THE WORLD FUNDS, INC.
1500 Forest Avenue, Suite 223, Richmond, Va. 23229
804-285-8211 * 800-527-9500 * 804-285-8251 (fax)
VIA EDGAR
Filing Desk
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20049
RE: The World Funds, Inc.
File Numbers 333-29289 and 811-8255
Post Effective Amendment to Registration Statement
Gentlemen:
Transmitted herewith for electronic filing with the U.S. Securities and
Exchange Commission (the "Commission") on behalf of The World Funds, Inc. (the
"Registrant"), pursuant to Rule 485(b) under the Securities Act of 1933, as
amended (the "1933 Act"), is Post-Effective Amendment No. 8 under the 1933 Act
and Amendment No. 9 under the Investment Company Act of 1940, as amended (the
"1940 Act"), referred to herein as the "485(b) Amendment" to the registration
statement of the Registrant.
The 485(b) Amendment contains the revised prospectuses and statements of
additional information ("SAIs") of the Sand Hill Portfolio Manager Fund, the CSI
Equity Fund, the CSI Fixed Income Fund (the "Income Fund", and together with the
CSI Equity Fund, the "CSI Fnds"), The New Market Fund (the "NMF") and the Third
Millennium Russia Fund ("Russia Fund") which are the series of the Registrant
for purposes of the annual post-effective amendment of the Registrant.
The prospectuses and SAIs of the Russia Fund and TNM Fund have been
revised with the intention of complying with the new Form N-1A simplified
prospectus and plain English requirements. The prospectuses and SAIs of the
Russia Fund and TNM Fund are modeled after the prospectuses and SAIs of the CSI
Funds and the Sand Hill Portfolio Manager Fund of the Registrant, which were
previously filed and are now effective. The prospectus and SAI of the CSI Funds
(the "CSI Prospectus/SAI") were filed in a Rule 485(a) post-effective amendment
of the Registrant on January 29, 1999, permitting a 60-day Commission staff
review and comments, and in a Rule 485(b) post-effective amendment of the
Registrant filed on March 30, 1999 that incorporated the responses to the
Commission staff's comments. The prospectuses and SAIs of the Russia Fund and
TNM Fund filed in this 485(b) Amendment are substantially similar to the CSI
Prospectus/SAI with respect to the new Form N-1A simplified prospectus
requirements and the plain English requirements and with the intention of
incorporating the Commission staff's comments on the CSI Prospectus/SAI that are
applicable to the prospectuses and SAIs of the Russia Fund and TNM Fund. The
Registrant requests that, due to this substantial similarity, the 485(b)
Amendment be permitted to be effective immediately.
The 485(b) Amendment also contains updated financial information and
financial statements and other minor and stylistic revisions
Should you have any questions regarding the filing of the foregoing
documents, please feel free to call or write the undersigned.
Sincerely,
/s/ Darryl S. Peay
Darryl S. Peay
Assistant Secretary
cc: Carylyn Gail Gilheany, Esq.
John Pasco, III
Steven M. Felsenstein, Esq.
As filed with the Securities and Exchange Commission on December 29, 1999.
Registration
No. 333-29289
File
No. 811-8255
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ X /
Pre-Effective Amendment No.
/ /
Post-Effective Amendment No. / 8 /
/ X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940
/ X /
Amendment No. / 9 /
/ X /
(Check appropriate box or boxes.)
THE WORLD FUNDS, INC. (THE "COMPANY")
(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
(800)-527-9525
Steven M. Felsenstein, Esq.
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square, Philadelphia, PA 19103-7098
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practical after this
post-effective amendment of this registration statement becomes effective.
It is proposed that this filing will become effective (check
appropriate box)
/ X / immediately upon filing pursuant to paragraph (b); / / on (date) pursuant
to paragraph (b); / / 60 days after filing pursuant to paragraph (a); / / on
(date) pursuant to paragraph (a) of rule (485 or 486).
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective
date for a
previously filed post-effective amendment.
<PAGE>
TABLE OF CONTENTS
This Filing of a post-effective amendment to the Registrant's registration
statement on Form N-1A consists of the following:
1. Part A revising the prospectus of the Sand Hill Portfolio Manager Fund,
the CSI Equity Fund series, the CSI Fixed Income Fund, The New Market Fund and
the Third Millennium Russia Fund series of the Registrant.
2. Part B revising the statement of additional information of the Sand
Hill Portfolio Manager Fund, the CSI Equity Fund series, the CSI Fixed Income
Fund, The New Market Fund and the Third Millennium Russia Fund series of the
Registrant.
3. Part C
PROSPECTUS
THE WORLD FUNDS, INC.
Sand Hill Portfolio Manager Fund
Prospectus dated December 29, 1999
This Prospectus describes the Sand Hill Portfolio Manager Fund (the "Fund"), a
series of The World Funds, Inc. A series fund offers you a choice of
investments, with each series having its own investment objective and a separate
portfolio. The Fund seeks to maximize total return by investing in a diversified
portfolio of equity securities, debt securities and short-term investments on a
global basis (within the U.S. and in other countries).
As with all mutual funds, the U.S. Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the accuracy or
completeness of this Prospectus. It is a criminal offense to suggest otherwise.
<PAGE>
RISK RETURN SUMMARY
Investment Objective:Maximize total return
Principal Investment
Strategies: The Fund seeks to achieve its objective by investing in
equity securities, debt securities and short term
investments on a global basis (within the U.S. and in
other countries). Equity securities consist of common
stocks and securities convertible into common stocks.
Debt securities include obligations of governments,
instrumentalities and corporations. Short-term
instruments are generally used to protect the Fund
against movements in interest rates or currency exchange
rates and to provide the Fund with liquidity. The Fund
may invest in each of these three asset classes without
limit.
Principal Risks: The principal risk of investing in the Fund is that
the values of its investments are subject to market,
economic, interest rate and business risk that may cause
the Fund's net asset value ("NAV") to fluctuate over time.
Therefore, the value of your investment in the Fund could
decline. There is no assurance that the investment adviser
will achieve the Fund's objective.
The Fund invests a varying portion of its assets in foreign
investments. These foreign investments may involve
financial, economic or political risks not ordinarily
associated with U.S. securities. With foreign investments,
the Fund's NAV may be affected by changes in exchange rates
between foreign currencies and the U.S. dollar, less
rigorous regulatory standards, less liquidity in markets
and more volatility in prices than U.S. securities, higher
taxes, and adverse social or political developments.
An investment in the Fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Investor Profile: You may want to invest in the Fund if you are
seeking to maximize total return and are willing to accept
share prices that may fluctuate, sometimes significantly,
over the short-term. The Fund will not be appropriate if
you are seeking current income or are seeking safety of
principal.
The bar chart and table below provide an indication of the
risks of investing in the Fund by showing past performances
of the Fund. The bar chart shows how the Fund's performance
has varied from one year to another. The table compares the
performance of the Fund to the Lipper Global Flexible
Portfolio Index. The Lipper Global Flexible Portfolio Index
is a composite of the total return of mutual funds with the
stated objective of allocating investments across asset
classes, including stocks, bonds, and money market
instruments with a focus on total return, with at least 25%
of their portfolios invested in securities outside of the
United States. Keep in mind that past performance may not
indicate how well the Fund will perform in the future.
[graph goes here]
Sand Hill Portfolio Manager Fund Total Return *
1995 11.60%
1996 19.57%
1997 17.87%
1998 8.11%
Best Calendar Quarter: Q2 '97 up 10.55% Worst Calendar Quarter: Q3 '98
down 7.24%
Sand Hill Portfolio Manager Fund Total Return for Calendar Years
[end graph]
* The year-to-date return for the period January 1, 1999 through September
30, 1999 is 4.66%.
--------------------------------------------------------------------
Average Annual Total Past One Past Three Since Inception
Returns(1) Year Years
(January 2,1995)
--------------------------------------------------------------------
--------------------------------------------------------------------
Sand Hill Portfolio 8.11% 15.04% 14.19%
Manager Fund
--------------------------------------------------------------------
--------------------------------------------------------------------
Lipper Global 8.99% 11.88% 9.43%
Flexible Portfolio(2)
--------------------------------------------------------------------
(1) For the periods ended December 31, 1998.
(2) This index, described above, is an unmanaged index. Returns include
reinvestment of all dividends and distributions.
FEES AND EXPENSES
Costs are an important consideration in choosing a mutual fund. Shareholders
indirectly pay the costs of operating a fund, plus any transaction costs
associated with buying and selling the securities a fund holds. These costs will
reduce a portion of the gross income or capital appreciation a fund achieves.
Even small differences in these expenses can, over time, have a significant
effect on a fund's performance.
The following table describes the fees and expenses that you may pay directly or
indirectly in connection with an investment in the Fund. There are no sales
charges in connection with purchases or redemption of shares. The annual
operating expenses, which cover the costs of investment management,
administration, accounting and shareholder communications, are shown as an
annual percentage of the Fund's average daily net assets.
Shareholder Transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (load) Imposed on Purchases None
Sales Charge (load) Imposed on Reinvested Dividends None
Redemption Fees(1) None
Exchange Fees(2) None
(1) A shareholder may be charged $10 for each redemption requested by
telephone.
(2) A shareholder may be charged a $10 fee for each exchange requested by
telephone.
Annual Operating Expenses (Expenses that are deducted from the Fund's assets)
Management Fee 1.00%
Distribution and Service (12b-1) Fees None
Other Operating Expenses* 1.05
Total Annual Fund Operating Expenses* 2.05%**
* The investment adviser (as defined below) has voluntarily agreed to waive
its management fee or make payments to limit the Fund's expenses to the
extent necessary to ensure that Total Annual Fund Operating Expenses do
not exceed 1.90% of average daily net assets through December 31, 2000
(see "Management Organization and Capital Structure" below).
** Expense credits reduced the Fund's total annual fund operating expenses to
1.90% during the fiscal year ended August 31, 1999.
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 the Fund increases in size, its Other Operating
Expenses will decline, reflecting economies of scale and its management fee rate
is reduced in one step as certain asset levels are reached. See "Management
Organization and Capital Structure".
EXAMPLE:
The following example shows the expenses that you could pay over time. It will
help you compare the costs of investing in the Fund with the cost of investing
in other mutual funds. The example assumes that you invest $10,000 in the Fund
and then redeem all of your shares at the end of the periods indicated. Also,
the example assumes that you earn a 5% annual return, with no change in Fund
expense levels. Because actual return and expenses will be different, the
example is for comparison only. Based on these assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- -----
$208 $643 $1,103 $2,379
* Should the adviser continue the voluntary operating expense limitation for
the periods shown below, your costs would be:
1 Year * 3 Years * 5 Years * 10 Years *
-------- --------- --------- ----------
$193 $597 $1,026 $2,222
INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS
The investment objective of the Fund is to maximize total return (consisting of
realized and unrealized appreciation plus income) consistent with allocating its
investments among equity securities, debt securities and short term investments.
Within each asset class, the Fund may invest in domestic or foreign securities.
By allocating investments across broad asset classes, Sand Hill Advisors, Inc.
(the "Investment Adviser") seeks to achieve over time a high total return, and a
lower price volatility than might be inherent in a more limited asset mix. The
portfolio of the Fund will be diversified. The Fund will not be limited to
investing in securities of companies of any size or to securities traded in any
particular market.
