund
Exhibit F Form of Custody Agreement on behalf of the CSI
Equity Fund and the CSI Fixed Income Fund
Exhibit G Form of Administrative Services Agreement on
behalf of the CSI Equity Fund
Exhibit H Form of Administrative Services Agreement on
behalf of the CSI Fixed Income Fund
Exhibit I Form of Fund Accounting Agreement on behalf of the
CSI Equity Fund and the CSI Fixed Income Fund
<PAGE>
EXHIBIT A
THE WORLD FUNDS, INC.
Articles Supplementary
The World Funds, Inc., a Maryland corporation having an office in
Baltimore, Maryland (the "Corporation") and an open-end investment company
registered under the Investment Company Act of 1940, as amended, hereby
certifies, in accordance with Section 2- 208 of the Maryland General Corporation
Law, to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation, at a meeting held on
June 10, 1997, adopted resolutions classifying and allocating unallocated and
unissued Common Stock of the Corporation as follows: (i) Fifty Million
(50,000,000) shares of Common Stock with a par value of One Cent ($.01) per
share to the CSI Fixed Income Fund series of the Corporation; and (ii) Fifty
Million (50,000,000) shares of Common Stock with a par value of One Cent ($.01)
per share to the CSI Equity Fund series of the Corporation.
SECOND: (a) The total number of shares of stock which the Corporation was
authorized to issue prior to the aforesaid action was Two Hundred Fifty Million
(250,000,000) shares of Common Stock, with a par value of One Cent ($.01) per
share, having an aggregate value of Two Million Five Hundred Thousand Dollars
($2,500,000):
One series of shares was designated as the Sand Hill Portfolio Manager
Fund series and Fifty Million (50,000,000) shares of Common Stock (par value
$.01 per share) were classified and allocated to such series, with an aggregate
par value of Five Hundred Thousand Dollars ($500,000); and
(b) The total number of shares of stock which the Corporation is
authorized to issue, following the aforesaid actions, is Two Hundred Fifty
Million (250,000,000) shares of Common Stock, with a par value of One Cent
($.01) per share, having an aggregate par value of Two Million Five Hundred
Thousand Dollars ($2,500,000):
One series of shares is designated as the Sand Hill Portfolio Management
Fund series and Fifty Million (50,000,000) shares of Common Stock (par value
$.01 per share) are classified and allocated to such series, with an aggregate
par value of Five Hundred Thousand Dollars ($500,000).
One series of shares is designated as the CSI Fixed Income Fund series and
Fifty Million (50,000,000) shares of Common Stock (par value $.01 per share) are
classified and allocated to such
<PAGE>
series, with an aggregate par value of Five Hundred Thousand
Dollars ($500,000);
One series of shares is designated as the CSI Equity Fund series and Fifty
Million (50,000,000) shares of Common Stock (par value $.01 per share) are
classified and allocated to such series, with an aggregate par value of Five
Hundred Thousand Dollars ($500,000);
THIRD: The shares of the CSI Fixed Income Fund series and the shares of
the CSI Equity Fund series shall have such preferences; conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, terms and conditions of redemption and other characteristics as
are stated in Article FIFTH of the Articles of Incorporation of the Corporation.
FOURTH: The aforesaid shares of Sand Hill Portfolio Manager Fund series
have been duly classified and allocated by the Board of Directors pursuant to
the authority and power contained in the charter of the Corporation.
IN WITNESS WHEREOF, The World Funds, Inc., has caused these Articles
Supplementary to be signed in its name and on its behalf this 29th day of July,
1997.
The World Funds, Inc.
By ______________________________
John Pasco, III
Chairman and Chief Executive Officer
WITNESS:
- -----------------
Name:
Title:
<PAGE>
THE UNDERSIGNED, Chairman and Chief Executive Officer of The World Funds,
Inc., who executed on behalf of said Corporation the foregoing Articles
Supplementary of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said Corporation, the foregoing Articles to be the
corporate act of said Corporation and further certifies, that, to the best of
his knowledge, information and belief, the matters and facts set forth herein
with respect to the approval thereof are true in all material respects, under
the penalties of perjury.
---------------------------------
John Pasco, III
Chairman and Chief Executive Officer`
Attest:
- ---------------------
Assistant Secretary
<PAGE>
EXHIBIT B
Below is the text of a sample of the Stock Certificate for CSI Equity Fund
Series of The World Funds, Inc.
CAPITAL STOCK OF CUSIP
THE WORLD FUNDS, INC.
CSI EQUITY FUND
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.01
EACH OF THE CAPITAL STOCK OF
THE WORLD FUNDS, INC. CSI EQUITY FUND
(hereinafter called the "Corporation") transferable on the books of the
Corporation in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to all of the provisions of the
Certificate of Incorporation and the bylaws of the Corporation and all
amendments thereto, to all of which the holder by acceptance hereof assents.
This certificate is not valid until countersigned by the Transfer Agent.
Witness the facsimile signatures of the duly authorized
officers of the Corporation
Dated Attest By
Secretary Chairman
<PAGE>
EXHIBIT C
Below is the text of a sample of the Stock Certificate for CSI Fixed Income Fund
Series of The World Funds, Inc.
CAPITAL STOCK OF CUSIP
THE WORLD FUNDS, INC.
CSI FIXED INCOME FUND
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.01
EACH OF THE CAPITAL STOCK OF
THE WORLD FUNDS, INC. CSI FIXED INCOME FUND
(hereinafter called the "Corporation") transferable on the books of the
Corporation in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to all of the provisions of the
Certificate of Incorporation and the bylaws of the Corporation and all
amendments thereto, to all of which the holder by acceptance hereof assents.
This certificate is not valid until countersigned by the Transfer Agent.
Witness the facsimile signatures of the duly authorized
officers of the Corporation
Dated Attest By
Secretary Chairman
<PAGE>
EXHIBIT D
INVESTMENT ADVISORY AGREEMENT
Investment Advisory Agreement (the "Agreement") dated , 1997 by and
between THE WORLD FUNDS, INC., a Maryland
corporation (herein called the "Fund"), and CSI CAPITAL MANAGEMENT, INC., a
California corporation (the "Advisor") and a registered investment adviser under
the Investment Advisers Act of 1940, as amended.
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
consisting of several series of shares, each having its own investment policies;
and
WHEREAS, the Fund desires to retain the Advisor to furnish investment
advisory and management services to certain portfolios of the Fund, subject to
the control of the Fund's Board of Directors, and the Advisor is willing to so
furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be bound, it is agreed between the parties
hereto as follows:
1. Appointment. The Fund hereby appoints the Advisor to act as the advisor
to the CSI EQUITY FUND series of the Fund (the "Portfolio") for the period and
on the terms set forth in this Agreement. The Advisor accepts such appointment
and agrees to furnish the services herein set forth, for the compensation herein
provided.
2. Duties of the Advisor. The Fund employs the Advisor to manage the
investments and reinvestment of the assets of the Portfolio, and to continuously
review, supervise, and administer the investment program of the Portfolio, to
determine in its discretion the securities to be purchased or sold, to provide
the Fund and Commonwealth Shareholder Services, Inc. (the "Administrator") with
records concerning the Advisor's activities which the Fund is required to
maintain, and to render regular reports to the Fund's Officers and Board of
Directors and to the Administrator concerning the Advisor's discharge of the
foregoing responsibilities.
The Advisor shall discharge the foregoing responsibilities subject
to the control of the Fund's Board of Directors and in compliance with such
policies as the Board may from time to time establish, and in compliance with
the objectives, policies, and limitations for the Portfolio as set forth in its
Prospectus and Statement of Additional Information, as amended from time to
time, and applicable laws and regulations. The Fund will instruct each of its
agents and
<PAGE>
contractors to co-operate in the conduct of the business of the
Portfolio.
The Advisor accepts such employment and agrees, at its own expense,
to render the services and to provide the office space, furnishings, and
equipment and the personnel required by it to perform the services on the terms
and for the compensation provided herein.
3. Portfolio Transactions. The Advisor is authorized to select the brokers
and dealers that will execute the purchases and sales of portfolio securities
for the Portfolio and is directed to use its best efforts to obtain the best
price and execution for the Portfolio's transactions in accordance with the
policies of the Fund as set forth from time to time in the Portfolio's
Prospectus and Statement of Additional Information. The Advisor will promptly
communicate to the Fund and to the Administrator such information relating to
portfolio transactions as they may reasonably request.
It is understood that the Advisor will not be deemed to have acted
unlawfully, or to have breached a fiduciary duty to the Fund or be in breach of
any obligation owing to the Fund under this Agreement, or otherwise, by reason
of its having directed a securities transaction on behalf of the Fund to an
unaffiliated broker-dealer in compliance with the provisions of Section 28(e) of
the Securities Exchange Act of 1934 or as described from time to time by the
Portfolio's Prospectus and Statement of Additional Information. Subject to the
foregoing, the Advisor may direct any transaction of the Portfolio to a broker
which is affiliated with the Advisor in accordance with, and subject to, the
policies and procedures approved by the Board of Directors of the Fund pursuant
to Rule 17e-1 under the 1940 Act. Such brokerage services are not deemed to be
provided under this Agreement.
4. Compensation of the Advisor. For the services to be rendered by the
Advisor under this Agreement, the Portfolio shall pay to the Advisor, and the
Advisor will accept as full compensation a fee, accrued daily and payable within
five (5) business days after the last business day of each month, at an annual
rate of one percent of the average daily net assets of the Portfolio.
All rights of compensation under this Agreement for services
performed as of the termination date shall survive the termination of this
Agreement.
5. Expenses. During the term of this Agreement, the
Advisor will pay all expenses incurred by it in connection with
the management of the Fund. Notwithstanding the foregoing, the
Portfolio shall pay the expenses and costs of the Portfolio for
the following:
<PAGE>
( 1) Taxes;
( 2) Brokerage fees and commissions with regard to
portfolio transactions;
( 3) Interest charges, fees and expenses of the
custodian of the securities;
( 4) Fees and expenses of the Fund's transfer agent and
the Administrator;
( 5) Its proportionate share of auditing and legal
expenses;
( 6) Its proportionate share of the cost of maintenance
of corporate existence;
( 7) Its proportionate share of compensation of
directors of the Fund who are not interested
persons of the Advisor as that term is defined by
law;
( 8) Its proportionate share of the costs of corporate
meetings;
( 9) Federal and State registration fees and expenses
incident to the sale of shares of the Portfolio;
(10) Costs of printing and mailing Prospectuses for the
Portfolio's shares, reports and notices to
existing shareholders;
(11) The Advisory fee payable to the Advisor, as
provided in paragraph 4 herein;
(12) Costs of recordkeeping (other than investment
records required to be maintained by the Advisor),
and daily pricing;
(13) Distribution expenses in accordance with any
Distribution Plan as and if approved by the
shareholders of the Portfolio; and
(14) Expenses and taxes incident to the failure of the Portfolio to
qualify as a regulated investment company under the provisions
of the Internal Revenue Code of 1986, as amended, unless such
expenses and/or taxes arise from the negligence of another
party.