The Fund seeks to take advantage of investment opportunities using a mix of
asset classes and markets throughout the world. The Fund allocates its
investments among equity securities, debt securities and short term investments
according to the Investment Adviser's anticipation of risks and returns for each
asset class. The Fund may invest in each of these three asset classes without
limit. While broad representation in markets and asset classes is a primary
asset allocation policy of the Fund, the Investment Adviser intends to retain
the flexibility necessary to move among asset classes and markets as changing
conditions warrant.
Because the Fund invests in different types of securities in proportions which
will vary over time, investors should not expect the Fund to exhibit stable
asset allocations. Investors should also realize that the Fund's performance
will depend upon the skill of the Investment Adviser to anticipate the relative
risks and returns of stocks, bonds and other securities and to adjust the Fund's
portfolio accordingly.
Equity securities consist of common stocks as well as warrants, rights and
securities which are convertible into common stocks, such as convertible bonds.
The Investment Adviser screens the Fund's equity holdings primarily by analyzing
a company's cash flow return on investment. Specifically, the Investment Adviser
determines the cash flow of a company and then applies a market derived discount
rate to the cash flow to evaluate the company. The Investment Adviser also
determines the free cash flow that can be reinvested into the company and
applies the same market derived discount rate. The Investment Adviser also
identifies industries that are positioned to participate in strong demographic,
societal or economic trends and looks for companies within those industries that
have a particular competitive advantage or niche.
Debt Securities consist of bonds, obligations and other evidences of
indebtedness denominated in U.S. or foreign currencies which are issued by
governments, companies or other issuers to borrow money from investors. Debt
securities may pay fixed or variable rates of interest, have varying maturity
dates at which the issuers must repay the debt, and have varying degrees of
risk. There is no limit on the maturities of the debt securities that the
Investment Adviser will select. Rather, the Investment Adviser will select debt
securities for the Fund on the basis of, among other things, credit quality,
yield, potential for capital gains and the Investment Adviser's fundamental
outlook for currency and interest rate trends around the world.
The debt securities in which the Fund will invest will be almost entirely
investment grade debt securities. Investment grade debt securities are
securities that (1) bear the rating BBB or higher by Standard & Poor's Ratings
Group; (2) bear the rating Baa or higher by Moody's Investors Service, Inc.; or
(3) are unrated securities which the Investment Adviser deems to be of
comparable quality. The Fund may invest in lower quality debt securities in
order to avail itself of the higher yields available from these securities or to
seek to realize capital gains. The Fund does not currently intend to invest more
than 5% of its total assets in securities that are rated below investment grade
or are unrated. After the Fund buys a debt security, the security may cease to
be rated or its rating may be reduced. Neither event would require the
elimination of the debt security from the Fund's portfolio.
Short-term investments are obligations denominated in U.S. or foreign currencies
consisting of bank deposits; bankers acceptances; certificates of deposit;
commercial paper; short-term government, government agency, supranational agency
and corporate obligations; and repurchase agreements. Depending on the
Investment Adviser's assessment of the prospects for the various asset classes,
all or a portion of the Fund's assets may be invested in high quality short-term
investments or cash for investment, to protect against adverse movements of the
market or interest rates or to provide liquidity.
The Fund's assets will be invested on a global basis to take advantage of
investment opportunities both within the U.S. and outside the U.S. The foreign
securities which the Fund purchases may be bought directly in their principal
markets or may be acquired through the use of depositary receipts. Investments
in foreign securities may involve risks not ordinarily associated with U.S.
securities. Foreign companies are not generally subject to the same accounting,
auditing and financial reporting standards as are domestic companies. Therefore,
there may be less information available about a foreign company than about a
domestic company. Certain countries do not honor legal rights enjoyed in the
U.S. In addition, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect the Fund's investments in those countries. Many foreign securities
have substantially less trading volume than securities traded on U.S. markets,
and securities in some foreign issuers are less liquid and more volatile in
price than securities of domestic issuers. It is more expensive to trade in
foreign markets than in U.S. markets.
The market values of debt securities are influenced primarily by credit risk and
interest rate risk. Credit risk is the risk that the issuer of the security will
not maintain the financial strength needed to pay principal and interest on its
debt securities. Generally, the market values of fixed-rate debt securities vary
inversely with the changes in prevailing interest rates. When interest rates
rise, the market values of such securities tend to decline and vice versa.
Although under normal market conditions longer term securities yield more than
short-term securities of similar quality, longer term securities are subject to
greater price fluctuations.
The Fund is subject to stock market risk, which is the possibility that stock
prices overall will decline over short or even long periods. Stock markets tend
to move in cycles, with periods of rising prices and periods of falling prices.
Therefore, the value of your investment in the Fund may increase or decrease.
The Fund's investment success depends on the skill of the Investment Adviser in
evaluating, selecting and monitoring the portfolio assets. If the Investment
Adviser's conclusions about asset allocation are incorrect, the Fund may not
perform as anticipated.
Like other mutual funds and financial or business organizations around the
world, The World Funds, Inc. (the "Company") and the Fund could be adversely
affected if its computer systems or the computer systems of its service
providers do not properly process and calculate date-related information and
data as of and after January 1, 2000. This is commonly known as the "Year 2000
Issue". The Company has taken steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to computer systems that it uses and to
obtain reasonable assurances that comparable steps are being taken by its major
service providers. These steps include identifying system problems, remediation
and testing the system fixes. The Company and each of its major service
providers are in the stage of testing the system fixes that have been
implemented. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Company.
Several European countries are participating in the European Economic and
Monetary Union, which established a common European currency for participating
countries. This currency is commonly known as the "Euro". Each participating
country replaced its existing currency with the Euro as of January 1, 1999.
Additional European countries may elect to participate in the common currency in
the future. The conversion presents unique uncertainties, including, among
others: (1) whether the payment and operational systems of banks and other
financial institutions will function properly; (2) how certain outstanding
financial contracts that refer to existing currencies rather than the Euro will
be treated legally; (3) how exchange rates for existing currencies and the Euro
will be established; and (4) how suitable clearing and settlement payment
systems for the Euro will be managed. If the Fund invests in securities of
countries that have converted to the Euro or convert in the future, the Fund
could be adversely affected if these uncertainties cause adverse effects on
these securities. To date the conversion of the Euro has had negligible impact
on the operations and investment returns of the Fund.
MANAGEMENT ORGANIZATION AND CAPITAL STRUCTURE
Sand Hill Advisors, Inc. (the "Investment Adviser") located at 3000 Sand Hill
Road, Building Three, Suite 150, Menlo Park, CA 94025, manages the assets of the
Fund. The Investment Adviser has been in existence since 1982 and as of December
31, 1999 had approximately $500 million under management. Since the Fund's
inception in January, 1995, Ms. Jane H. Williams, Executive Vice President of
the Investment Adviser, has been primarily responsible for the day to day
management of the Fund. Effective June 1, 1998, Gary K. Conway began co-managing
the Fund with Ms. Williams. Mr. Conway is President and co-founder of the
Investment Adviser. Prior to assuming the role of co-manager, Mr. Conway was an
adviser to the Fund and was actively involved in management decisions and
portfolio selection. The Adviser is responsible for effecting all security
transactions on behalf of the Fund, including the allocation of principal
business and portfolio brokerage and the negotiation of commissions. In placing
orders with brokers and dealers, the Adviser will attempt to obtain the best
price and execution of orders.
Under its investment advisory agreement with the Fund, the Investment Adviser is
entitled to receive a monthly investment advisory fee at an annual rate of 1% of
the first $100 million of the average daily net assets of the Fund and 0.75% of
the average daily net assets of the Fund over $100 million. The Investment
Adviser has voluntarily agreed to waive all or a portion of the advisory fee or
make payments to the Fund in order to maintain the Fund's total operating
expenses at an annual rate not to exceed 1.90% through December 31, 2000. For
the period ended August 31, 1999, the Investment Adviser received $126,902 in
advisory fees from the Fund.
SHAREHOLDER INFORMATION
The Fund's share price, called its NAV per share, is determined and shares are
priced as of the close of trading on the New York Stock Exchange ("NYSE")
(currently 4:00 p.m. Eastern Time) on each business day ("Valuation Time") that
the NYSE is open. As of the date of this prospectus, the Fund is informed that
the NYSE observes the following holidays: New Year's Day, Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. NAV per share is computed by adding the
total value of the Fund's investments and other assets, subtracting any
liabilities of the Fund and then dividing by the total number of Fund shares
outstanding.
Shares are bought, sold or exchanged at the NAV per share next determined after
a request has been received in proper form. Any request received in proper form,
before the Valuation Time, will be processed the same business day. Any request
received in proper form, after the Valuation Time, will be processed the next
business day.
The Fund's securities are valued at current market prices. Investments in
securities traded on the national securities exchanges or included in the NASDAQ
National Market System are valued at the last reported sale price. Other
securities traded in the over-the-counter market and listed securities for which
no sales are reported on a given 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. 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. Depositary receipts 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.
Securities 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 value of a foreign security is determined as of the close of
trading on the foreign exchange on which it is traded or as of the scheduled
close of trading on the NYSE, whichever is earlier. Portfolio securities that
are listed on foreign exchanges may experience a change in value on days when
shareholders will not be able to purchase or redeem shares of the Fund.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times.
PURCHASING SHARES
Shares of the Fund may be purchased directly from First Dominion Capital Corp.
(the "Distributor") or through brokers or dealers who are members of the
National Association of Securities Dealers, Inc. When an investor acquires
shares of the Fund from a securities broker dealer, the investor may be charged
a transaction fee by that broker dealer. The minimum initial investment in the
Fund is $25,000 and additional investments must be $50 or more. The Fund retains
the right to refuse to accept an order.
Purchases by Mail - For initial purchases, the account application form, which
accompanies the prospectus, should be completed, signed and mailed to Fund
Services, Inc. (the "Transfer Agent") at 1500 Forest Avenue, Suite 111,
Richmond, Virginia 23229, together with your check payable to the 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 social security number(s).
Investing by Wire - You may purchase shares by requesting your bank to transmit
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. Once you
have arranged to purchase shares by wire, please complete and mail the account
application form promptly to the Transfer Agent. This application is required to
complete the Fund's records. You will not have access to your shares until the
Fund's records are complete. Once your account is opened, you may make
additional investments using the wire procedure described above. Be sure to
include your name and account number in the wire instructions you provide your
bank.
REDEEMING SHARES
You may redeem your shares 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 the information and documents necessary for your request to be
considered 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 NAV per share next determined
after the Transfer Agent receives the redemption request in proper order.
Payment will be made promptly, but no later than the seventh day following the
receipt of the request in proper order. The Company may suspend the right to
redeem shares for any period during which the NYSE is closed or the U.S.
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 after the suspension is terminated.
If you sell shares through a securities dealer or investment professional, it is
such person's responsibility to transmit the order to the Fund in a timely
fashion. Any loss to you resulting from failure to do so must be settled between
you and such person.
Delivery of the proceeds of a redemption of shares purchased and paid for by
check shortly before the receipt of the redemption request may be delayed until
the Fund determines that the Transfer Agent has completed collection of the
purchase check, which may take up to 14 days. Also, payment of the proceeds of a
redemption request for an account for which purchases were made by wire may be
delayed until the Fund receives a completed account application form for the
account to permit the Fund to verify the identify of the person redeeming the
shares, and to eliminate the need for backup withholding.
Redemption by Mail - To redeem shares by mail, send a written request for
redemption, signed by the registered owner(s) exactly as the account is
registered. Certain written requests to redeem shares may require signature
guarantees. For example, signature guarantees may be required if you sell a
large number of shares, if your address of record on the account application
form has been changed within the last 30 days, or if you ask that the proceeds
be sent to a different person or address. Signature guarantees are used to help
protect you and the Fund. You can obtain a signature guarantee from most banks
or securities dealers, but not from a Notary Public. Please call the Transfer
Agent at (800) 628-4077 to learn if a signature guarantee is needed or to make
sure that it is completed appropriately in order to avoid any processing delays.
Redemption by Telephone - You may redeem your shares by telephone provided that
you requested this service on your initial account application form. If you
request this service at a later date, you must send a written request, along
with a signature guarantee to the Transfer Agent. Once your telephone
authorization is in effect, you may redeem shares by calling the Transfer Agent
at 800-628-4077. There is no charge for establishing this service, but the
Transfer Agent will charge your account a $10 service fee for each telephone
redemption. The Transfer Agent may change the charge for this service at any
time without prior notice.
Redemption by Wire - If you request 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
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.
Automatic Investment Plan - Existing shareholders, who wish to make regular
monthly investments in amounts of $50 or more, may do so through the Automatic
Investment Plan. Under the Plan, your designated bank or other financial
institution debits a pre-authorized amount from your account on or about the
15th day of each month and applies the amount to the purchase of shares. To use
this service, you must authorize the transfer of funds by completing the Plan
Section of the Account Application and sending a blank voided check.
Exchange Privileges - You may exchange all or a portion of your shares for the
shares of certain other funds having different investment objectives, provided
the shares of the fund you are exchanging into are registered for sale in your
state of residence. Your account may be charged $10 for a telephone exchange
fee. An exchange is treated as a redemption and a purchase and may result in
realization of a gain or loss on the transaction.
Dividends and Capital Gain Distributions - Dividends from net investment income,
if any, are declared and paid annually. The Fund intends to distribute annually
any net capital gains.
Distributions will automatically be reinvested in additional shares of the Fund,
unless you elect to have the distributions paid to you in cash. There are no
sales charges or transaction fees for reinvested dividends and all shares will
be purchased at NAV. If the investment in shares is made within an IRA, all
dividends and capital gain distributions must be reinvested.
Unless you are investing through a tax deferred retirement account, such as an
IRA, it is not to your advantage to buy shares of the Fund shortly before the
next distribution, because doing so can cost you money in taxes. This is known
as "buying a dividend". To avoid buying a dividend, check the Fund's
distribution schedule before you invest.
DISTRIBUTION AND TAXES
In general, Fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of the Fund or receive them in cash. Any capital gains the
Fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares. Every January, you will receive a statement
that shows the tax status of distributions you received for the previous year.
Distributions declared in December but paid in January are taxable as if they
were paid in December.
When you sell shares of the Fund, you may have a capital gain or loss. For tax
purposes, an exchange of your shares of the Fund for shares of a different fund
of the Company is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Foreign exchange gains or
losses realized on the sale of securities generally are treated as ordinary
income or loss by the Fund and may increase or decrease Fund distributions to
you. Non-U.S. investors may be subject to U.S. withholding and estate tax. You
should consult with your tax adviser about the federal, state, local or foreign
tax consequences of your investment in the Fund.
By law, the Fund must withhold 31% of your taxable distribution and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS has notified you that you are subject to
backup withholding and instructs a Fund to do so.
DISTRIBUTION ARRANGEMENTS
The Fund is offered directly through the Distributor and through third parties,
such as financial supermarkets, investment advisers and consultants, financial
planners, brokers, dealers and other investment professionals. The shares are
offered and sold without any sales charges imposed by the Funds or the
Distributor. However, third parties who offer shares may request fees from their
individual clients. If you invest through a third party, the policies and fees
may be different than those described in the Prospectus. For example, third
parties may charge transaction fees or set different minimum investment amounts.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
Fund's financial highlights for the period presented have been audited by Tait,
Weller and Baker, independent auditors, whose unqualified report thereon is
included in the SAI. The Fund's financial statements, notes to financial
statements and report of independent accountants are included in the SAI as well
as in the Fund's Annual Report to Shareholders (the "Annual Report"). Additional
performance information for the Fund is included in the Annual Report. The
Annual Report and the SAI are available at no cost from the Fund at the address
and telephone number noted on the back page of this Prospectus. The following
information should be read in conjunction with the financial statements and
notes thereto.
FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD
- -------------------------------------------------------------------
Years
ended Jan 2,
Period December 1995*
Year ended ended 31, to
August August 1997 1996 Dec
31, 1999 31, 31,
1998*** 1995
---------- -------------------- -----
Per Share Operating
Performance
Net asset value, $13.59 $14.57 $12.79 $11.11 $10.00
beginning of period
---------- ---- ----- ---- -----
Income from investment
operations-
Net investment 0.02 0.06 0.09 0.14 0.06
income
Net realized and 3.04 (1.04) 2.20 2.02 1.10
unrealized gain on
investments
---------- ---- ----- ---- -----
---------- ---- ----- ---- -----
Total from investment 3.06 (0.98) 2.29 2.16 1.16
operations
---------- ---- ----- ---- -----
Less distributions-
Distributions from (0.07) -- (0.08) (0.15) (0.05)
net investment income
Distributions from (0.85) -- (0.43) (0.33) 0.00
realized gains on
investments
---------- ---- ----- ---- -----
---------- ---- -----
Total distributions (0.92) 0.00 (0.51) (0.48) (0.05)
---------- ---- ----- ---- -----
========== ==== ===== ==== =====
Net asset value, $15.73 $13.59 $14.57 $12.79 $11.11
end of period
========== ==== ===== ==== =====
Total Return 23.22% (6.73%) 17.87% 19.57% 11.60%
Ratios/Supplemental Date
Net assets, end of $14,190 $10,370 $10,566 $6,459 $4,025
period (000's)
Ratio to average
net assets - (A)
Expenses (B) 2.05% 2.08** 2.08% 2.50% 3.03%
Expense ratio - net (C) 1.90% 1.86** 1.90% 2.00% 1.90%
Net investment incoem 0.19% 0.62** 0.71% 1.29% 0.52%
Portfolio turnover rate 39.17% 30.19% 16.48% 32.97% 40.96%
- --------------
* Commencement of operations
** Annualized
*** The Fund has changed its year end from December 31st to August 31st. This
represents the period from January 1, 1998 to August 31, 1998.
(A) Management fee waivers reduced the expense ratios and increased the net
investment income ratio by .64% in 1996 and 1.00% in 1995.
(B) Expense ratios have been increased to include custodian fees which were
offset by custodian credits.
(C) Expense ratio - net reflects the effect of the custodian fee credits the
Fund received.
See Notes to Financial Statements
<PAGE>
For investors who want more information about the Fund, the following documents
are available free upon request:
Annual & Semiannual Reports:
Additional information about the Fund's investments is available in the Fund's
Annual and Semiannual Reports to Shareholders. In the Fund's Annual Report to
Shareholders, you will find performance information for the Fund.
Statement of Additional Information (SAI): The SAI provides additional detailed
information about the Fund and is incorporated into this prospectus by
reference.
You can receive free copies of reports and the SAI, request other information
and discuss your questions about the Fund by contacting the Fund directly at:
THE WORLD FUNDS, INC.
1500 FOREST AVENUE, SUITE 223
RICHMOND, VIRGINIA 23229
TELEPHONE: 1-800-527-9525
E-MAIL: [email protected]
You can review the Fund's reports and SAI at the Public Reference Room of the
SEC. You can receive text-only copies:
For a fee, by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009 or call 1-800-SEC-0330
Free from the SEC's Internet Website at http://www.sec.gov.
(Investment Company Act file No. 811-8255)
PROSPECTUS
THE WORLD FUNDS, INC.
CSI Equity Fund
CSI Fixed Income Fund
Prospectus dated December 29, 1999
This Prospectus describes the CSI Equity Fund (the "Equity Fund") and the CSI
Fixed Income Fund (the "Fixed Income Fund") (collectively, the "Funds"). A
series fund offers you a choice of investments, with each series having its own
investment objective and a separate portfolio. The CSI Equity Fund seeks growth
of capital by investing in a diversified portfolio of equity securities. The CSI
Fixed Income Fund seeks current income by investing in debt securities.
As with all mutual funds, the U.S. Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the accuracy or
completeness of this Prospectus. It is a criminal offense to suggest otherwise.
<PAGE>
RISK RETURN SUMMARY
CSI EQUITY FUND (the "Equity Fund")
Investment Objective:Growth of Capital
Principal Investment
Strategies: The Fund will seek to achieve its investment objective by
investing in a portfolio consisting primarily of common
stocks and securities convertible into common stocks, such
as warrants, convertible bonds, debentures or convertible
preferred stock.
Principal Risks: The principal risk of investing in the Equity
Fund is that the value of its investments are
subject to market, economic and business risk
that may cause the Equity Fund's net asset
value ("NAV") to fluctuate over time.
Therefore, the value of your investment in the
Equity Fund could decline. There is no
assurance that the investment adviser will
achieve the Equity Fund's objective.
The Equity Fund's assets will be invested on a global
basis. These investments may involve financial, economic or
political risks not ordinarily associated with U.S.
securities. The Equity Fund's NAV may be affected by
changes in exchange rates between foreign currencies and
the U.S. dollar, different regulatory standards, less
liquidity and more volatility than U.S. securities, taxes,
and adverse social or political developments.
An investment in the Equity Fund is not a bank deposit and
is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Investor Profile: You may want to invest in the Equity Fund if you
are seeking long-term capital growth and are willing to
accept share prices that may fluctuate, sometimes
significantly, over the short-term. The Equity Fund will
not be appropriate if you are seeking current income or are
seeking safety of principal.
The bar chart and table below provide an indication of the
risks of investing in the Equity Fund. The bar chart shows
the performance for the initial calendar year. The table
compares the performance of the Equity Fund and the Lipper
Global Funds Index. The Lipper Global Funds Index is a
composite of the total return of mutual funds with the
stated objective of investing at least 25% of their
portfolio securities outside of the United States and may
own U.S. securities as well. Keep in mind that past
performance may not indicate how well the Equity Fund will
perform in the future.
(Graph goes here)
CSI Equity Fund 1998
Total Return * 26.10%
(End of Graph)
-----------------------------------------------------------
Average Annual Past One Since Inception
Total Returns Year
(for the period (October 15, 1997)
ending December
31, 1998)
-----------------------------------------------------------
-----------------------------------------------------------
CSI Equity Fund 26.10% 21.11%
-----------------------------------------------------------
-----------------------------------------------------------
Lipper Global Fund 14.63% 7.88%
Index **
-----------------------------------------------------------
* During the period shown in the bar chart, the highest return for a
calendar quarter was 12.30% (quarter ending 3/31/98) and the lowest return
for a calendar quarter was (14.32% )(quarter ending 9/30/98). The
year-to-date return for the period January 1, 1999 through September 30,
1999 is 4.92%.