If the expenses projected to be borne by the Portfolio (exclusive of
interest, brokerage commissions, taxes and extraordinary items, but inclusive of
Advisory fees) in any fiscal year are expected to exceed any applicable state
expense
<PAGE>
limitation provision to which the Fund is subject, the Advisory fee payable by
the Portfolio to the Advisor shall be reduced on each day such fee is accrued to
the extent of that day's portion of such excess expenses. The amount of such
reduction shall not exceed the actual amount of the Advisory fee otherwise
payable in such year. Accruals of expenses and adjustments to advisory fees
otherwise payable under this Agreement, and the amounts payable monthly in
accordance with this Agreement, shall be adjusted as required from month to
month.
It is understood that the Fund will register its shares in states
which impose expense limitations on mutual funds only with the prior written
consent of the Advisor and, if consent is granted, the Advisor agrees to
reimburse the Fund for any excess expenses incurred over such states' limitation
up to a maximum of its Advisory fee.
6. Reports. The Fund and the Advisor agree to furnish to each other, if
applicable, current information required for the preparation by such parties of
prospectuses, statements of additional information, proxy statements, reports to
shareholders, certified copies of their financial statements, and to furnish to
each other such other information and documents with regard to their affairs as
each may reasonably request.
7. Status of the Advisor. The services of the Advisor to the Fund are not
to be deemed exclusive, and the Advisor shall be free to render similar services
to others so long as its services to the Fund are not impaired thereby.
Pursuant to comparable agreements, the Fund may also retain the
services of the Advisor to serve as the investment advisor of other series of
the Fund.
8. Books and Records. In compliance with the requirements of the 1940 Act,
the Advisor hereby agrees that all records which it maintains for the Fund are
the property of the Fund, and further agrees to surrender promptly to the Fund
any of such records upon the Fund's request. The Advisor further agrees to
preserve for the periods prescribed by the 1940 Act, and the rules or orders
thereunder, the records required to be maintained by the 1940 Act.
9. Limitation of Liability of Advisor. The duties of the Advisor shall be
confined to those expressly set forth herein, and no implied duties are assumed
by or may be asserted against the Advisor hereunder. The Advisor shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or negligence on the part of the Advisor in the performance of its duties
or from reckless disregard by it of its obligations and duties under this
<PAGE>
Agreement. (As used in this Paragraph 9, the term "Advisor" shall include
directors, officers, employees and other corporate agents of the Advisor as well
as that corporation itself).
10. Permissible Interests. Directors, agents, and shareholders of the Fund
are or may be interested in the Advisor (or any successor thereof) as directors,
officers, or shareholders, or otherwise; directors, officers, agents, and
shareholders of the Advisor are or may be interested in the Fund as directors,
officers, shareholders or otherwise; and the Advisor (or any successor) is or
may be interested in the Fund as a shareholder or otherwise. In addition,
brokerage transactions for the Fund may be effected through affiliates of the
Advisor if approved by the Fund's Board of Directors, subject to the rules and
regulations of the Securities and Exchange Commission, and the policies and
procedures adopted by the Fund.
11. License of Advisor's Name. The Advisor hereby authorizes the Fund to
use the name "CSI" for the Portfolio. The Fund agrees that if this Agreement is
terminated it will promptly redesignate the name of the Portfolio to eliminate
any reference to the name "CSI" or any derivation thereof unless the Advisor
waives this requirement in writing.
12. Duration and Termination. This Agreement shall become effective on the
date first above written subject to its approval by the shareholders of the
Portfolio and unless sooner terminated as provided herein, shall continue in
effect for two (2) years from that date. Thereafter, this Agreement shall be
renewable for successive periods of one year each, provided such continuance is
specifically approved annually (a) by the vote of a majority of those members of
the Fund's Board of Directors who are not parties to this Agreement or
interested persons of any such party (as that term is defined in the 1940 Act),
cast in person at a meeting Called for the purpose of voting on such approval,
and (b) by vote of either the Board of Directors or of a majority of the
outstanding voting securities (as that term is defined in the 1940 Act) of the
Portfolio. Notwithstanding the foregoing, this Agreement may be terminated by
the Portfolio or by the Fund at any time on sixty (60) days written notice,
without the payment of any penalty, provided that termination must be authorized
either by vote of the Fund's Board of Directors or by vote of a majority of the
outstanding voting securities of the Portfolio or by the Advisor on sixty (60)
days written notice. This Agreement will automatically terminate in the event of
its assignment (as that term is defined in the 1940 Act).
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No material amendment of this Agreement
shall be effective until approved by vote of the holders of a
<PAGE>
majority of the Portfolio's outstanding voting securities (as
defined in the 1940 Act).
14. Notice. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient if sent by registered or certified mail,
postage prepaid, addressed by the party giving notice to the other party at the
address stated below:
(a) To the Fund at: 1500 Forest Avenue
Suite 223
Rchmond, VA 23229
(b) To the Advisor at: One Montgomery Street
Suite 2525, Telesis Tower
San Francisco, CA 94104
15. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of the Agreement shall not be affected
thereby. This Agreement shall be binding and shall inure to the benefit of the
parties hereto and their respective successors.
16. Applicable Law. This Agreement shall be construed in accordance with,
and governed by, the laws of the State of Maryland, and the applicable
provisions of the 1940 Act. To the extent that the applicable laws of the State
of Maryland, or any of the provisions herein, conflict with the applicable
provisions of the 1940 Act, the latter shall control.
17. This Agreement may be executed in two or more counterparts, each of
which, when so executed, shall be deemed to be an original, but such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
CSI CAPITAL MANAGEMENT, INC.
BY:
Leland H. Faust
President
<PAGE>
THE WORLD FUNDS, INC.
BY:
John Pasco, III
Chairman
<PAGE>
EXHIBIT E
INVESTMENT ADVISORY AGREEMENT
Investment Advisory Agreement (the "Agreement") dated , 1997 by and
between THE WORLD FUNDS, INC., a Maryland
corporation (herein called the "Fund"), and CSI CAPITAL MANAGEMENT, INC., a
California corporation (the "Advisor") and a registered investment adviser under
the Investment Advisers Act of 1940, as amended.
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
consisting of several series of shares, each having its own investment policies;
and
WHEREAS, the Fund desires to retain the Advisor to furnish investment
advisory and management services to certain portfolios of the Fund, subject to
the control of the Fund's Board of Directors, and the Advisor is willing to so
furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be bound, it is agreed between the parties
hereto as follows:
1. Appointment. The Fund hereby appoints the Advisor to act as the advisor
to the CSI FIXED INCOME FUND series of the Fund (the "Portfolio") for the period
and on the terms set forth in this Agreement. The Advisor accepts such
appointment and agrees to furnish the services herein set forth, for the
compensation herein provided.
2. Duties of the Advisor. The Fund employs the Advisor to manage the
investments and reinvestment of the assets of the Portfolio, and to continuously
review, supervise, and administer the investment program of the Portfolio, to
determine in its discretion the securities to be purchased or sold, to provide
the Fund and Commonwealth Shareholder Services, Inc. (the "Administrator") with
records concerning the Advisor's activities which the Fund is required to
maintain, and to render regular reports to the Fund's Officers and Board of
Directors and to the Administrator concerning the Advisor's discharge of the
foregoing responsibilities.
The Advisor shall discharge the foregoing responsibilities subject
to the control of the Fund's Board of Directors and in compliance with such
policies as the Board may from time to time establish, and in compliance with
the objectives, policies, and limitations for the Portfolio as set forth in its
Prospectus and Statement of Additional Information, as amended from time to
time, and applicable laws and regulations. The Fund will instruct each of its
agents and
<PAGE>
contractors to co-operate in the conduct of the business of the
Portfolio.
The Advisor accepts such employment and agrees, at its own expense,
to render the services and to provide the office space, furnishings, and
equipment and the personnel required by it to perform the services on the terms
and for the compensation provided herein.
3. Portfolio Transactions. The Advisor is authorized to select the brokers
and dealers that will execute the purchases and sales of portfolio securities
for the Portfolio and is directed to use its best efforts to obtain the best
price and execution for the Portfolio's transactions in accordance with the
policies of the Fund as set forth from time to time in the Portfolio's
Prospectus and Statement of Additional Information. The Advisor will promptly
communicate to the Fund and to the Administrator such information relating to
portfolio transactions as they may reasonably request.
It is understood that the Advisor will not be deemed to have acted
unlawfully, or to have breached a fiduciary duty to the Fund or be in breach of
any obligation owing to the Fund under this Agreement, or otherwise, by reason
of its having directed a securities transaction on behalf of the Fund to an
unaffiliated broker-dealer in compliance with the provisions of Section 28(e) of
the Securities Exchange Act of 1934 or as described from time to time by the
Portfolio's Prospectus and Statement of Additional Information. Subject to the
foregoing, the Advisor may direct any transaction of the Portfolio to a broker
which is affiliated with the Advisor in accordance with, and subject to, the
policies and procedures approved by the Board of Directors of the Fund pursuant
to Rule 17e-1 under the 1940 Act. Such brokerage services are not deemed to be
provided under this Agreement.
4. Compensation of the Advisor. For the services to be rendered by the
Advisor under this Agreement, the Portfolio shall pay to the Advisor, and the
Advisor will accept as full compensation a fee, accrued daily and payable within
five (5) business days after the last business day of each month, at an annual
rate of one percent of the average daily net assets of the Portfolio.
All rights of compensation under this Agreement for services
performed as of the termination date shall survive the termination of this
Agreement.
5. Expenses. During the term of this Agreement, the
Advisor will pay all expenses incurred by it in connection with
the management of the Fund. Notwithstanding the foregoing, the
Portfolio shall pay the expenses and costs of the Portfolio for
the following:
<PAGE>
( 1) Taxes;
( 2) Brokerage fees and commissions with regard to
portfolio transactions;
( 3) Interest charges, fees and expenses of the
custodian of the securities;
( 4) Fees and expenses of the Fund's transfer agent and
the Administrator;
( 5) Its proportionate share of auditing and legal
expenses;
( 6) Its proportionate share of the cost of maintenance
of corporate existence;
( 7) Its proportionate share of compensation of
directors of the Fund who are not interested
persons of the Advisor as that term is defined by
law;
( 8) Its proportionate share of the costs of corporate
meetings;
( 9) Federal and State registration fees and expenses
incident to the sale of shares of the Portfolio;
(10) Costs of printing and mailing Prospectuses for the
Portfolio's shares, reports and notices to
existing shareholders;
(11) The Advisory fee payable to the Advisor, as
provided in paragraph 4 herein;
(12) Costs of recordkeeping (other than investment
records required to be maintained by the Advisor),
and daily pricing;
(13) Distribution expenses in accordance with any
Distribution Plan as and if approved by the
shareholders of the Portfolio; and
(14) Expenses and taxes incident to the failure of the Portfolio to
qualify as a regulated investment company under the provisions
of the Internal Revenue Code of 1986, as amended, unless such
expenses and/or taxes arise from the negligence of another
party.