** The Lipper Global Fund Index is an equally-weighted
performance indice, adjusted for capital gains distributions
and income dividends of the largest 30 qualifying equity funds
that invest at least 25% of their portfolio in securities
traded outside of the United States and that may own U.S.
securities as well. It is not adjusted to reflect expenses
that the SEC requires to be reflected in the Fund's
performance.
CSI FIXED INCOME FUND (the "Fixed Income Fund")
Investment Objective:Current Income
Principal Investment
Strategies: The Fixed Income Fund seeks to achieve its
objective by investing primarily 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.
Principal Risk: The principal risk of investing in the Fixed
Income Fund is that the value of its
investments are subject to interest rate risk
that may cause the NAV to fluctuate over time.
Therefore, the value of the Fund could decline
as well as increase. There is no assurance that
the investment adviser will achieve the Fund's
objective.
An investment in the Fixed Income Fund is not a bank
deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency.
Investor Profile: You may want to invest in the Fixed Income Fund if
you are seeking current income and are willing to accept
share prices that may fluctuate over the short-term. The
Fixed Income Fund will not be appropriate if you are
seeking growth of capital over the long-term.
FEES AND EXPENSES
Costs are an important consideration in choosing a mutual fund. Shareholders are
indirectly pay the costs of operating a fund, plus any transaction costs
associated with buying and selling the securities a fund holds. These costs will
reduce a portion of the gross income or capital appreciation a fund achieves.
Even small differences in these expenses can, over time, have a significant
effect on a fund's performance.
The following table describes the fees and expenses that you will pay directly
or indirectly in connection with an investment in the Equity Fund or the Fixed
Income Fund (collectively, the "Funds"). There are no sales charges in
connection with purchases or redemption of shares. The annual operating
expenses, which cover the costs of investment management, administration,
accounting and shareholder communications, are shown as an annual percentage of
the average daily net assets.
Shareholder Transaction Fees (fees paid directly from your
investment)
Equity Fund Fixed
Income Fund
Maximum Sales Charge (load)
Imposed on Purchases None None
Sales Charge (load) Imposed on
Reinvested Dividends None None
Redemption Fees(1) 1.0%(2) None
Exchange Fees(3) None None
(1) A shareholder electing to redeem shares via telephone request may be
charged $10 for each such redemption request.
(2) A 1% redemption fee is charged on shares held less than one year.
(3) A shareholder may be charged a $10 fee for each telephone exchange.
Annual Operating Expenses (Expenses that are deducted from the Funds' assets)
Equity Fund Fixed Income Fund
Management Fee 1.00% 1.00%*
Distribution and Service (12b-1) Fees None None
Other Operating Expenses 0.50% 0.50%
Total Fund Operating Expenses 1.50% 1.50%*
* The management fee is 1%, however, the adviser has voluntarily agreed to
hold the Total Fund Operating Expenses to 1% through December 31, 2000
(see "Management Organization and Capital Structure" below)..
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, as the Funds increase in size, their Other Operating Expenses will
decline as an annual percentage rate reflecting economies of scale.
EXAMPLE
The following example shows the expenses that you could pay over time. It will
help you compare the costs of investing in the Funds with the cost of investing
in other mutual funds. The example assumes that you invest $10,000 in a Fund and
then redeem all of your shares at the end of the periods indicated. Also, the
example assumes that you earn a 5% annual return, with no change in Fund expense
levels. Because actual return and expenses will be different, the example is for
comparison only. Based on these assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years
----- ------- -------- ------
Equity Fund $153 $474 $818 $1,791
Fixed Income Fund * $153 $474 $818 $1,791
* Should the adviser continue the voluntary operating expense limitation for
the periods shown below, your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- -------
$102 $318 $552 $1,225
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND RISKS
THE EQUITY FUND
The investment objective of the Equity Fund is to achieve growth of capital by
investing in a portfolio consisting primarily of common stocks and securities
convertible into common stocks, such as warrants, convertible bonds, debentures
or convertible preferred stock. Under normal market conditions, the Equity Fund
will have at least 65% of its total assets invested in common stocks or
securities convertible into common stocks. The portfolio of the Equity Fund will
be diversified. The Equity Fund will not be limited to investing in securities
of companies of any size or to securities traded in any particular market.
The Equity Fund's assets will be invested on a global basis to take advantage of
investment opportunities both within the U.S. and outside the U.S. The foreign
securities which the Equity Fund purchases may be bought directly in their
principal markets or may be acquired through the use of depositary receipts.
Investments in foreign securities may involve risks not ordinarily associated
with U.S. securities. Foreign companies are not generally subject to the same
accounting, auditing and financial reporting standards as are domestic
companies. Therefore, there may be less information available about a foreign
company than about a domestic company. Certain countries do not honor legal
rights enjoyed in the U.S. In addition, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect the Equity Fund's investments in
those countries. Many foreign securities have substantially less trading volume
than in the U.S. market, and securities in some foreign issuers are less liquid
and more volatile in price than securities of domestic issuers.
It is more expensive for U.S. investors to trade in foreign markets than in U.S.
markets. Mutual funds offer an efficient way for individuals to invest abroad,
but the overall expense ratios of global mutual funds are usually higher than
those of mutual funds that invest only in U.S. securities.
The Equity Fund is subject to stock market risk, which is the possibility that
stock prices overall will decline over short or even long periods. Stock markets
tend to move in cycles, with periods of rising prices and periods of falling
prices. Therefore, the value of your investment in the Equity Fund may increase
or decrease. The Equity Fund's investment success depends on the skill of CSI
Capital Management, Inc. (the "Adviser"), the Equity Fund's investment adviser,
in evaluating, selecting and monitoring the portfolio assets. If the Adviser's
conclusions about growth rates or securities values are incorrect, the Equity
Fund may not perform as anticipated.
The Adviser considers the Equity Fund's universe of recommended stock to be
worldwide in scope. Securities under consideration for purchase must meet a
variety of criteria. No particular formulas are used, but rather emphasis is
placed on those companies which the Adviser believes are most likely to prosper
under various economic conditions and which have demonstrated the ability to
produce reliable earnings or dividend growth over the years. Among other things,
balance sheet analysis, return on equity, price/earnings ratios and relative
strength are included in the Adviser's decision making process.
While the Equity Fund intends to remain substantially invested in common stocks
and securities convertible into common stocks, it may invest in high quality
money market instruments during times when excess cash is generated or when cash
is held pending investment in suitable securities. Such money market investments
include short-term obligations of the U.S. Government (and its agencies) or
other forms of indebtedness, such as bonds, certificates of deposit or
repurchase agreements. The Equity Fund has authority to invest up to 100% of its
total assets in such short term instruments for temporary or defensive purposes
in response to extreme or adverse market, economic or other conditions. The
Adviser does not anticipate exercising this authority, but reserves the right to
do so. When the Equity Fund is in a temporary defensive position, it might not
achieve its investment objective.
THE FIXED INCOME FUND
The Fixed Income Fund seeks current income by investing in debt securities. The
Fixed Income Fund seeks to achieve its objective by investing primarily in 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.
Under normal market conditions, at least 65% of the Fixed Income Fund's total
assets will be invested in securities rated, at the time of purchase, AA or
higher by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Rating Group ("S&P"), or unrated securities which the Adviser believes to be of
comparable quality. The Fixed Income 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 total assets may be invested in securities rated
below investment grade (i.e., below BBB by S&P or Baa by Moody's) or which are
unrated but are of comparable quality as determined by the Adviser. Securities
rated below investment grade entail greater risk than investment grade
securities. After purchase by the Fixed Income 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 selection of debt securities for the Fixed Income Fund is dependent upon the
Adviser's evaluation of those factors influencing interest rates. The Adviser
considers the rates of return available for any particular maturity and compares
that to the rates for other maturities in order to determine the relative and
absolute differences as they relate to income and the potential for market
fluctuation. There are no restrictions on the maturity composition of the Fixed
Income Fund. Under normal economic and market conditions, the Fixed Income Fund
generally will hold its short-term securities or debt obligations until maturity
and its other securities or obligations until market conditions, in the judgment
of the Adviser, make sale advantageous to the Fixed Income Fund. In either case,
the Fixed Income Fund may sell such securities or obligations as required to
meet requests for redemption of shares of the Fixed Income Fund.
The market values of fixed income securities tend to vary inversely with the
level of interest rates. When interest rates rise, the market values of such
securities tend to decline and vice versa. Although under normal market
conditions longer term securities yield more than short-term securities of
similar quality, longer term securities are subject to greater price
fluctuations. Fluctuations in the value of the investments will be reflected in
the NAV of the Fixed Income Fund.
OTHER PRINCIPAL RISKS
Year 2000 Issue. Like other mutual funds and financial or business organizations
around the world, The World Funds, Inc. (the "Company") could be adversely
affected if its computer systems or the computer systems of its service
providers do not properly process and calculate date-related information and
data as of and after January 1, 2000. This is commonly known as the "Year 2000
Issue". The Company has taken steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to computer systems that it uses and to
obtain reasonable assurances that comparable steps are being taken by its major
service providers. These steps include identifying system problems, remediation
and testing the system fixes. The Company and each of its major service
providers are in the stage of testing the system fixes that have been
implemented. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Company.
European Currency. Several European countries are participating in the European
Economic and Monetary Union, which established a common European currency for
participating countries. This currency is commonly known as the "Euro". Each
participating country replaced its existing currency with the Euro as of January
1, 1999. Additional European countries may elect to participate in the common
currency in the future. The conversion presents unique uncertainties, including,
among others: (1) whether the payment and operational systems of banks and other
financial institutions will function properly; (2) how certain outstanding
financial contracts that refer to existing currencies rather than the Euro will
be treated legally; (3) how exchange rates for existing currencies and the Euro
will be established; and (4) how suitable clearing and settlement payment
systems for the Euro will be managed. If either of the Funds invests in
securities of countries that have converted to the Euro or convert in the
future, the Fund could be adversely affected if these uncertainties cause
adverse effects on these securities. To date the conversion of the Euro has had
negligible impact on the operations and investment returns of the Funds.
MANAGEMENT ORGANIZATION AND CAPITAL STRUCTURE
CSI Capital Management, Inc. (the "Adviser") located at 445 Bush Street, 5th
Floor, San Francisco, CA 94108-3725, manages the assets of the Funds. Since the
Funds' inceptions on October 14, 1997, Leland Faust has been primarily
responsible for the day to day management of the Funds. The Adviser has two
years experience in managing a mutual fund. The Adviser has been in existence
since 1978 and as of December 30, 1999 has approximately $244 million under
management. Mr. Faust has been President of the Adviser since its formation.
The Adviser is responsible for effecting all security transactions on behalf of
the Funds, including the allocation of principal business and portfolio
brokerage and the negotiation of commissions. In placing orders with brokers and
dealers, the Adviser will attempt to obtain the best price and execution of
orders.
Each Fund pays the Adviser a monthly investment advisory fee at an annual rate
of 1% of the average daily net assets. However, the Adviser has voluntarily
agreed to waive all or a portion of the advisory fee or make payments to the
Fixed Income Fund in order to maintain its total operating expenses at an annual
rate not to exceed 1%. This voluntary arrangement continues through December 31,
2000.
SHAREHOLDER INFORMATION
Each Fund's share price, called its NAV per share, is determined and shares are
priced as of the close of trading on the New York Stock Exchange ("NYSE")
(currently 4:00 p.m. Eastern Time) on each business day ("Valuation Time") that
the NYSE is open. As of the date of this prospectus, the Funds are informed that
the NYSE observes the following holidays: New Year's Day, Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. NAV per share is computed by adding the
total value of a Fund's investments and other assets, subtracting any
liabilities of the Fund and then dividing by the total number of Fund shares
outstanding.
Shares are bought, sold or exchanged at the NAV next determined after a request
has been received in proper form. Any request received in proper form, before
the Valuation Time, will be processed the same business day. Any request
received in proper form, after the Valuation Time, will be processed the next
business day.
The Fund's securities are valued at current market prices. Investments in
securities traded on the national securities exchanges or included in the NASDAQ
National Market System are valued at the last reported sale price. Other
securities traded in the over-the-counter market and listed securities for which
no sales are reported on a given 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. 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. Depositary receipts 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.
Securities 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 value of a foreign security is determined as of the close of
trading on the foreign exchange on which it is traded or as of the scheduled
close of trading on the NYSE, whichever is earlier. Portfolio securities that
are listed on foreign exchanges may experience a change in value on days when
shareholders will not be able to purchase or redeem shares of the Funds.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times.
PURCHASING SHARES
Shares of the Fund may be purchased directly from First Dominion Capital Corp.
(the "Distributor") or through brokers or dealers who are members of the
National Association of Securities Dealers, Inc. When an investor acquires
shares of a Fund from a securities broker dealer, the investor may be charged a
transaction fee by that broker dealer. The minimum initial investment in a Fund
is $1,000 and additional investments must be $50 or more. The Funds retain the
right to refuse to accept an order.
Purchases by Mail - For initial purchases, the account application form, which
accompanies the prospectus, should be completed, signed and mailed to Fund
Services, Inc. (the "Transfer Agent") at 1500 Forest Avenue, Suite 111,
Richmond, VA 23229, together with your check(s) payable to the Fund(s) that you
selected. 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 social security number(s).
Investing by Wire - You may purchase shares by requesting your bank to transmit
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. Once you
have arranged to purchase shares by wire, please complete and mail the account
application form promptly to the Transfer Agent. This application is required to
complete the records of the Fund(s). You will not have access to your shares
until the records of the Fund(s) are complete. Once your account is opened, you
may make additional investments using the wire procedure described above. Be
sure to include your name, account number and the name of the Fund(s) to receive
the amount(s) you are investing in the wire instructions you provide your bank.
REDEEMING SHARES
You may redeem your shares 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 the information and documents necessary for your request to be
considered 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 Funds' procedure is to redeem shares at the NAV next determined after the
Transfer Agent receives the redemption request in proper order. A 1% redemption
fee is deducted from proceeds of the Funds' shares redeemed less than one year
after purchase. Payment will be made promptly, but no later than the seventh day
following the receipt of the request in proper order. The Funds may suspend the
right to redeem shares for any period during which the NYSE is closed or the
U.S. 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 after the suspension is terminated.
If you sell shares through a securities dealer or investment professional, it is
such person's responsibility to transmit the order to the Fund(s) you designate
in a timely fashion. Any loss to you resulting from failure to do so must be
settled between you and such person.
Delivery of the proceeds of a redemption of shares purchased and paid for by
check shortly before the receipt of the redemption request may be delayed until
the designated Fund determines that the Transfer Agent has completed collection
of the purchase check, which may take up to 14 days. Also, payment of the
proceeds of a redemption request for an account for which purchases were made by
wire may be delayed until the designated Fund receives a completed account
application form for the account to permit the Fund to verify the identify of
the person redeeming the shares, and to eliminate the need for backup
withholding.
Redemption by Mail - To redeem shares by mail, send a written request for
redemption that designates the Fund(s) you selected and is signed by the
registered owner(s) exactly as the account is registered. Certain written
requests to redeem shares may require signature guarantees. For example,
signature guarantees may be required if you sell a large number of shares, if
your address of record on the account application form has been changed within
the last 30 days, or if you ask that the proceeds be sent to a different person
or address. Signature guarantees are used to help protect you and the Funds. You
can obtain a signature guarantee from most banks or securities dealers, but not
from a Notary Public. Please call the Transfer Agent at (800) 628-4077 to learn
if a signature guarantee is needed or to make sure that it is completed
appropriately in order to avoid any processing delays.
Redemption by Telephone - You may redeem your shares by telephone provided that
you requested this service on your initial Account Application. If you request
this service at a later date, you must send a written request, along with a
signature guarantee to the Transfer Agent. Once your telephone authorization is
in effect, you may redeem shares by calling the Transfer Agent at 800-628-4077.
There is no charge for establishing this service, but the Transfer Agent will
charge your account a $10 service fee for each telephone redemption. The
Transfer Agent may change the charge for this service at any time without prior
notice.
Redemption by Wire - If you request 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 Funds 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 Funds may waive these requirements in certain
instances.
The following institutions are acceptable signature guarantors: (a) participants
in good standing of the Securities Transfer Agents Medallion Program ("STAMP");
(b) commercial banks which are members of the Federal Deposit Insurance
Corporation ("FDIC"); (c) trust companies; (d) firms which are members of a
domestic stock 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 Funds
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.
Automatic Investment Plan - Existing shareholders, who wish to make regular
monthly investments in amounts of $100 or more, may do so through the Automatic
Investment Plan. Under the Plan, your designated bank or other financial
institution debits a pre-authorized amount from your account on or about the
15th day of each month and applies the amount to the purchase of shares of the
Fund(s) you designate. To use this service, you must authorize the transfer of
funds by completing the Plan section of the account application form and sending
a blank voided check.
Exchange Privileges - You may exchange all or a portion of your shares of a Fund
for the shares of the othe Fund or certain other funds having different
investment objectives, provided the shares of the fund you are exchanging into
are registered for sale in your state of residence. Your account may be charged
$10 for a telephone exchange fee. An exchange is treated as a redemption and a
purchase and may result in realization of a gain or loss on the transaction.
Dividends and Capital Gain Distributions - Dividends from net investment income,
if any, are declared and paid annually. Each of the Funds intends to distribute
annually any net capital gains.
Distributions from a Fund will automatically be reinvested in additional shares
of the same Fund, unless you elect to have the distributions paid to you in
cash. There are no sales charges or transaction fees for reinvested dividends
and all shares will be purchased at NAV. If the investment in shares is made
within an IRA, all dividends and capital gain distributions must be reinvested.
Unless you are investing through a tax deferred retirement account, such as an
IRA, it is not to your advantage to buy shares of a Fund shortly before the next
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend". To avoid buying a dividend, check each Fund's distribution
schedule before you invest.
DISTRIBUTION AND TAXES
In general, Fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of a Fund or receive them in cash. Any capital gains a Fund
distributes are taxable to you as long-term capital gains no matter how long you
have owned your shares. Every January, you will receive a statement that shows
the tax status of distributions you received for the previous year.
Distributions declared in December but paid in January are taxable as if they
were paid in December.
When you sell shares of a Fund, you may have a capital gain or loss. For tax
purposes, an exchange of your shares of a Fund for shares of a different fund of
the Company is the same as a sale. The individual tax rate on any gain from the
sale or exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Foreign exchange gains or
losses realized on the sale of securities generally are treated as ordinary
income or loss by a Fund and may increase or decrease Fund distributions to you.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult with your tax adviser about the federal, state, local or foreign tax
consequences of your investment in a Fund.
By law, a Fund must withhold 31% of your taxable distribution and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS has notified you that you are subject to
backup withholding and instructs a Fund to do so.
DISTRIBUTION ARRANGEMENTS
The Funds are offered directly through the Distributor and through third
parties, such as financial supermarkets, investment advisers and consultants,
financial planners, brokers, dealers and other investment professionals. The
shares are offered and sold without any sales charges imposed by the Funds or
the Distributor. However, third parties who offer shares may request fees from
their individual clients. If you invest through a third party, the policies and
fees may be different than those described in the Prospectus. For example, third
parties may charge transaction fees or set different minimum investment amounts.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the financial
performance for the past year and the initial period of the Funds' operations
prior to the last year. Certain information reflects financial results for a
single Fund share. The total returns in the tables represent the rate that an
investor would have earned or lost on investments in the Funds (assuming
reinvestment of all dividends and distributions). The Funds' financial
highlights for the period presented have been audited by Tait, Weller and Baker,
independent auditors, whose unqualified report thereon is included in the SAI.
The Funds' financial statements, notes to financial statements and report of
independent accountants are included in the SAI as well as in the Funds' Annual
Report to Shareholders (the "Annual Report"). Additional performance information
for the Funds is included in the Annual Report. The Annual Report and the SAI
are available at no cost from the Funds at the address and telephone number
noted on the back page of this Prospectus. The following information should be
read in conjunction with the financial statements and notes thereto.
EQUITY FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- ----------------------------------------------------------------------
Year ended Period ended
August 31,1999 August 31,1998*
------------- ----------
Per Share Operating
Performance
Net asset value, $9.88 $10.00
beginning of period
------------- ----------
Income from investment
operations-
Net Investment Income (.02) 0.02
Net realized and unrealized 3.52 (0.14)
gain (loss) on investments
------------- ----------
Total from investment operations 3.50 (0.12)
------------- ----------
Less distributions-
Distributions from net
investment income (0.02) -
Distributions from capital gains - -
------------- ----------
Total distributions (0.02) -
------------- ----------
Net asset value, end of period $13.36 $9.88
============= ==========
Total Return 35.21% (1.20%)***
Ratios/Supplemental Data
Net assets, end of period (000's) $52,924 $26,576
Ratio of expenses to average net assets-
Expenses (A) 1.50% 1.50% **
Expenses-net (B) 1.50% 1.49% **
Net investment income (0.15%) 0.42% **
Portfolio turnover rate 12.91% 8.16%
* Commencement of operations October 15, 1997
** Annualized
*** Not annualized
(A) Expense ratio has been increased to include custodian fees which were offset
by custodian credits for the period ended August 31, 1998. (B) Expense ratio net
reflects the effect of the custodian fee credits the Fund received for the
period ended August 31, 1998.
See Notes to Financial Statements
FIXED INCOME FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- -----------------------------------------------------------------------
Year ended Period ended
August 31, 1999 August 31,1998*
------------- ---------------
Per Share Operating Peformance
Net asset value, $10.48 $10.00
beginning of period
------------- -------
Income from investment operations-
Net investment income 0.39 0.22
Net realized and unrealized (0.51) 0.26
gain (loss) on investments
------------- -------
------------- -------
Total from investment operations (0.12) 0.48
------------- -------
Less distributions-
Distributions from net
investment income (0.61) -
Distributions from capital gains - -
------------- -------
-------------
Total distributions (0.61) -
------------- -------
=======
Net asset value, end of period $9.75 $10.48
============= =======
Total Return (1.31%) 4.80%***
Ratios/Supplemental Data
Net assets, end of period (000's) $48,605 $33,900
Ratio of expenses to average net assets - (A)
Expenses (B) 1.00% 1.51% **
Expenses-net (C) 1.00% 1.00% **
Net investment income 4.22% 4.34% **
Portfolio turnover rate 1.38% 0.00%
* Commencement of operations January 27, 1998
** Annualized
*** Not annualized
(A) Management fee waivers reduced the expense ratios and increased the net
investment income ratio by .50% for the period ended August 31, 1998.