If the expenses projected to be borne by the Portfolio (exclusive of
interest, brokerage commissions, taxes and extraordinary items, but inclusive of
Advisory fees) in any fiscal year are expected to exceed any applicable state
expense
<PAGE>
limitation provision to which the Fund is subject, the Advisory fee payable by
the Portfolio to the Advisor shall be reduced on each day such fee is accrued to
the extent of that day's portion of such excess expenses. The amount of such
reduction shall not exceed the actual amount of the Advisory fee otherwise
payable in such year. Accruals of expenses and adjustments to advisory fees
otherwise payable under this Agreement, and the amounts payable monthly in
accordance with this Agreement, shall be adjusted as required from month to
month.
It is understood that the Fund will register its shares in states
which impose expense limitations on mutual funds only with the prior written
consent of the Advisor and, if consent is granted, the Advisor agrees to
reimburse the Fund for any excess expenses incurred over such states' limitation
up to a maximum of its Advisory fee.
6. Reports. The Fund and the Advisor agree to furnish to each other, if
applicable, current information required for the preparation by such parties of
prospectuses, statements of additional information, proxy statements, reports to
shareholders, certified copies of their financial statements, and to furnish to
each other such other information and documents with regard to their affairs as
each may reasonably request.
7. Status of the Advisor. The services of the Advisor to the Fund are not
to be deemed exclusive, and the Advisor shall be free to render similar services
to others so long as its services to the Fund are not impaired thereby.
Pursuant to comparable agreements, the Fund may also retain the
services of the Advisor to serve as the investment advisor of other series of
the Fund.
8. Books and Records. In compliance with the requirements of the 1940 Act,
the Advisor hereby agrees that all records which it maintains for the Fund are
the property of the Fund, and further agrees to surrender promptly to the Fund
any of such records upon the Fund's request. The Advisor further agrees to
preserve for the periods prescribed by the 1940 Act, and the rules or orders
thereunder, the records required to be maintained by the 1940 Act.
9. Limitation of Liability of Advisor. The duties of the Advisor shall be
confined to those expressly set forth herein, and no implied duties are assumed
by or may be asserted against the Advisor hereunder. The Advisor shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or negligence on the part of the Advisor in the performance of its duties
or from reckless disregard by it of its obligations and duties under this
<PAGE>
Agreement. (As used in this Paragraph 9, the term "Advisor" shall include
directors, officers, employees and other corporate agents of the Advisor as well
as that corporation itself).
10. Permissible Interests. Directors, agents, and shareholders of the Fund
are or may be interested in the Advisor (or any successor thereof) as directors,
officers, or shareholders, or otherwise; directors, officers, agents, and
shareholders of the Advisor are or may be interested in the Fund as directors,
officers, shareholders or otherwise; and the Advisor (or any successor) is or
may be interested in the Fund as a shareholder or otherwise. In addition,
brokerage transactions for the Fund may be effected through affiliates of the
Advisor if approved by the Fund's Board of Directors, subject to the rules and
regulations of the Securities and Exchange Commission, and the policies and
procedures adopted by the Fund.
11. License of Advisor's Name. The Advisor hereby authorizes the Fund to
use the name "CSI" for the Portfolio. The Fund agrees that if this Agreement is
terminated it will promptly redesignate the name of the Portfolio to eliminate
any reference to the name "CSI" or any derivation thereof unless the Advisor
waives this requirement in writing.
12. Duration and Termination. This Agreement shall become effective on the
date first above written subject to its approval by the shareholders of the
Portfolio and unless sooner terminated as provided herein, shall continue in
effect for two (2) years from that date. Thereafter, this Agreement shall be
renewable for successive periods of one year each, provided such continuance is
specifically approved annually (a) by the vote of a majority of those members of
the Fund's Board of Directors who are not parties to this Agreement or
interested persons of any such party (as that term is defined in the 1940 Act),
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by vote of either the Board of Directors or of a majority of the
outstanding voting securities (as that term is defined in the 1940 Act) of the
Portfolio. Notwithstanding the foregoing, this Agreement may be terminated by
the Portfolio or by the Fund at any time on sixty (60) days written notice,
without the payment of any penalty, provided that termination must be authorized
either by vote of the Fund's Board of Directors or by vote of a majority of the
outstanding voting securities of the Portfolio or by the Advisor on sixty (60)
days written notice. This Agreement will automatically terminate in the event of
its assignment (as that term is defined in the 1940 Act).
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No material amendment of this Agreement
shall be effective until approved by vote of the holders of a
<PAGE>
majority of the Portfolio's outstanding voting securities (as
defined in the 1940 Act).
14. Notice. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient if sent by registered or certified mail,
postage prepaid, addressed by the party giving notice to the other party at the
address stated below:
(a) To the Fund at: 1500 Forest Avenue
Suite 223
Richmond, VA 23229
(b) To the Advisor at: One Montgomery Street
Suite 2525, Telesis Tower
San Francisco, CA 94104
15. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of the Agreement shall not be affected
thereby. This Agreement shall be binding and shall inure to the benefit of the
parties hereto and their respective successors.
16. Applicable Law. This Agreement shall be construed in accordance with,
and governed by, the laws of the State of Maryland, and the applicable
provisions of the 1940 Act. To the extent that the applicable laws of the State
of Maryland, or any of the provisions herein, conflict with the applicable
provisions of the 1940 Act, the latter shall control.
17. This Agreement may be executed in two or more counterparts, each of
which, when so executed, shall be deemed to be an original, but such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
CSI CAPITAL MANAGEMENT, INC.
BY:
Leland H. Faust
President
<PAGE>
THE WORLD FUNDS, INC.
BY:
John Pasco, III
Chairman
<PAGE>
EXHIBIT F
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the _____ day of
___________, 1997, by and between The World Funds, Inc., (the "Fund"), an
open-end diversified investment business corporation organized under the laws of
Maryland and having its office at 1500 Forest Avenue, Suite 223, Richmond,
Virginia, 23229 on behalf of the CSI Equity Fund series and the CSI Fixed Income
Fund series and any other series (the "Series") as may from time to time be
created and designated by the Fund and which becomes subject to this Agreement
by the mutual consent of the parties hereto, and Star Bank, National
Association, (the "Custodian"), a national banking association having its
principal office at 425 Walnut Street, Cincinnati, Ohio, 45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement to
provide for the custody and safekeeping of the assets of the Series as required
by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Series' Securities and moneys at any time owned by the Series during the term of
this Agreement (the "Series Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set forth,
the Fund and the Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless the
context otherwise requires, shall have the following meanings:
Authorized Person - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized by
the Board of Directors of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Book-Entry System - the Federal Reserve Bank book-entry system for United
States Treasury securities and federal agency securities.
Depository - The Depository Trust Company ("DTC"), a limited purpose trust
company its successor(s) and its nominee(s) or any other person or clearing
agent.
Dividend and Transfer Agent - the dividend and transfer agent appointed,
from time to time, pursuant to a written agreement between the dividend and
transfer agent and the Fund.
<PAGE>
Foreign Securities - a) securities issued and sold primarily outside of
the United States by a foreign government, a national of any foreign country, or
a corporation or other organization incorporated or organized under the laws of
any foreign country or; b) securities issued or guaranteed by the government of
the United States, by any state, by any political subdivision or agency thereof,
or by any entity organized under the laws of the United States or of any state
thereof, which have been issued and sold primarily outside of the United States.
Money Market Security - debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including certificates
of deposit, bankers' acceptances, repurchase agreements and reverse repurchase
agreements with respect to the same), and time deposits of domestic banks and
thrift institutions whose deposits are insured by the Federal Deposit Insurance
Corporation, and short-term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase and sale, all of which mature in not more than
thirteen (13) months.
Officers - the Chairman, President, Secretary, Treasurer, Controller, and
Senior Vice President of the Fund listed in the Certificate annexed hereto as
Appendix A, or such other Certificate as may be received by the Custodian from
time to time.
Oral Instructions - verbal instructions received by the Custodian from an
Authorized Person (or from a person that the Custodian reasonably believes in
good faith to be an Authorized Person) and confirmed by Written Instructions in
such a manner that such Written Instructions are received by the Custodian not
later than the business day immediately following receipt of such Oral
Instructions.
Prospectus - the Fund's then currently effective prospectus and Statement
of Additional Information, as filed with and declared effective from time to
time by the Securities and Exchange Commission.
Security or Securities - Money Market Securities, common stock, preferred
stock, options, financial futures, bonds, notes, debentures, corporate debt
securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
Written Instructions - communication received in writing by the Custodian
from an Authorized Person.
ARTICLE II
Documents and Notices to be Furnished by the Fund
A The following documents, including any amendments thereto, will be
provided contemporaneously with the execution of the Agreement, to the Custodian
by the Fund:
<PAGE>
1. A copy of the Articles of Incorporation of the Fund
certified by the Secretary.
2. A copy of the By-Laws of the Fund certified by the
Secretary.
3. A copy of the resolution of the Board of Directors of
the Fund appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectus of the Series.
5. A Certificate of the President and Secretary of the
Fund setting forth the names and signatures of the Officers of the Fund.
B. The Fund agrees to notify the Custodian in writing of
the appointment of any Dividend and Transfer Agent.
ARTICLE III
Receipt of Fund Assets
A. During the term of this Agreement, the Fund will deliver or cause to be
delivered to the Custodian all moneys constituting Series Assets. The Custodian
shall be entitled to reverse any deposits made on the Fund's behalf where such
deposits have been entered and moneys are not finally collected within 30 days
of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or cause to be
delivered to the Custodian all Securities constituting Series Assets. The
Custodian will not have any duties or responsibilities with respect to such
Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the account(s) of
the Series any and all payments for shares of the Series issued or sold from
time to time as they are received from the Fund's distributor or Dividend and
Transfer Agent or from the Fund itself.