(B) Expense ratios have been increased to include custodian fees which were
offset by custodian credits and before management fee waivers.
(C) Expense ratio - net reflects the effect of the management fee waivers and
the custodian fee credits the fund received.
See Notes to Financial Statements
<PAGE>
For investors who want more information about the Funds, the following documents
are available free upon request:
Annual & Semiannual Reports:
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In each Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.
You can receive free copies of reports and SAI, request other information and
discuss your questions about the Funds by contacting the Funds directly at:
THE WORLD FUNDS, INC.
1500 FOREST AVENUE, SUITE 223
RICHMOND, VIRGINIA 23229
TELEPHONE: 1-800-527-9525
E-MAIL: [email protected]
You can review and copy the Funds' reports and SAIs at the Public Reference Room
of the SEC. You can receive text-only copies:
For a fee, by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009 or call 1-800-SEC-0330 Free from the SEC's Internet Website
at http://www.sec.gov.
(Investment Company Act File No. 811-8255)
PROSPECTUS
THE WORLD FUNDS, INC.
The New Market Fund
Prospectus dated December 29, 1999
This Prospectus describes The New Market Fund (the "Fund"), a series of The
World Funds, Inc. A series fund offers you a choice of investments, with each
series having its own investment objective and a separate portfolio. The Fund
seeks long-term growth of capital by investing in a non-diversified portfolio of
common stocks and securities convertible into common stock.
As with all mutual funds, the U.S. Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the accuracy or
completeness of this Prospectus. It is a criminal offense to suggest otherwise.
<PAGE>
RISK RETURN SUMMARY
Investment Objective: Long-term growth of capital
Principal Investment Strategies: Under normal market
conditions, the Fund will invest at least
65% of its total assets in common stocks or
securities convertible into common stocks,
such as warrants, convertible bonds,
debentures or convertible preferred stock.
Principal Risk: The principal risk of investing in the
Fund is that the value of its investments
are subject to market, economic and business
risk that may cause the net asset value
("NAV") to fluctuate over time. Therefore,
the value of your investment could decline.
There is no assurance that the investment
adviser will achieve the Fund's objective.
The Fund operates as a non-diversified fund.
As such, the Fund may invest a larger
portion of its assets in fewer securities.
This may cause the market action of the
Fund's larger portfolio positions to have a
greater impact on the Fund's NAV, which
could result in increased volatility.
An investment in the Fund is not a bank
deposit and is not insured or guaranteed by
the Federal Deposit Insurance Corporation
("FDIC") or any other government agency.
Investor Profile: You may want to invest in the Fund
if you are seeking long-term growth of
capital and are willing to accept share
prices that may fluctuate, sometimes
significantly, over the short-term. The Fund
will not be appropriate if you are seeking
current income or are seeking safety of
principal.
FEES AND EXPENSES
Costs are an important consideration in choosing a mutual fund. Shareholders
indirectly pay the costs of operating a fund, plus any transaction costs
associated with buying and selling the securities a fund holds. These costs will
reduce a portion of the gross income or capital appreciation a fund achieves.
Even small differences in these expenses can, over time, have a significant
effect on a fund's performance.
The following table describes the fees and expenses that you may pay directly or
indirectly in connection with an investment in the Fund. The annual operating
expenses, which cover the costs of investment management, administration,
accounting and shareholder communications, are shown as an annual percentage of
the Fund's average daily net assets.
Shareholder Transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (load) Imposed on Purchases 2.75%
Sales Charge (load) Imposed on Reinvested Dividends None
Redemption Fees (1) 1.00% (2)
Exchange Fees (3) None
(1) A shareholder electing to redeem shares by telephone may be charged
$10 for each such redemption request.
(2) A one percent (1%) redemption fee is charged on shares held less than
one year.
(3) A shareholder may be charged a $10 fee for each telephone exchange.
Estimated Annual Operating Expenses (expenses that are deducted from Fund
assets)
Management Fee 1.00%
Distribution and Service (12b-1) Fees 0.50%
Other Operating Expenses 2.97%
-----
Total Annual Fund Operating Expenses 4.47%
Fee Waiver and/or Expense Reimbursements 2.48%
-----
Net Expenses 1.99%*
* The Adviser has contractually agreed to waive its fees and pay expenses
to the extent necessary to cap the Total Annual Operating Expenses at
1.99% of the Fund's average daily net assets until October 1, 2001.
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 as the Fund increases in size, its Other Operating Expenses will
decline as an annual percentage rate reflecting economies of scale.
EXAMPLE:
The following expense example shows the expenses that you could pay over time.
It will help you compare the costs of investing in the Fund with the cost of
investing in other mutual funds. The example assumes that you invest $10,000 in
the Fund and then redeem all of your shares at the end of the periods indicated.
Also, the example assumes that you earn a 5% annual return, with no change in
Fund expense levels. Because actual return and expenses will be different, the
example is for comparison only. Based on these assumptions, your costs would be:
1 Year * 3 Years * 5 Years * 10 Years *
-------- --------- --------- ----------
$292 $624 $1,073 $2,317
* These costs are net of fee waivers and reimbursements to maintain total
operating expenses at 1.99% pursuant to an expense limitation agreement
(see "Management Organization and Capital Structure" below).
Absent this commitment, your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$448 $1,352 2,265 $4,590
INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS
The Fund's investment objective is to achieve long-term growth of capital by
investing in a non-diversified portfolio composed of common stocks and
securities convertible into common stock, such as warrants, convertible bonds,
debentures or convertible preferred stock.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in common stocks or securities convertible into common stocks. The Fund's
portfolio will be non-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. It is the Fund's policy to focus its investments on
profitable, financially stable growth companies. It is anticipated that such
companies will generate high returns on invested capital. The companies will
generally be unleveraged, characteristically have shareholder-oriented
management, and generally tend to have large market capitalizations.
The Fund is subject to stock market risk, which is the possibility that stock
prices overall will decline over short or even long periods. Stock markets tend
to move in cycles, with periods of rising prices and periods of falling prices.
Therefore, the value of your investment in the Fund may increase or decrease.
The Fund's investment success depends on the skill of the investment adviser in
evaluating, selecting and monitoring the portfolio assets. If the investment
adviser's conclusions about asset allocation are incorrect, the Fund may not
perform as anticipated.
The Fund may 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 Fund is non-diversified under Federal securities laws and, therefore, may
invest a larger portion of its assets in fewer securities than a diversified
fund. This may cause the market action of the Fund's larger portfolio positions
to have a greater impact on the Fund's NAV, which could result in increased
volatility.
When the Fund's investment adviser 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 total 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 or certificates of deposits. When the
Fund is in a temporary defensive position, it may not achieve its investment
objective.
Year 2000 Issue. Like other mutual funds and financial or business organizations
around the world, The World Funds, Inc. (the "Company") and the Fund could be
adversely affected if its computer systems or the computer systems of its
service providers do not properly process and calculate date-related information
and data as of and after January 1, 2000. This is commonly known as the "Year
2000 Issue". The Company has taken steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to computer systems that it
uses and to obtain reasonable assurances that comparable steps are being taken
by its major service providers. These steps include identifying system problems,
remediation and testing the system fixes. The Company and each of its major
service providers are in the stage of testing the system fixes that have been
implemented. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Company.
MANAGEMENT ORGANIZATION AND CAPITAL STRUCTURE
Virginia Management Investment Corporation (the "Manager"), located 7800
Rockfalls Dr, Richmond, Virginia 23225, manages the assets of the Fund. Prior to
the Fund's inception, the Manager had no previous experience managing a mutual
fund. The Manager is responsible for selecting all of the Fund's investments and
effecting all security transactions on behalf of the Fund, including the
allocation of principal business and portfolio brokerage and the negotiation of
commissions. In placing orders with brokers and dealers, the Manager will
attempt to obtain the best price and execution of orders.
The Fund pays the Manager a monthly management fee at an annual rate equal to 1%
of the average daily net assets of the Fund. In the interest of limiting
expenses of the Fund, the Manager has entered into an expense limitation
agreement with the Fund. The Manager has agreed to waive or limit its fees and
to assume other expenses so that the total annual operating expenses of the Fund
are limited to 1.99%. The limit does not apply to interest, taxes, brokerage
commissions, other expenditures capitalized in accordance with generally
accepted accounting principles and other extraordinary expenses not incurred in
the ordinary course of business.
The Manager has entered into an Investment Advisory Agreement (the "Advisory
Agreement") with The London Company of Virginia established in 1994 and located
at Riverfront Plaza, West Tower, 901 East Byrd Street, Suite 1350A, Richmond,
Virginia 23219 (the "Investment Adviser"). Stephen Goddard has been the
President and principal shareholder of the Investment Adviser since its
inception and has been the portfolio manager of the Fund since its inception on
October 1, 1998. Mr. Goddard is also a director and shareholder of the Manager.
Mr. Goddard has thirteen years experience in senior portfolio management,
security analysis and finance.
The Investment Adviser provides the Manager with investment analysis and timing
advice, research and statistical analysis relating to the management of the
portfolio securities of the Fund. The investment recommendations of the
Investment Adviser are subject to the review and approval of the Manager (acting
under the supervision of the Company's Board of Directors). The Manager, from
its management fee, pays the Investment Adviser one-half of the management fee
received from the Fund.
SHAREHOLDER INFORMATION
The Fund's share price, called its net asset value per share or NAV per share,
is determined as of the close of trading on the New York Stock Exchange ("NYSE")
(currently 4:00 p.m. Eastern Time) on each business day ("Valuation Time") that
the NYSE is open. As of the date of this prospectus, the Fund is informed that
the NYSE observes the following holidays: New Year's Day, Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. NAV per share is computed by adding the
total value of the Fund's investments and other assets, subtracting any
liabilities of the Fund and then dividing by the total number of Fund shares
outstanding.
Shares are bought at the public offering price per share next determined after a
request has been received in proper form. Shares are sold or exchanged at the
NAV per share next determined after a request has been received in proper form.
Any request received in proper form before the Valuation Time, will be processed
the same business day. Any request received in proper form after the Valuation
Time, will be processed the next business day.
The Fund's securities are valued at current market prices. Investments in
securities traded on the national securities exchanges or included in the NASDAQ
National Market System are valued at the last reported sale price. Other
securities traded in the over-the-counter market and listed securities for which
no sales are reported on a given 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. 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. Depositary receipts 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.
Securities 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 value of a foreign security is determined as of the close of
trading on the foreign exchange on which it is traded or as of the scheduled
close of trading on the NYSE, whichever is earlier. Portfolio securities that
are listed on foreign exchanges may experience a change in value on days when
shareholders will not be able to purchase or redeem shares of the Fund.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times.
PURCHASING SHARES
Shares of the Fund may be purchased directly from First Dominion Capital Corp.
(the "Distributor") or through brokers or dealers who are members of the
National Association of Securities Dealers, Inc. When an investor acquires
shares of the Fund from a securities broker-dealer, the investor may be charged
a transaction fee by that broker-dealer. The minimum initial investment in the
Fund is $5,000 and additional investments must be $100 or more.