ARTICLE IV
Disbursement of Fund Assets
A. The Fund shall furnish to the Custodian a copy of the resolution of the
Board of Directors of the Fund, certified by the Fund's Secretary, either (i)
setting forth the date of the declaration of any dividend or distribution in
respect of shares of the Series, the date of payment thereof, the record date as
of which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Series shareholders of record as of that date, and the
total amount to be paid by the Dividend and Transfer Agent on the payment date,
or (ii) authorizing the declaration of dividends and distributions in respect of
shares of the Fund on a daily basis and authorizing the Custodian to rely on a
Certificate setting forth the date of the declaration of any such dividend or
distribution, the date of payment thereof, the record date as of which Series
shareholders entitled to payment shall be determined, the amount payable per
share to Series shareholders of record as of that date, and the total amount to
be paid by the Dividend and Transfer Agent on the payment date.
<PAGE>
On the payment date specified in such resolution or Certificate
described above, the Custodian shall segregate such amounts from moneys held for
the account of the Series so that they are available for such payment.
B. Upon receipt of Written Instructions so directing it, the Custodian
shall segregate amounts necessary for the payment of redemption proceeds to be
made by the Dividend and Transfer Agent from moneys held for the account of the
Series so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting forth the
name and address of the person to whom such payment is to be made, the amount of
such payment, and the purpose for which payment is to be made, the Custodian
shall disburse amounts as and when directed from the Series Assets. The
Custodian is authorized to rely on such directions and shall be under no
obligation to inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian shall
disburse moneys from the Series Assets in payment of the Custodian's fees and
expenses as provided in Article VIII hereof.
E. Upon receipt of a Certificate directing payment and setting forth the
name and address of the person to whom such payment is to be made, the amount of
such payment, and the purpose for which payment is to be made, the Custodian
shall disburse amounts to any imprest account maintained for the Series as and
when directed from the Series Assets. The Custodian is authorized to rely on
such directions and shall be under no obligation to inquire as to the propriety
of such directions.
ARTICLE V
Custody of Fund Assets
A. The Custodian shall open and maintain a separate bank account or
accounts in the United States in the name of the Fund for the assets of the
Series, subject only to draft or order by the Custodian acting pursuant to the
terms of this Agreement, and shall hold all cash received by it from or for the
account of the Series, other than cash maintained by the Fund in a bank account
established and used by the Series in accordance with Rule 17f-3 under the Act.
Moneys held by the Custodian on behalf of the Series may be deposited by the
Custodian to its credit as Custodian in the banking department of the Custodian.
Such moneys shall be deposited by the Custodian in its capacity as such, and
shall be withdrawable by the Custodian only in such capacity.
B. The Custodian shall hold all Securities delivered to
it in safekeeping in a separate account or accounts maintained at
Star Bank, N.A. for the benefit of the Series.
C. All Securities held which are issued or issuable only in bearer form,
shall be held by the Custodian in that form; all other Securities held for the
Series shall be registered in the name of the Custodian or its nominee. The Fund
agrees to furnish to the Custodian appropriate instruments to enable the
Custodian
<PAGE>
to hold, or deliver in proper form for transfer, any Securities that it may hold
for the account of the Fund and which may, from time to time, be registered in
the name of the Series.
D. With respect to all Securities held for the Series, the Custodian shall
on a timely basis (concerning items 1 and 2 below, as defined in the Custodian's
Standards of Service Guide, as amended from time to time, annexed hereto as
Appendix C):
1. Collect all income due and payable with
respect to such Securities;
2. Present for payment and collect amounts payable upon
all Securities which may mature or be called, redeemed,
or retired, or otherwise become payable;
3. Surrender Securities in temporary form for definitive
Securities; and
4. Execute, as agent, any necessary declarations or certificates of
ownership under the Federal income tax laws or the laws or
regulations of any other taxing authority, including any foreign
taxing authority, now or hereafter in effect.
E. Upon receipt of a Certificate and not otherwise, the
Custodian shall:
1. Execute and deliver to such persons as may be
designated in such Certificate proxies, consents,
authorizations, and any other instruments whereby
the authority of the Fund as beneficial owner of
any Scurities may be exercised;
2. Deliver any Securities in exchange for other
Securities or cash issued or paid in connection
with the liquidation, reorganization, refinancing,
merger, consolidation, or recapitalization of any
corporation, or the exercise of any conversion
privilege;
3. Deliver any Securities to any protective
committee, reorganization committee, or other
person in connection with the reorganization,
refinancing, merger, consolidation,
recapitalization, or sale of assets of any
corporation, and receive and hold under the terms
of this Agreement such certificates of deposit,
interim receipts or other instruments or documents
as may be issued to it to evidence such delivery;
4. Make such transfers or exchanges of the assets of the Fund and
take such other steps as shall be stated in said Certificate
to be for the purpose of effectuating any duly authorized plan
of liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
5. Deliver any Securities held for the Series to the
depository agent for tender or other similar
offers.
F. The Custodian shall promptly deliver to the Fund all
notices, proxy material and executed but unvoted proxies
pertaining to shareholder meetings of Securities held by the
Fund. The Custodian shall not vote or authorize the voting of
<PAGE>
any Securities or give any consent, waiver or approval with respect thereto
unless so directed by a Certificate or Written Instruction.
G. The Custodian shall promptly deliver to the Fund all information
received by the Custodian and pertaining to Securities held by the Fund with
respect to tender or exchange offers, calls for redemption or purchase, or
expiration of rights.
ARTICLE VI
Purchase and Sale of Securities
A. Promptly after each purchase of Securities by the Fund for the Series,
the Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, Written Instructions, and (ii)
with respect to each purchase of Money Market Securities, Written Instructions
or Oral Instructions, specifying with respect to each such purchase the;
1. name of the issuer and the title of the ecurities,
2. principal amount purchased and accrued interest, if any,
3. date of purchase and settlement,
4. purchase price per unit,
5. total amount payable, and
6. name of the person from whom, or the broker
through which, the purchase was made. The Custodian shall,
against receipt of Securities purchased by or for the Series, pay out of the
Series Assets, the total amount payable to the person from whom or the broker
through which the purchase was made, provided that the same conforms to the
total amount payable as set forth in such Written Instructions or Oral
Instructions, as the case may be.
B. Promptly after each sale of Securities by the Fund for the Series, the
Fund shall deliver to the Custodian (i) with respect to each sale of Securities
which are not Money Market Securities, Written Instructions, and (ii) with
respect to each sale of Money Market Securities, Written Instructions or Oral
Instructions, specifying with respect to each such sale the;
1. name of the issuer and the title of the ecurities,
2. principal amount sold and accrued interest, if any,
3. date of sale and settlement,
4. sale price per unit,
5. total amount receivable, and
6. name of the person to whom, or the broker through
which, the sale was made.
The Custodian shall deliver the Securities against receipt of the total amount
receivable, provided that the same conforms to the total amount receivable as
set forth in such Written Instructions or Oral Instructions, as the case may be.
<PAGE>
C. On contractual settlement date, the account of the Series will be
charged for all purchased Securities settling on that day, regardless of whether
or not delivery is made. Likewise, on contractual settlement date, proceeds from
the sale of Securities settling that day will be credited to the account of the
Series, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian will be
made on a delivery versus payment basis. The Custodian may, in its sole
discretion, upon receipt of a Certificate, elect to settle a purchase or sale
transaction in some other manner, but only upon receipt of acceptable
indemnification from the Fund.
E. The Custodian shall, upon receipt of a Written Instructions so
directing it, establish and maintain a segregated account or accounts for and on
behalf of the Series. Cash and/or Securities may be transferred into such
account or accounts for specific purposes, to-wit:
1. in accordance with the provision of any agreement
among the Fund, the Custodian, and a broker-dealer
registered under the Securities and Exchange Act
of 1934, as amended, and also a member of the
National Association of Securities Dealers (NASD)
(or any futures commission merchant registered
under the Commodity Exchange Act), relating to
compliance with the rules of the Options Clearing
Corporation and of any registered national
securities exchange, the Commodity Futures Trading
Commission, any registered contract market, or any
similar organization or organizations requiring
escrow or other similar arrangements in connection
with transactions by the Fund for the Series;
2. for purposes of segregating cash or government
securities in connection with options purchased,
sold, or written by the Fund or commodity futures
contracts or options thereon purchased or sold by
the Fund for the Series;
3. for the purpose of compliance by the Series with
the procedures required for reverse repurchase
agreements, firm commitment agreements, standby
commitment agreements, and short sales by Act
Release No. 10666, or any subsequent release or
releases or rule of the Securities and Exchange
Commission relating to the maintenance of
segregated accounts by registered investment
companies; and
4. for other corporate purposes, only in the case of this clause
4 upon receipt of a copy of a resolution of the Board of
Directors of the Fund, certified by the Secretary of the Fund,
setting forth the purposes of such segregated account.
F. Except as otherwise may be agreed upon by the parties
hereto, the Custodian shall not be required to comply with any
Written Instructions to settle the purchase of any Securities on
behalf of the Series unless there is sufficient cash in the
<PAGE>
account(s) at the time or to settle the sale of any Securities from an
account(s) unless such Securities are in deliverable form. Notwithstanding the
foregoing, if the purchase price of such Securities exceeds the amount of cash
in the account(s) at the time of such purchase, the Custodian may, in its sole
discretion, advance the amount of the difference in order to settle the purchase
of such Securities. The amount of any such advance shall be deemed a loan from
the Custodian to the Fund for the respective Series payable on demand and
bearing interest accruing from the date such loan is made up to but not
including the date such loan is repaid at a rate per annum customarily charged
by the Custodian on similar loans.
ARTICLE VII
Fund Indebtedness
In connection with any borrowings by the Fund for the Series, the Fund
will cause to be delivered to the Custodian by a bank or broker requiring
Securities as collateral for such borrowings (including the Custodian if the
borrowing is from the Custodian), a notice or undertaking in the form currently
employed by such bank or broker setting forth the amount of collateral. The Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
each such borrowing: (a) the name of the bank or broker, (b) the amount and
terms of the borrowing, which may be set forth by incorporating by reference an
attached promissory note duly endorsed by the Fund, or a loan agreement, (c) the
date, and time if known, on which the loan is to be entered into, (d) the date
on which the loan becomes due and payable, (e) the total amount payable to the
Series on the borrowing date, and (f) the description of the Securities securing
the loan, including the name of the issuer, the title and the number of shares
or the principal amount. The Custodian shall deliver on the borrowing date
specified in the Certificate the required collateral against the lender's
delivery of the total loan amount then payable, provided that the same conforms
to that which is described in the Certificate. The Custodian shall deliver, in
the manner directed by the Fund, such Securities as additional collateral, as
may be specified in a Certificate, to secure further any transaction described
in this Article VII. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it.
The Custodian may, at the option of the lender, keep such collateral in
its possession, subject to all rights therein given to the lender because of the
loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem appropriate.
ARTICLE VIII
Concerning the Custodian
<PAGE>
A. Except as otherwise provided herein, the Custodian shall not be liable
for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own gross
negligence or willful misconduct. The Fund shall defend, indemnify and hold
harmless the Custodian and its directors, officers, employees and agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Fund's duties
hereunder or any other action or inaction of the Fund or its Directors,
officers, employees or agents, except such as may arise from the negligent
action, omission, willful misconduct or breach of this Agreement by the
Custodian. The Custodian may, with respect to questions of law, apply for and
obtain the advice and opinion of counsel, at the expense of the Fund, and shall
be fully protected with respect to anything done or omitted by it in good faith
in conformity with the advice or opinion of counsel. The provisions under this
paragraph shall survive the termination of this Agreement.
B. Without limiting the generality of the foregoing, the
Custodian, acting in the capacity of Custodian hereunder, shall
be under no obligation to inquire into, and shall not be liable for:
1. The validity of the issue of any Securities
purchased by or for the account of the Fund,
the legality of the purchase thereof, or the
propriety of the amount paid therefor;
2. The legality of the sale of any Securities by or
for the account of the Series, or the propriety of
the amount for which the same are sold;
3. The legality of the issue or sale of any shares of
the Series, or the sufficiency of the amount to be
received therefor;
4. The legality of the redemption of any shares of
the Series, or the propriety of the amount to be
paid therefor;
5. The legality of the declaration or payment of any
dividend by the Fund in respect of shares of the
Series;
6. The legality of any borrowing by the Series on
behalf of the Fund, using Securities as
collateral;
C. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount due to the Series from any Dividend and
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by any Dividend and Transfer Agent of the Fund of any amount paid
by the Custodian to any Dividend and Transfer Agent of the Fund in accordance
with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not be
under any duty or obligation to take action to effect collection of any amount,
if the Securities upon which such amount is payable are in default, or if
payment is refused after due demand or presentation, unless and until (i) it
shall be directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction (including prepayment
<PAGE>
thereof) of reimbursement of its costs and expenses in connection
with any such action.
E. The Fund acknowledges and hereby authorizes the Custodian to hold
Securities through its various agents described in Appendix B annexed hereto.
The Fund hereby represents that such authorization has been duly approved by the
Board of Directors of the Fund as required by the Act. The Custodian
acknowledges that although certain Series Assets are held by its agents, the
Custodian remains primarily liable for the safekeeping of the Series Assets.
In addition, the Fund acknowledges that the Custodian may appoint one or
more financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Series. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Fund any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist directors of registered investment companies fulfill their
responsibilities under Rule 17f-5 of the Act.
F. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Fund are such as properly may be held by the Series under the provisions of
the Articles of Incorporation and the Fund's By-Laws.
G. The Custodian shall treat all records and other information relating to
the Fund and the Series Assets as confidential and shall not disclose any such
records or information to any other person unless (i) the Fund shall have
consented thereto in writing or (ii) such disclosure is required by law.
H. The Custodian shall be entitled to receive and the Fund agrees to pay
to the Custodian from the assets of the Series such compensation as shall be
determined pursuant to Appendix D attached hereto, or as shall be determined
pursuant to amendments to such Appendix D. The Custodian shall be entitled to
charge against any money held by it for the account of the Series, the amount of
any of its fees, any loss, damage, liability or expense, including counsel fees
relating to such Series. The expenses which the Custodian may charge against the
account of the Series include, but are not limited to, the expenses of agents or
sub-custodians incurred in settling transactions involving the purchase and sale
of Securities of the Fund.
I. The Custodian shall be entitled to rely upon any Oral
Instructions and any Written Instructions. The Fund agrees to
forward to the Custodian Written Instructions confirming Oral
Instructions in such a manner so that such Written Instructions
are received by the Custodian, whether by hand delivery,
facsimile or otherwise, not later than the following business
day on which such Oral Instructions were given. The Fund agrees
<PAGE>
that the failure of the Custodian to receive such confirming instructions shall
in no way affect the validity of the transactions or enforceability of the
transactions hereby authorized by the Fund. The Fund agrees that the Custodian
shall incur no greater liability to the Fund for acting upon Oral Instructions
given to the Custodian hereunder concerning such transactions than would arise
as to a similar transaction pursuant to a Written Instruction.
J. The Custodian will (i) set up and maintain proper books of account and
complete records of all transactions in the accounts maintained by the Custodian
hereunder in such manner as will meet the obligations of the Fund under the Act,
with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder and those records are the property of the Fund, and (ii) preserve for
the periods prescribed by applicable Federal statute or regulation all records
required to be so preserved. All such books and records shall be the property of
the Fund, and shall be open to inspection and audit at reasonable times and with
prior notice by Officers and auditors employed by the Fund.
K. The Custodian shall send to the Fund any report received on the systems
of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Fund may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and shall have
no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Fund. The Custodian is not a selling
agent for shares of the Series and performance of its duties as custodian shall
not be deemed to be a recommendation to the Fund's depositors or others of
shares of the Series as an investment.
M. The Custodian shall take all reasonable action, that the Fund may from
time to time request, to assist the Fund in obtaining favorable opinions from
the Fund's independent accountants, with respect to the Custodian's activities
hereunder, in connection with the preparation of the Fund's Form N-1A, Form
N-SAR, or other annual reports to the Securities and Exchange Commission.
N. The Fund hereby pledges to and grants the Custodian a security interest
in any Series Assets to secure the payment of any liabilities of the Series to
the Custodian, whether acting in its capacity as Custodian or otherwise, or on
account of money borrowed from the Custodian. This pledge is in addition to any
other pledge of collateral by the Fund to the Custodian.
ARTICLE X
Termination
A. Either of the parties hereto may terminate this Agreement for any
reason by giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after the date
of giving of such notice. If such notice is given by the Fund, it shall be
<PAGE>
accompanied by a copy of a resolution of the Board of Directors of the Fund,
certified by the Secretary of the Fund, electing to terminate this Agreement and
designating a successor custodian or custodians. In the event such notice is
given by the Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board of Directors of the
Fund, certified by the Secretary, designating a successor custodian or
custodians to act on behalf of the Fund. In the absence of such designation by
the Fund, the Custodian may designate a successor custodian which shall be a
bank or trust company having not less than $100,000,000 aggregate capital,
surplus, and undivided profits. Upon the date set forth in such notice this
Agreement shall terminate, and the Custodian, provided that it has received a
notice of acceptance by the successor custodian, shall deliver, on that date,
directly to the successor custodian all Securities and moneys then owned by the
Fund and held by it as Custodian. Upon termination of this Agreement, the Fund
shall pay to the Custodian on behalf of the Fund such compensation as may be due
as of the date of such termination. The Fund agrees on behalf of the Fund that
the Custodian shall be reimbursed for its reasonable costs in connection with
the termination of this Agreement.
B. If a successor custodian is not designated by the Fund, or by the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund, be deemed to be the custodian for the Fund, and the Custodian shall
thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the Book-Entry
System, which cannot be delivered to the Fund, which shall be held by the
Custodian in accordance with this Agreement.
ARTICLE XI
MISCELLANEOUS
A. Appendix A sets forth the names and the signatures of all Authorized
Persons, as certified by the Secretary of the Fund. The Fund agrees to furnish
to the Custodian a new Appendix A in form similar to the attached Appendix A, if
any present Authorized Person ceases to be an Authorized Person or if any other
or additional Authorized Persons are elected or appointed. Until such new
Appendix A shall be received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon Oral Instructions or signatures of
the then current Authorized Persons as set forth in the last delivered Appendix
A.
B. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer,
Director, past, present or future as such, of the Fund or of any predecessor or
successor, either directly or through the Fund or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity,
<PAGE>
or be the enforcement of any assessment or penalty or otherwise; it being
expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Fund, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Directors of the Fund or of any predecessor
or successor, or any of them as such. To the extent that any such liability
exists, it is hereby expressly waived and released by the Custodian as a
condition of, and as a consideration for, the execution of this Agreement.
C. The obligations set forth in this Agreement as having been made by the
Fund have been made by the Board of Directors, acting as such Directors for and
on behalf of the Fund, pursuant to the authority vested in them under the laws
of the State of Maryland, the Articles of Incorporation and the By-Laws of the
Fund. This Agreement has been executed by Officers of the Fund as officers, and
not individually, and the obligations contained herein are not binding upon any
of the Directors, Officers, agents or holders of shares, personally, but bind
only the Fund.
D. Provisions of the Prospectus and any other documents (including
advertising material) specifically mentioning the Custodian (other than merely
by name and address) shall be reviewed with the Custodian by the Fund prior to
publication and/or dissemination or distribution, and shall be subject to the
consent of the Custodian.
E. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at Star
Bank Center, 425 Walnut Street, M. L. 6118, Cincinnati, Ohio 45202, attention
Mutual Fund Custody Department, or at such other place as the Custodian may from
time to time designate in writing.
F. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given when
delivered to the Fund or on the second business day following the time such
notice is deposited in the U.S. mail postage prepaid and addressed to the Fund
at its office at 1500 Forest Avenue, Suite 223, Richmond, Virginia, 23229 or at
such other place as the Fund may from time to time designate in writing.
G. This Agreement, with the exception of the Appendices,may not be amended
or modified in any manner except by a written agreement executed by both parties
with the same formality as this Agreement, and authorized and approved by a
resolution of the Board of Directors of the Fund.
H. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund or by the Custodian, and no
attempted assignment by the Fund or the Custodian shall be effective without the
written consent of the other party hereto.
I. This Agreement shall be construed in accordance with
the laws of the State of Ohio.
<PAGE>
J. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
The World Funds, Inc.
ATTEST: By: _________________________
John Pasco, III
________________________ Chairman
Star Bank, N.A.
ATTEST: By: _________________________
Marsha A. Croxton
_________________________ Vice President
<PAGE>
APPENDIX A
Authorized Persons Specimen Signatures
Chairman:
President:
Secretary:
Treasurer:
Controller:
Adviser Employees:
Transfer Agent/Fund Accountant
Employees:
<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A. for securities
processing and control . . .
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC eligible Securities)
<PAGE>
APPENDIX C
Standards of Service Guide
<PAGE>
APPENDIX D
Schedule of Compensation
<PAGE>
EXHIBIT G
ADMINISTRATIVE SERVICES AGREEMENT
Administrative Services Agreement (the "Agreement") dated , 1997, by and
between THE WORLD FUNDS, INC. (the "Fund"), a diversified, open-end management
investment company, duly organized as a corporation in accordance with the laws
of the State of Maryland, and COMMONWEALTH SHAREHOLDER SERVICES, INC. ("CSS"), a
corporation duly organized as a corporation in accordance with the laws of the
Commonwealth of Virginia.