The public offering price is normally the share's NAV plus an initial sales
charge. However, if you purchase shares in amounts over a certain level, the
initial sales charge may be reduced, as the chart below shows. The Fund reserves
the right to refuse to accept an order.
Amount of Purchase Sales Charge as a Percentage of Dealer Discount
At the Public Offering Net Amount as Percentage of
Offering Price Price Invested Offering Price
$5,000 but under $100,000 2.75% 2.83% 2.25%
$100,000 but under $250,000 2.25% 2.30% 1.75%
$250,000 but under $500,000 1.50% 1.52% 1.25%
$500,000 but under $1 million 1.00% 1.01% 0.75%
$1 million or over 0.00% 0.00% 0.00%
A front-end sales charge may not be imposed if a shareholder purchases shares of
the Fund with redemption proceeds from other mutual fund complexes on which the
shareholder previously paid a front-end sales charge or a contingent deferred
sales charge.
Plan of Distribution - The Fund has a Plan of Distribution or "12b-1 Plan" under
which it may finance activities primarily intended to sell shares, provided the
categories of expenses are approved in advance by the Board of Directors of the
Company and the expenses paid under the Plan were incurred within the preceding
12 months and accrued while the Plan is in effect.
Right of Accumulation - Pursuant to the Right of Accumulation privilege,
investors are permitted to purchase shares at the sales charge applicable to the
total of (a) the dollar amount then being purchased plus (b) an amount equal to
the then current public offering price of the purchaser's combined holdings of
shares of the Fund previously purchased. To receive the Right of Accumulation,
shareholders must, at the time of purchase, give the Transfer Agent or the
Distributor sufficient information to permit confirmation of qualification for
such right.
Statement of Intention - A reduced sales charge as set forth above applies
immediately to all purchases where the investor has executed a Statement of
Intention calling for the purchase within a 13-month period of an amount
qualifying for the reduced sales charge. The investor must actually purchase the
amount stated in such statement to avoid later paying the full sales charge on
shares that are purchased. For a description of the Statement of Intention, see
the Statement of Additional Information.
Purchases by Mail - For initial purchases, the account application form, which
accompanies the prospectus, should be completed, signed and mailed to Fund
Services, Inc. (the "Transfer Agent") at 1500 Forest Avenue, Suite 111,
Richmond, Virginia 23229, together with your check payable to the 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 social security number(s).
Investing by Wire - You may purchase shares by requesting your bank to transmit
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. Once you
have arranged to purchase shares by wire, please complete and mail the account
application form promptly to the Transfer Agent. This application is required to
complete the Fund's records. You will not have access to your shares until the
Fund's records are complete. Once your account is opened, you may make
additional investments using the wire procedure described above. Be sure to
include your name and account number in the wire instructions you provide your
bank.
REDEEMING SHARES
You may redeem your shares 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 the information and documents necessary for your request to be
considered 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 NAV next determined after the
Transfer Agent receives the redemption request in proper order. A one percent
(1%) redemption fee is deducted from proceeds of Fund shares redeemed less than
one year after purchase. Payment will be made promptly, but no later than the
seventh day following the receipt of the request in proper order. The Company
may suspend the right to redeem shares for any period during which the NYSE is
closed or the U.S. 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 after the suspension is
terminated.
If you sell shares through a securities dealer or investment professional, it is
such person's responsibility to transmit the order to the Fund in a timely
fashion. Any loss to you resulting from failure to do so must be settled between
you and such person.
Delivery of the proceeds of a redemption of shares purchased and paid for by
check shortly before the receipt of the redemption request may be delayed until
the Fund determines that the Transfer Agent has completed collection of the
purchase check, which may take up to 14 days. Also, payment of the proceeds of a
redemption request for an account for which purchases were made by wire may be
delayed until the Fund receives a completed account application form for the
account to permit the Fund to verify the identify of the person redeeming the
shares, and to eliminate the need for backup withholding.
Redemption by Mail - To redeem shares by mail, send a written request for
redemption, signed by the registered owner(s) exactly as the account is
registered. Certain written requests to redeem shares may require signature
guarantees. For example, signature guarantees may be required if you sell a
large number of shares, if your address of record on the account application
form has been changed within the last 30 days, or if you ask that the proceeds
to be sent to a different person or address. Signature guarantees are used to
help protect you and the Fund. You can obtain a signature guarantee from most
banks or securities dealers, but not from a Notary Public. Please call the
Transfer Agent at (800) 628-4077 to learn if a signature guarantee is needed or
to make sure that it is completed appropriately in order to avoid any processing
delays.
Redemption by Telephone - You may redeem your shares by telephone provided that
you requested this service on your initial account application form. If you
request this service at a later date, you must send a written request, along
with a signature guarantee to the Transfer Agent. Once your telephone
authorization is in effect, you may redeem shares by calling the Transfer Agent
at 800-628-4077. There is no charge for establishing this service, but the
Transfer Agent will charge your account a $10 service fee for each telephone
redemption. The Transfer Agent may change the charge for this service at any
time without prior notice.
Redemption by Wire - If you request 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
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.
Automatic Investment Plan - Existing shareholders, who wish to make regular
monthly investments in amounts of $100 or more, may do so through the Automatic
Investment Plan. Under the Plan, your designated bank or other financial
institution debits a pre-authorized amount from your account on or about the
15th day of each month and applies the amount to the purchase of shares. To use
this service, you must authorize the transfer of funds by completing the Plan
section of the account application and sending a blank voided check.
Exchange Privileges - You may exchange all or a portion of your shares for the
shares of certain other funds having different investment objectives, provided
the shares of the fund you are exchanging into are registered for sale in your
state of residence. Your account may be charged $10 for a telephone exchange
fee. An exchange is treated as a redemption and a purchase and may result in
realization of a gain or loss on the transaction.
Dividends and Capital Gain Distributions - Dividends from net investment income,
if any, are declared and paid annually. The Fund intends to distribute annually
any net capital gains.
Distributions will automatically be reinvested in additional shares of the Fund,
unless you elect to have the distributions paid to you in cash. There are no
sales charges or transaction fees for reinvested dividends and all shares will
be purchased at NAV. If the investment in shares is made within an IRA, all
dividends and capital gain distributions must be reinvested.
Unless you are investing through a tax deferred retirement account, such as an
IRA, it is not to your advantage to buy shares of the Fund shortly before the
next distribution, because doing so can cost you money in taxes. This is known
as "buying a dividend". To avoid buying a dividend, check the Fund's
distribution schedule before you invest.
DISTRIBUTION AND TAXES
In general, Fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of a Fund or receive them in cash. Any capital gains the Fund
distributes are taxable to you as long-term capital gains no matter how long you
have owned your shares. Every January, you will receive a statement that shows
the tax status of distributions you received for the previous year.
Distributions declared in December but paid in January are taxable as if they
were paid in December.
When you sell shares of a Fund, you may have a capital gain or loss. For tax
purposes, an exchange of your shares of the Fund for shares of a different fund
of the Company is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Foreign exchange gains or
losses realized on the sale of securities generally are treated as ordinary
income or loss by a Fund and may increase or decrease Fund distributions to you.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult with your tax adviser about the federal, state, local or foreign tax
consequences of your investment in the Fund.
By law, the Fund must withhold 31% of your taxable distribution and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS has notified you that you are subject to
backup withholding and instructs a Fund to do so.
DISTRIBUTION ARRANGEMENTS
The Fund is offered through financial supermarkets, investment advisers and
consultants, financial planners, brokers, dealers and other investment
professionals, and directly through the Distributor. Investment professionals
who offer shares may request fees from their individual clients. If you invest
through a third party, the policies and fees may be different than those
described in the Prospectus. For example, third parties may charge transaction
fees or set different minimum investment amounts.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned [or
lost] on an investment in the Fund (assuming reinvestment of all dividends and
distributions). The Fund's financial highlights for the period presented have
been audited by Tait, Weller and Baker, independent auditors, whose unqualified
report thereon is included in the SAI. The Fund's financial statements, notes to
financial statements and report of independent accountants are included in the
SAI as well as in the Funds' Annual Report to Shareholders (the "Annual
Report"). Additional performance information for the Fund is included in the
Annual Report. The Annual Report and the SAI are available at no cost from the
Fund at the address and telephone number noted on the back page of this
Prospectus. The following information should be read in conjunction with the
financial statements and notes thereto.
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- --------------------------------------------------------------------------------
Period ended
August 31, 1999*
----------------------
Per Share Operating Performance
Net asset value, beginning of period $10.00
-----------
Income from investment operations-
Net investment loss (0.03)
Net realized and unrealized gain on investments 1.67
-----------
-----------
Total from investment operations 1.64
-----------
Less distributions-
Distributions from net investment income
--
Distributions from capital gains
-
-----------
Total distributions -
-----------
===========
Net asset value, end of period $11.64
===========
Total Return 13.20% ***
Ratios/Supplemental Data Net assets, end of period (000's) $3,256
Ratio of expenses to average net assets
Before expense waivers and reimbursements 4.47% **
After expense waivers and reimbursements 1.99% **
Net investment loss (0.41%) **
Portfolio turnover rate 8.31%
- -----------------------------------------------------------------
* Commencement of operations October 1, 1998
** Annualized
*** Non-annualized
See Notes to Financial Statements
<PAGE>
For investors who want more information about the Fund, the following documents
are available free upon request:
Annual & Semiannual Reports:
Additional information about the Fund's investments is available in the Fund's
Annual and Semiannual Reports to Shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund and is incorporated into this prospectus by
reference.
You can receive free copies of reports and SAI, request other information and
discuss your questions about the Fund by contacting the Fund directly at:
THE WORLD FUNDS, INC.
1500 FOREST AVENUE, SUITE 223
RICHMOND, VIRGINIA 23229
TELEPHONE: 1-800-527-9525
E-MAIL: [email protected]
You can review the Fund's reports and SAIs at the Public Reference Room of the
SEC. You can receive text-only copies:
For a fee, by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009 or call 1-800-SEC-0330 Free from the SEC's Internet
Website at http://www.sec.gov.
Investment Company Act file no. 811-8255
PROSPECTUS
THE WORLD FUNDS, INC.
Third Millennium Russia Fund
Prospectus dated December 29, 1999
This Prospectus describes the Third Millennium Russia Fund (the "Fund"), a
series of The World Funds, Inc. (the "Company"). A series fund offers you a
choice of investments, with each series having its own investment objective and
a separate portfolio. The Fund seeks capital appreciation by investing in a
non-diversified portfolio of equity securities.
As with all mutual funds, the U.S. Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the accuracy or
completeness of this Prospectus. It is a criminal offense to suggest otherwise.
<PAGE>
RISK RETURN SUMMARY
Investment Objective: Capital appreciation.
Principal Investment
Strategies: The Fund will seek to achieve its investment
objective by investing in a non-diversified
portfolio consisting primarily of equity
securities or securities convertible into
equity securities, such as warrants,
convertible bonds, debentures or convertible
preferred stock.
Principal Risks: The principal risk of investing in
the Fund is that the value of its
investments are subject to market, economic
and business risk that may cause the net
asset value ("NAV") to fluctuate over time.
Therefore, the value of your investment in
the Fund could decline. There is no
assurance that the investment adviser will
achieve the Fund's objective.