WITNESSETH THAT:
WHEREAS, the Fund desires to appoint CSS as its Administrative Services
Agent, for and on behalf of the CSI EQUITY FUND series (the "Portfolio"), to
perform certain recordkeeping and shareholder servicing functions required of a
duly registered investment company to comply with certain provisions of federal,
state and local law, rules and regulations, and, as is required, to assist the
Fund in preparing and filing certain financial reports, and further to perform
certain daily functions in connection with on-going operations of the Fund and
the Portfolio, and provide ministerial services to implement the investment
decisions of the Fund and the investment advisor of the Portfolio, CSI Capital
Management, Inc. (the "Advisor"); and
WHEREAS, CSS is willing to perform such functions upon the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto, intending to be legally bound,
agree as follows:
Section 1. CSS shall examine and review all records and documents of the
Portfolio pertaining to its duties under this Agreement in order to determine
and/or recommend how such records and documents shall be maintained.
Section 2. CSS shall, as necessary for such purposes, advise the Fund and
its agents of the information which is deemed to be "necessary" for the
performance of its duties under this Agreement, and upon receipt of necessary
information and Written or Oral Instructions from the Fund, shall maintain and
keep current such shareholder relations records.
Unless the information necessary to perform the above functions is
furnished in writing to CSS by the Fund or its agents (such as Custodians,
Transfer Agents, etc.), CSS shall incur no liability and the Fund shall
indemnify and hold harmless CSS from and
<PAGE>
against any liability arising from any discrepancy in the information received
by CSS and used in the performance by CSS of its duties.
It shall be the responsibility of the Fund to furnish CSS with the net
asset value per share, declaration, record and payment dates and amounts of any
dividends or income and any other special actions required concerning each of
its securities.
CSS shall maintain such shareholder records above mentioned as required by
regulation and as agreed upon between the Fund and CSS.
Section 3. The Fund shall confirm to the Fund's Transfer Agent all
purchases and redemptions of shares of the Portfolio effected through the Fund
or its distributor, as and when such orders are accepted by the Fund or an
authorized agent of the Fund designated for that purpose. CSS shall receive from
the Fund's Transfer Agent daily reports of share purchases, redemptions, and
total shares outstanding, and shall be accountable for the information contained
in such reports of purchases and redemptions when received. It is agreed by the
parties that the net asset value per share of the Fund will be calculated in
accordance with Rule 22c-1 under the Investment Company Act of 1940 and as
otherwise directed by the Board of Directors of the Fund.
CSS shall reconcile its records of outstanding shares and shareholder
accounts with the Fund's Transfer Agent periodically, and not less frequently
than monthly.
Section 4. CSS shall provide assistance to the Fund in the servicing of
shareholder accounts, which may include telephone and written conversations,
assistance in redemptions, exchanges, transfers and opening accounts as may be
required from time to time. CSS shall, in addition, provide such additional
administrative non-advisory management services as CSS and the Fund may from
time to time agree.
Section 5. The accounts and records maintained by CSS shall be the
property of the Fund, and shall be made available to the Fund, within a
reasonable period of time, upon demand. CSS shall assist the Fund's independent
auditors, or any other person authorized by the Fund or, upon demand, any
regulatory body as authorized by law or regulation, in any requested review of
the Fund's accounts and records but shall be reimbursed for all reasonable and
documented expenses and employee time invested in any such review outside of
routine and normal periodic reviews. Upon receipt from the Fund of any necessary
information, CSS shall assist the Fund in organizing necessary data for the
Fund's completion of any necessary tax returns, questionnaires, periodic reports
to shareholders and such other reports and information requests as the Fund and
CSS shall agree upon from time to time.
Section 6. CSS and the Fund may from time to time adopt procedures they
agree upon, and, absent knowledge to the contrary, CSS may conclusively assume
that any procedure approved by the Fund or directed by the Fund, does not
conflict with or violate any requirements of Fund's Prospectuses, Articles of
Incorporation, By-Laws, registration statements, orders, or any rule or
regulation of any regulatory body or
<PAGE>
governmental agency. The Fund (acting through its officers or other agents)
shall be responsible for notifying CSS of any changes in regulations or rules
which might necessitate changes in the Fund's procedures.
Section 7. CSS may rely upon the advice of the Fund and upon statements of
the Fund's lawyers, accountants and other persons believed by it in good faith
to be expert in matters upon which they are consulted, and CSS shall not be
liable for any actions taken in good faith upon such statements.
Section 8. CSS shall not be liable for any actions taken in good faith
reliance upon any authorized Oral Instructions, any Written Instructions, and
certified copy of any resolution of the Board of Directors of the Fund or any
other document reasonably believed by CSS to be genuine and to have been
executed or signed by the proper person or persons.
CSS shall not be held to have notice of any change of authority of any
officer, employee or agent of the Fund until receipt of notification thereof by
the Fund.
The Fund shall indemnify and hold CSS harmless from any and all expenses,
damages, claims, suits, liabilities, actions, demands and losses whatsoever
arising out of or in connection with any error, omission, inaccuracy or other
deficiency of any information provided to CSS by the Fund, or the failure of the
Fund to provide any information needed by CSS knowledgeably to perform its
functions hereunder. Also, the Fund shall indemnify and hold harmless CSS from
all claims and liabilities (including reasonable documented expenses for legal
counsel) incurred by or assessed against CSS in connection with the performance
of this Agreement, except such as may arise from CSS's own negligent action,
omission or willful misconduct; provided, however, that before confessing any
claim against it, CSS shall give the Fund reasonable opportunity to defend
against such claim in the name of the Fund or CSS or both.
Section 9. The Fund agrees to pay CSS compensation for its services and to
reimburse it for expenses, as set forth in the Schedule attached hereto, or as
shall be set forth in amendments to such schedule approved by the Fund's Board
of Directors and CSS.
Section 10. Except as required by laws and regulations governing
investment companies, nothing contained in this Agreement is intended to or
shall require CSS, in any capacity hereunder, to perform any functions or duties
on any holiday or other day of special observance on which CSS is closed.
Functions or duties normally scheduled to be performed on such days shall be
performed on, and as of, the next business day on which both the Fund and CSS
are open. CSS will be open for business on days when the Fund is open for
business and/or as otherwise set forth in the Fund's Prospectuses and Statements
of Additional Information.
Section 11. Either the Fund or CSS may give written notice to the other of
the termination of this Agreement, such termination to take effect at the time
specified in
<PAGE>
the notice, which time shall be not less than 90 days from the giving of such
notice. Such termination shall be without penalty.
Section 12. Any notice or other communication required by or permitted to
be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first-class mail, postage prepaid, to the
respective parties at their last known address, except that Oral Instructions
may be given if authorized by the Board of the Fund and preceded by a
certificate from the Fund's secretary so attesting.
Notices to the Fund shall be directed to:
1500 Forest Ave.
Suite 223
Richmond, VA 23229
Notices to CSS shall be directed to:
1500 Forest Ave.
Suite 223
Richmond, VA 23229
Section 13. This Agreement may be executed in two or more counterparts,
each of which, when so executed, shall be deemed to be an original, but such
counterparts shall together constitute but one and the same instrument.
Section 14. This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by the Fund without the written
consent of CSS, or by CSS without the written consent of the Fund, authorized or
approved by a resolution of its Board of Directors.
Section 15. For purposes of this Agreement, the terms Oral Instructions
and Written Instructions shall mean:
Oral Instructions: The term Oral Instruction shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to CSS in person or by telephone, telegram, telecopy, or other
mechanical or documentary means lacking a signature, by a person or persons
believed in good faith by CSS to be a person or persons authorized by a
resolution of the Board of Directors of the Fund, to give Oral Instructions on
behalf of the Fund.
Written Instructions: The term Written Instruction shall mean an
authorization, instruction, approval, item or set of data, or information of any
kind transmitted to CSS in original writing containing original signatures or a
copy of such document transmitted by telecopy including transmission of such
signature believed in good faith by CSS to be
<PAGE>
the signature of a person authorized by a resolution of the Board of Directors
of the Fund to give Written Instructions on behalf of the Fund.
The Fund shall file with CSS a certified copy of each resolution of its
Board of Directors authorizing execution of Written Instructions or the
transmittal of Oral Instructions as provided above.
Section 16. This Agreement shall be governed by the laws of the State of
Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officers as of the day and year first above
written.
THE WORLD FUNDS, INC.
By:
John Pasco, III
Chairman
COMMONWEALTH SHAREHOLDER SERVICES, INC.
By:
John Pasco, III
President
<PAGE>
SCHEDULE A TO
ADMINISTRATIVE SERVICES AGREEMENT
BY AND BETWEEN
THE WORLD FUNDS, INC. AND
COMMONWEALTH SHAREHOLDER SERVICES, INC.
FOR THE
CSI EQUITY FUND
Pursuant to Section 9 of the Administrative Services Agreement, dated ,
1997, by and between The World Funds, Inc. (the "Fund"), and Commonwealth
Shareholder Services, Inc. ("CSS"), the CSI Equity Fund series of the Fund shall
pay CSS a fee calculated and paid monthly as follows:
A. For the performance of Blue Sky matters, CSS shall be paid at the rate of
$30 per hour of actual time used.
B. For shareholder servicing, CSS shall be paid at the rate of $30 per hour of
actual time used.
C. For all other administration, CSS shall be paid a fee at the rate of 0.2%
per annum of the average daily net assets on the first $50 million (with a
minimum fee of $30,000), 0.15% per annum of the average daily net assets
from $50 million to $100 million, and 0.1% per annum of the average daily
net assets over $100 million.
D. In addition to the foregoing, the Fund shall reimburse CSS, from the assets
of the Portfolio, for the Portfolio's proportionate share of general
expenses incurred for the Fund and for all expenses incurred by the
Portfolio individually. Such out-of- pocket expenses shall include, but not
be limited to: documented fees and costs of obtaining advice of counsel or
accountants in connection with its services to the Fund; postage; long
distance telephone; special forms required by the Fund; any travel which
may be required in the performance of its duties to the Fund; and any other
extraordinary expenses it may incur in connection with its services to the
Fund.
<PAGE>
EXHIBIT H
ADMINISTRATIVE SERVICES AGREEMENT
Administrative Services Agreement (the "Agreement") dated , 1997, by and
between THE WORLD FUNDS, INC. (the "Fund"), a diversified, open-end management
investment company, duly organized as a corporation in accordance with the laws
of the State of Maryland, and COMMONWEALTH SHAREHOLDER SERVICES, INC. ("CSS"), a
corporation duly organized as a corporation in accordance with the laws of the
Commonwealth of Virginia.
WITNESSETH THAT:
WHEREAS, the Fund desires to appoint CSS as its Administrative Services
Agent, for and on behalf of the CSI FIXED INCOME FUND series (the "Portfolio"),
to perform certain recordkeeping and shareholder servicing functions required of
a duly registered investment company to comply with certain provisions of
federal, state and local law, rules and regulations, and, as is required, to
assist the Fund in preparing and filing certain financial reports, and further
to perform certain daily functions in connection with on-going operations of the
Fund and the Portfolio, and provide ministerial services to implement the
investment decisions of the Fund and the investment advisor of the Portfolio,
CSI Capital Management, Inc. (the "Advisor"); and
WHEREAS, CSS is willing to perform such functions upon the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto, intending to be legally bound,
agree as follows:
Section 1. CSS shall examine and review all records and documents of the
Portfolio pertaining to its duties under this Agreement in order to determine
and/or recommend how such records and documents shall be maintained.
Section 2. CSS shall, as necessary for such purposes, advise the Fund and
its agents of the information which is deemed to be "necessary" for the
performance of its duties under this Agreement, and upon receipt of necessary
information and Written or Oral Instructions from the Fund, shall maintain and
keep current such shareholder relations records.
Unless the information necessary to perform the above functions is
furnished in writing to CSS by the Fund or its agents (such as Custodians,
Transfer Agents, etc.), CSS shall incur no liability and the Fund shall
indemnify and hold harmless CSS from and against any liability arising from any
discrepancy in the information received by CSS and used in the performance by
CSS of its duties.
<PAGE>
It shall be the responsibility of the Fund to furnish CSS with the net
asset value per share, declaration, record and payment dates and amounts of any
dividends or income and any other special actions required concerning each of
its securities.
CSS shall maintain such shareholder records above mentioned as required by
regulation and as agreed upon between the Fund and CSS.
Section 3. The Fund shall confirm to the Fund's Transfer Agent all
purchases and redemptions of shares of the Portfolio effected through the Fund
or its distributor, as and when such orders are accepted by the Fund or an
authorized agent of the Fund designated for that purpose. CSS shall receive from
the Fund's Transfer Agent daily reports of share purchases, redemptions, and
total shares outstanding, and shall be accountable for the information contained
in such reports of purchases and redemptions when received. It is agreed by the
parties that the net asset value per share of the Fund will be calculated in
accordance with Rule 22c-1 under the Investment Company Act of 1940 and as
otherwise directed by the Board of Directors of the Fund.
CSS shall reconcile its records of outstanding shares and shareholder
accounts with the Fund's Transfer Agent periodically, and not less frequently
than monthly.
Section 4. CSS shall provide assistance to the Fund in the servicing of
shareholder accounts, which may include telephone and written conversations,
assistance in redemptions, exchanges, transfers and opening accounts as may be
required from time to time. CSS shall, in addition, provide such additional
administrative non-advisory management services as CSS and the Fund may from
time to time agree.
Section 5. The accounts and records maintained by CSS shall be the
property of the Fund, and shall be made available to the Fund, within a
reasonable period of time, upon demand. CSS shall assist the Fund's independent
auditors, or any other person authorized by the Fund or, upon demand, any
regulatory body as authorized by law or regulation, in any requested review of
the Fund's accounts and records but shall be reimbursed for all reasonable and
documented expenses and employee time invested in any such review outside of
routine and normal periodic reviews. Upon receipt from the Fund of any necessary
information, CSS shall assist the Fund in organizing necessary data for the
Fund's completion of any necessary tax returns, questionnaires, periodic reports
to shareholders and such other reports and information requests as the Fund and
CSS shall agree upon from time to time.
Section 6. CSS and the Fund may from time to time adopt procedures they
agree upon, and, absent knowledge to the contrary, CSS may conclusively assume
that any procedure approved by the Fund or directed by the Fund, does not
conflict with or violate any requirements of Fund's Prospectuses, Articles of
Incorporation, By-Laws, registration statements, orders, or any rule or
regulation of any regulatory body or governmental agency. The Fund (acting
through its officers or other agents) shall be responsible for notifying CSS of
any changes in regulations or rules which might necessitate changes in the
Fund's procedures.
<PAGE>
Section 7. CSS may rely upon the advice of the Fund and upon statements of
the Fund's lawyers, accountants and other persons believed by it in good faith
to be expert in matters upon which they are consulted, and CSS shall not be
liable for any actions taken in good faith upon such statements.
Section 8. CSS shall not be liable for any actions taken in good faith
reliance upon any authorized Oral Instructions, any Written Instructions, and
certified copy of any resolution of the Board of Directors of the Fund or any
other document reasonably believed by CSS to be genuine and to have been
executed or signed by the proper person or persons.
CSS shall not be held to have notice of any change of authority of any
officer, employee or agent of the Fund until receipt of notification thereof by
the Fund.
The Fund shall indemnify and hold CSS harmless from any and all expenses,
damages, claims, suits, liabilities, actions, demands and losses whatsoever
arising out of or in connection with any error, omission, inaccuracy or other
deficiency of any information provided to CSS by the Fund, or the failure of the
Fund to provide any information needed by CSS knowledgeably to perform its
functions hereunder. Also, the Fund shall indemnify and hold harmless CSS from
all claims and liabilities (including reasonable documented expenses for legal
counsel) incurred by or assessed against CSS in connection with the performance
of this Agreement, except such as may arise from CSS's own negligent action,
omission or willful misconduct; provided, however, that before confessing any
claim against it, CSS shall give the Fund reasonable opportunity to defend
against such claim in the name of the Fund or CSS or both.
Section 9. The Fund agrees to pay CSS compensation for its services and to
reimburse it for expenses, as set forth in the Schedule attached hereto, or as
shall be set forth in amendments to such schedule approved by the Fund's Board
of Directors and CSS.
Section 10. Except as required by laws and regulations governing
investment companies, nothing contained in this Agreement is intended to or
shall require CSS, in any capacity hereunder, to perform any functions or duties
on any holiday or other day of special observance on which CSS is closed.
Functions or duties normally scheduled to be performed on such days shall be
performed on, and as of, the next business day on which both the Fund and CSS
are open. CSS will be open for business on days when the Fund is open for
business and/or as otherwise set forth in the Fund's Prospectuses and Statements
of Additional Information.
Section 11. Either the Fund or CSS may give written notice to the other of
the termination of this Agreement, such termination to take effect at the time
specified in the notice, which time shall be not less than 90 days from the
giving of such notice. Such termination shall be without penalty.
<PAGE>
Section 12. Any notice or other communication required by or permitted to
be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first-class mail, postage prepaid, to the
respective parties at their last known address, except that Oral Instructions
may be given if authorized by the Board of the Fund and preceded by a
certificate from the Fund's secretary so attesting.
Notices to the Fund shall be directed to:
1500 Forest Ave.
Suite 223
Richmond, VA 23229
Notices to CSS shall be directed to:
1500 Forest Ave.
Suite 223
Richmond, VA 23229
Section 13. This Agreement may be executed in two or more counterparts,
each of which, when so executed, shall be deemed to be an original, but such
counterparts shall together constitute but one and the same instrument.
Section 14. This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by the Fund without the written
consent of CSS, or by CSS without the written consent of the Fund, authorized or
approved by a resolution of its Board of Directors.
Section 15. For purposes of this Agreement, the terms Oral Instructions
and Written Instructions shall mean:
Oral Instructions: The term Oral Instruction shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to CSS in person or by telephone, telegram, telecopy, or other
mechanical or documentary means lacking a signature, by a person or persons
believed in good faith by CSS to be a person or persons authorized by a
resolution of the Board of Directors of the Fund, to give Oral Instructions on
behalf of the Fund.
Written Instructions: The term Written Instruction shall mean an
authorization, instruction, approval, item or set of data, or information of any
kind transmitted to CSS in original writing containing original signatures or a
copy of such document transmitted by telecopy including transmission of such
signature believed in good faith by CSS to be the signature of a person
authorized by a resolution of the Board of Directors of the Fund to give Written
Instructions on behalf of the Fund.
<PAGE>
The Fund shall file with CSS a certified copy of each resolution of its
Board of Directors authorizing execution of Written Instructions or the
transmittal of Oral Instructions as provided above.
Section 16. This Agreement shall be governed by the laws of the State of
Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officers as of the day and year first above
written.
THE WORLD FUNDS, INC.
By:
John Pasco, III
Chairman
COMMONWEALTH SHAREHOLDER SERVICES,
INC.
By:
John Pasco, III
President
<PAGE>
SCHEDULE A TO
ADMINISTRATIVE SERVICES AGREEMENT
BY AND BETWEEN
THE WORLD FUNDS, INC. AND
COMMONWEALTH SHAREHOLDER SERVICES, INC.
FOR THE
CSI FIXED INCOME FUND
Pursuant to Section 9 of the Administrative Services Agreement, dated ,
1997, by and between The World Funds, Inc. (the "Fund"), and Commonwealth
Shareholder Services, Inc. ("CSS"), the CSI Fixed Income Fund series of the Fund
shall pay CSS a fee calculated and paid monthly as follows:
A. For the performance of Blue Sky matters, CSS shall be paid at the rate of
$30 per hour of actual time used.
B. For shareholder servicing, CSS shall be paid at the rate of $30 per hour of
actual time used.
C. For all other administration, CSS shall be paid a fee at the rate of 0.2%
per annum of the average daily net assets on the first $50 million (with a
minimum fee of $30,000), 0.15% per annum of the average daily net assets
from $50 million to $100 million, and 0.1% per annum of the average daily
net assets over $100 million.
D. In addition to the foregoing, the Fund shall reimburse CSS, from the assets
of the Portfolio, for the Portfolio's proportionate share of general
expenses incurred for the Fund and for all expenses incurred by the
Portfolio individually. Such out-of- pocket expenses shall include, but not
be limited to: documented fees and costs of obtaining advice of counsel or
accountants in connection with its services to the Fund; postage; long
distance telephone; special forms required by the Fund; any travel which
may be required in the performance of its duties to the Fund; and any other
extraordinary expenses it may incur in connection with its services to the
Fund.
<PAGE>
EXHIBIT I
FUND ACCOUNTING SERVICE AGREEMENT
This agreement (the "Agreement") is entered into as of the day of , 1997
by and between The World Funds, Inc., (the "Fund"), an open-end diversified
investment business corporation organized under the laws of Maryland and having
its office at 1500 Forest Avenue, Suite 223, Richmond, Virginia, 23229, on
behalf of the CSI Equity Fund series and the CSI Fixed Income Fund series and
any other series (the "Series") as may from time to time be created and
designated by the Fund and which becomes subject to this Agreement by the mutual
consent of the parties hereto, and Star Bank, National Association, (the "Star
Bank"), a national banking association having its principal office at 425 Walnut
Street, Cincinnati, Ohio, 45202.
WHEREAS, the Fund desires to appoint Star Bank as an Accounting Services
Agent to maintain and keep current the books, accounts, records, journals or
other records of original entry relating to the business of the Series as set
forth in this Agreement; and
WHEREAS, the Fund will cause to be provided certain information to Star
Bank as set forth below:
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereafter contained, the parties hereto agree as follows:
Section 1. DEFINITIONS
For purposes of this Agreement, the terms Oral Instructions and Written
Instructions shall mean: (a) Oral Instructions: The term Oral Instructions shall
mean an authorization, instruction, approval, item or set of data, or
information of any kind transmitted to Star Bank in person or by telephone,
telegram, telecopy or other mechanical or documentary means lacking an original
signature, by a person or persons believed in good faith by Star Bank to be a
person or persons authorized by a resolution of the Board of Directors of the
Fund, to give Oral Instructions on behalf of the Fund. (b) Written Instructions:
The term Written Instructions shall mean an authorization, instruction,
approval, item or set of data or information of any kind transmitted to Star
Bank bearing an original signature of an authorized person, or a copy of such
document transmitted by telecopy including transmission of such signature
believed in good faith by Star Bank to be the signature of a person authorized
by a resolution of the Board of Directors of the Fund to give Written
Instructions of behalf of the Fund. (c) The Fund shall file with Star Bank a
certified copy of each resolution of its Board of Directors authorizing
execution of Written Instructions or the transmittal of Oral Instructions as
provided above.
Section 2. SCOPE OF DUTIES OF STAR BANK
(a) Upon receipt of the necessary information from the Fund or its agents by
Written or Oral Instructions, Star Bank shall maintain and keep current the
following Accounts
<PAGE>
and Records relating to the business of the Series, in such form as may be
mutually agreed to between the Fund and Star Bank, and as may be required by the
Investment Company Act of 1940 (the "Act"):
(1) Cash Receipts Journal
(2) Cash Disbursements Journal
(3) Dividends Paid and Payable Schedule
(4) Purchase and Sales Journals - Portfolio Securities
(5) Subscription and Redemption Journals
(6) Security Ledgers - Transaction Report and Tax Lot Report
(7) Broker Ledger - Commission Report
(8) Daily Expense Accruals
(9) Daily Interest Accruals
(10) Daily Trial Balance
(11) Portfolio Interest Receivable and Income Journal
(12) Listing of Portfolio Holdings showing cost, market value and
percentage of portfolio comprised of each security.
(b) Star Bank shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
Section 3. LIMITATION OF LIABILITY OF STAR BANK
(a) Unless necessary information to perform the above functions is furnished by
Written or Oral Instructions to Star Bank in a timely manner to enable the daily
calculation of the Fund's net asset value at the time set by the Fund pursuant
to Rule 22c-1 under the Act, Star Bank shall incur no liability, and the Fund
shall indemnify and hold harmless Star Bank from and against any liability
arising from any failure to provide complete information or from any discrepancy
between the information received by Star Bank and used in such calculations and
any subsequent information received from the Fund or any of its designated
Agents. (b) Star Bank may rely upon the advice of the Fund, or of counsel for
the Fund and upon statements of the Fund's independent accountants, brokers and
other persons reasonably believed by it in good faith to be expert in the
matters upon which they are consulted and for any actions reasonably taken in
good faith reliance upon such statements and without negligence or willful
misconduct, Star Bank shall not be liable to anyone.
Section 4. REPORTS
(a) The Fund shall provide to Star Bank on a quarterly basis a report of a duly
authorized officer of the Fund representing that all information furnished to
Star Bank during the preceding quarter was true, complete and correct in all
material respects. Star Bank shall not be responsible for the accuracy of any
information furnished to it by the Fund or its authorized agents, and the Fund
shall hold Star Bank harmless in regard to any liability incurred by reason of
the inaccuracy of such information.
<PAGE>
(b) Whenever, in the course of performing its duties under this Agreement, Star
Bank determines, on the basis of information supplied to Star Bank by the Fund
or its authorized agents, that a violation of applicable law has occurred or
that, to its knowledge, a possible violation of applicable law may have occurred
or, with the passage of time, would occur, Star Bank shall promptly notify the
Fund and its counsel of such violation.
Section 5. PRICING
(a) Star Bank shall perform ministerial calculations necessary to calculate the
Fund's net asset value daily, in accordance with the Fund's current prospectus
and utilizing the information described in this Section. (b) Portfolio
investments for which market value is to be determined by the use of an
automated financial service (a "Pricing Service") approved by the Fund shall be
valued based on the prices of the portfolio investment reported by such Pricing
Service except where the Fund has given or caused to be given specific Written
or Oral Instructions to utilize a different value. Notwithstanding any
information obtained from a Pricing Service, all portfolio securities shall be
given such values as the Fund shall direct by Written or Oral Instructions,
including all restricted securities and other securities requiring valuation not
readily ascertainable solely by the use of such a Pricing Service. (c) Star Bank
shall have no responsibility or liability for the accuracy of prices quoted by
any recognized Pricing Service used by it pursuant to the preceding paragraph;
for the accuracy of the information supplied by the Fund; or for any loss,
liability, damage, or cost arising out of any inaccuracy of such data, unless
Star Bank is itself negligent with respect thereto.
Section 6. RELIANCE UPON INSTRUCTIONS
(a) For all purposes under this Agreement, Star Bank is authorized to act upon
receipt of the first of any Written or Oral Instructions it receives from the
Fund or authorized agents of the Fund. In cases where the first instruction is
an Oral Instruction that is not in the form of a document or written record, a
confirmatory Written Instruction or Oral Instruction in the form of a document
or written record shall be delivered, and in cases where Star Bank receives an
Instruction, whether Written or Oral, to enter a portfolio transaction on the
records, the Fund shall cause the broker-dealer to send a written confirmation
to Star Bank. (b) Star Bank shall be entitled to rely on the first Instruction
received by it, and for any act or omission undertaken in compliance therewith
shall be free of liability and fully indemnified and held harmless by the Fund.
If additional Instructions are received by the bank prior to complying with the
original Instruction, the sole obligation of Star Bank with respect to any
follow-up or confirmatory Written Instruction, Oral Instruction in documentary
or written form, or broker-dealer written confirmation shall be to make
reasonable efforts to detect any such discrepancy between the original
Instruction and such confirmation and to report such discrepancy to the Fund.
The Fund shall be responsible, at the Fund's expense, for taking any action,
including any reprocessing, necessary to correct any discrepancy or error.
Section 7. OWNERSHIP OF AND ACCESS TO FUND RECORDS
<PAGE>
(a) It is agreed that the Accounts and Records maintained by Star Bank for the
Fund are the property of the Fund, and shall be made available to the Fund
promptly upon request and shall be maintained for the periods prescribed in Rule
31(a)-2 under the Act. (b) Star Bank shall assist the Fund's independent
auditors or, upon lawful demand, any authorized regulatory body, in any
authorized inspection or review of the Fund's Accounts and Records.
Section 8. PROCEDURES AND COMPLIANCE
Star Bank and the Fund may from time to time adopt such procedures as they
agree upon in writing, and Star Bank may conclusively assume that any procedure
approved or directed by the Fund does not conflict with or violate any
requirements of its Prospectus, Articles of Incorporation, By-Laws, or any rule
or regulation of any regulatory body or governmental agency. The Fund shall be
responsible for notifying Star Bank of any changes in regulations or rules which
might necessitate changes in Star Bank's procedures, and for working out such
changes with Star Bank.
Section 9. COMPENSATION
In consideration of the services to be performed by Star Bank, the Fund
agrees to pay Star Bank the fees and reimbursement of out-of-pocket expenses as
set forth in the fee schedule attached hereto as Schedule A.
Section 10. HOLIDAYS
Nothing contained in this Agreement is intended to or shall require Star
Bank, in any capacity hereunder, to perform any functions or duties on any
holiday, day of special observance or any other day on which the Custodian or
the New York Stock Exchange is closed. Functions or duties normally scheduled to
be performed on such days shall be performed, and as of, the next succeeding
business day on which both the New York Stock Exchange and the Custodian are
open. Not withstanding the foregoing, Star Bank shall compute the net asset
value of the Fund on each day required pursuant to Rule 22c-1 promulgated under
the Act.
Section 11. AGENTS
Star Bank reserves the right to appoint, in its sole discretion, agents
who may serve as accounting service agents, or perform any part of the duties
and responsibilities of Star Bank under this Agreement.
Section 12. TERMINATION
Either Party hereto may give written notice to the other party (the
"Termination Notice") of the termination of this Agreement. Such Termination
Notice shall state a date upon which the termination is effective (the
"Termination Date"), which shall be not less than sixty (60) days after the date
of the giving of the notice unless otherwise agreed by the parties hereto in
writing.
Section 13. NOTICE
<PAGE>
Any notice or other communication required by or permitted to be given in
connection with this Agreement shall be in writing, and shall be delivered in
person or sent by first class mail, postage prepaid to the respective parties as
follows:
If to the Fund:
The World Funds, Inc.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
If to Star Bank:
Star Bank, N.A.
425 Walnut Street ML 6118
Cincinnati, OH 45202
Section 14. AMENDMENTS TO BE IN WRITING
This Agreement may be amended from time to time by a writing executed by
the Fund and Star Bank. The compensation stated in Schedule A attached hereto
may be adjusted from time to time by the execution of a new schedule signed by
both of the parties.
Section 15. CONTROLLING LAW
This Agreement shall be construed in accordance with the laws of the State
of Ohio.
Section 16. JURISDICTION
Any legal action, suit or proceeding to be instituted by either party with
respect to this Agreement shall be brought by such party exclusively in the
courts of the State of Ohio or in courts of the United States for the Southern
District of Ohio, and each party, by its execution of this Agreement,
irrevocably (i) submits to such jurisdiction and (ii) consents to the service of
any process or pleadings by first class U.S. mail, postage prepaid and return
receipt requested, or by any other means from time to time authorized by the
laws of such jurisdiction.
Section 17. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
Section 18. HEADINGS
The headings of paragraphs in this Agreement are for convenience of
reference only and shall not affect the meaning or construction of any provision
of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
The World Funds, Inc.
ATTEST:
By: ___________________________
______________________ John Pasco III
Title: Chairman
Star Bank, N.A.
ATTEST:
By: ____________________________
____________________ Marsha A. Croxton
Title: Vice President
<PAGE>
SCHEDULE A
1. Domestic and ADR Securities Annual Basic Fee per portfolio (1/12 payable
monthly)
$12,000 Minimum up to $5 Million Average Net Assets
$18,000 Minimum up to $10 Million Average Net Assets
$24,000 Minimum up to $25 Million Average Net Assets
.0002 on Next $75 Million of Average Net Assets
Should total assets exceed $100 Million/Fund the fee schedule will
be renegotiated.
2. Should the Series security trading activity exceed an average of 100
trades per month per portfolio, and additional fee of $2.50 will be
charged per trade.
<PAGE>