These investments may involve financial,
economic or political risks not ordinarily
associated with U.S. securities. The Fund's
NAV may be affected by: less developed and
effective systems for custody and transfer
of securities, changes in exchange rates
between foreign currencies and the U.S.
dollar, different regulatory standards, less
liquidity and more volatility than U.S.
securities, taxes, and adverse social or
political developments.
The Fund operates as a non-diversified fund.
As such, the Fund may invest a larger
portion of its assets in fewer securities.
This may cause the market action of the
Fund's larger portfolio positions to have a
greater impact on the Fund's NAV, which
could result in increased volatility.
An investment in the Fund is not a bank
deposit and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or
any other government agency.
Investor Profile: You may want to invest in the Fund if you
are seeking long-term capital
appreciation and are willing to accept share
prices that may fluctuate, sometimes
significantly, over the short-term. The Fund
will not be appropriate if you are seeking
current income or are seeking safety of
principal.
FEES AND EXPENSES
Costs are an important consideration in choosing a mutual fund. Shareholders
indirectly pay the costs of operating a fund, plus any transaction costs
associated with buying and selling the securities a fund holds. These costs will
reduce a portion of the gross income or capital appreciation a fund achieves.
Even small differences in these expenses can, over time, have a significant
effect on a fund's performance.
The following table describes the fees and expenses that you will pay directly
or indirectly in connection with an investment in the Fund. There are no sales
charges in connection with purchases or redemption of shares. The annual
operating expenses, which cover the costs of investment management,
administration, accounting and shareholder communications, are shown as an
annual percentage of the average daily net assets.
Shareholder Transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (load) Imposed on Purchases None
Sales Charge (load) Imposed on Reinvested Dividends None
Redemption Fees(1) 2.00%(2)
Exchange Fees(3) None
(1) A shareholder electing to redeem shares by telephone request may be
charged $10 for each such redemption request.
(2) A 2% redemption fee is charged on shares held less than 360 days.
(3) A shareholder may be charged a $10 fee for each telephone exchange.
Annual Operating Expenses (Expenses that are deducted from the Fund's assets)
Management Fee 1.75%
Distribution and Service (12b-1) Fees 0.25%
Other Operating Expenses 13.92%
-----
Total Annual Fund Operating Expenses 15.92%
Fee Waiver and/or Expense Reimbursements 13.17%
-----
Net Expenses 2.75%*
* The Adviser has contractually agreed to waive its fees and pay expenses
to the extent necessary to cap the Total Annual Operating Expenses at
2.75% of the Fund's average daily net assets until October 1, 2001.
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, as the Fund increases in size, its Other Operating Expenses will
decline as an annual percentage rate reflecting economies of scale and its
management fee rate is reduced in two steps as certain asset levels are reached.
See "Management Organization and Capital Structure".
EXAMPLE
The following example shows the expenses that you could pay over time. It will
help you compare the costs of investing in the Fund with the cost of investing
in other mutual funds. The example assumes that you invest $10,000 in the Fund
and then redeem all of your shares at the end of the periods indicated. Also,
the example assumes that you earn a 5% annual return, with no change in Fund
expense levels. Because actual return and expenses will be different, the
example is for comparison only. Based on these assumptions, your costs would be:
1 Year * 3 Years * 5 Years * 10 Years *
-------- --------- --------- ----------
$278 $853 $1,454 $3,080
* These costs are net of fee waivers and reimbursements to maintain total
operating expenses at 2.75% pursuant to an expense limitation agreement
(see "Management Organization and Capital Structure" below).
Absent this commitment, your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$1,505 $4,040 $6,052 $9,446
INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS
The investment objective of the Fund is to achieve capital appreciation by
investing in a non-diversified portfolio consisting primarily of equity
securities or securities convertible into equity securities, such as warrants,
convertible bonds, debentures or convertible preferred stock.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in securities of companies located in Russia. Russia refers to the
Russian Federation, which does not include other countries that formerly
comprised the Soviet Union.
As used in this Prospectus, the term "Russian Company" means a legal entity (1)
that is organized under the laws of, or with a principal office in, Russia, (2)
for which the principal equity securities trading market is in Russia, (3) that
derives at least 50% of its revenues or profits from goods produced or sold,
investments made, or services performed, in Russia , or (4)or that has at least
50% of its assets situated in Russia. Under current conditions, the Adviser
expects to maintain at least 20% of the Fund in cash and liquid investments to
maintain a degree of liquidity and provide more stability. As the Russian equity
markets develop and grow, the Adviser may elect greater equity exposure.
The Fund invests its assets over a broad economic spectrum of Russian Companies,
including issuers from the following sectors: oil and gas, energy generation and
distribution, communications, mineral extraction, trade (including retail trade
and distribution) financial and business services, transportation,
manufacturing, real estate, textiles, food processing and construction. The Fund
does not concentrate its investments in any industry and therefore it does not
invest more than 25% of its assets in any one industry.
The Fund is non-diversified under Federal securities laws and, therefore, may
invest a larger portion of its assets in fewer securities than a diversified
fund. This may cause the market action of the Fund's larger portfolio positions
to have a greater impact on the Fund's NAV, which could result in increased
volatility.
The Adviser's approach to selecting investments emphasizes fundamental
company-by-company analysis in conjunction with broader analysis of specific
sectors. When relevant, however, the Adviser may consider historical value
measures, such as price/earnings ratios, operating profit margins and
liquidation values. The primary factor in selecting securities for investment by
the Fund will be the company's current price relative to its long-term earnings
potential, or intrinsic value as determined using discounted cash flow analysis
and other valuation techniques, whichever are appropriate. In addition, the
Adviser will consider overall growth prospects, competitive positions in export
markets, technologies, research and development, productivity, labor costs, raw
material costs and sources, profit margins, returns on investment, capital
resources, state regulation, management and other factors in comparison to other
companies around the world which the Adviser believes are comparable. The
Adviser, in selecting investments, will also consider macroeconomic factors such
as inflation, GDP growth in Russia, government spending and the government's
support of particular industries.
The Fund's investments will include investments in companies which, while
falling within the definition of Russian Companies, as stated above, have
characteristics and business relationships common to companies in a country or
countries other than Russia. As a result, the value of the securities of such
companies may reflect economic market forces applicable to other countries, as
well as to Russia. For example, the Fund may invest in companies organized and
located in countries other than Russia, including companies having their entire
production facilities outside of Russia, when securities of such companies meet
one or more elements of the Fund's definition of Russian Company.
Although the Fund does not generally intend to invest for the purpose of seeking
short-term profits, the Fund's investments may be changed when circumstances
warrant, without regard to the length of time a particular security has been
held. As more companies in Russia are privatized and as more companies increase
their capitalization and float, turnover may increase in order to capitalize on
these new opportunities. It is expected that the Fund will have an annual
portfolio turnover rate that will generally not exceed 150%. A 100% turnover
rate would occur if all the Fund's portfolio investments were sold and either
repurchased or replaced within a year. A high turnover rate (100% or more)
results in correspondingly greater brokerage commissions and other transactional
expenses which are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to shareholders, will be taxable as ordinary income.
Investing in Russian Companies involves significant risks and special
considerations not typically associated with investing in the United States
securities, and should be considered highly speculative, including:
* Greater social, economic and political uncertainty in general
(including risk of regional war).
* Delays in settling portfolio transactions and risk of loss
arising out of the system of share registration and custody.
* Risks in connection with the maintenance of Fund portfolio
securities and cash with Russian licensed sub-custodians and
securities depositories.
* The risk that it may be more difficult or problematic to
obtain and/or enforce a legal judgment.
* The negative effects of public corruption and crime.
* Greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities
markets and traded securities.
* Adverse currency exchange rates and dearth of currency
hedging instruments.
* Return of period of high rate of inflation (and any attendant
social unrest).
* The risk that, by investing significantly in a limited number
of industry sectors, the Fund may be more affected by any
single economic, political or regulatory development relating
to a specific sector.
* Controls on foreign investment and local practices disfavoring
investors in general and/or foreign investors in particular,
and limitations on repatriation of invested capital, profits
and dividends, and the Fund's ability to exchange rubles for
other currencies.
* The risk that the Government of Russia may decide not to
continue to support the economic reform programs implemented
to date and to follow instead radically different political
and/or economic policies to the detriment of investors,
including non-market-oriented policies such as the support of
certain industries to the detriment of other sectors or
investors or a return to the centrally planned economy that
previously existed.
* The financial condition of Russian Companies, including large
amounts of inter-company debt, the lack of transparency and/or
proper financial reporting based on international accounting
standards and the fact that Russian Companies may be smaller,
less seasoned and experienced in financial reporting and in
modern management in general.
* The difference in, or lack of, auditing and financial
reporting standards in general, which may result in the
unavailability of material information about issuers.
* The risk that dividends may be withheld at the source.
* Russia's dependency on export earnings and the corresponding
importance of international trade and prospect of declining
currency earnings and reserves and devaluation pressure on the
ruble's exchange rate.
* The risk that the Russian tax system will not be reformed to
prevent inconsistent, retroactive and/or exorbitant taxation.
* The fact that statistical information may be inaccurate or not
comparable to statistical information regarding the U.S. or
other economies.
* Less extensive regulation of the securities markets than is
the case in other countries.
* The risks associated with the difficulties that may occur in
pricing the Fund's portfolio securities.
* Possible difficulty in identifying a purchaser of the Fund's
securities due to the undeveloped nature of the securities
markets.
* The risk of lawsuits or government intervention arising from
restrictive regulations and practices with respect to foreign
investment in particular industries.
* The risk of nationalization or expropriation of assets or
confiscatory taxation, which may involve total loss of
investments.
OTHER PRINCIPAL STRATEGIES AND RISKS
Depositary Receipts. The Fund may invest indirectly in securities through
sponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs") and other types of Depositary Receipts (collectively "Depositary
Receipts"), to the extent such Depositary Receipts become available. ADRs are
Depositary Receipts typically issued by a U.S. bank or trust company evidencing
ownership of underlying foreign securities. GDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or a United States corporation.
Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. For purposes of the
Fund's investment policies, investments in Depositary Receipts will be deemed to
be investments in the underlying securities.
Temporary Investments. During periods in which the Adviser believes changes in
economic, financial or political conditions make it advisable, the Fund may
reduce its holdings in equity securities and invest without limit in short-term
(less than twelve months to maturity) debt securities or hold cash. The
short-term and medium-term debt securities in which the Fund may invest consist
of (a) obligations of the U.S. or Russian governments, and their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign banks denominated in any currency; (c) floating rate securities and
other instruments denominated in any currency issued by various governments or
international development agencies; and (d) finance company and corporate
commercial paper and other short-term corporate debt obligations of U.S or
Russian companies. The Fund intends to invest for temporary defensive purposes
only in short-term and medium-term debt securities rated, at the time of
investment, A or higher by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Rating Group ("S&P") or, if unrated by either rating agency,
of equivalent credit quality to securities so rated as determined by the
Adviser. For purposes of the Fund's investment restriction prohibiting the
investment of 25% or more of the total value of its assets in a particular
industry, a foreign government (but not the United States government) is deemed
to be an "industry," and therefore investments in the obligations of any one
foreign government may not equal or exceed 25% of the Fund's total assets. In
addition, supranational organizations are deemed to comprise an industry, and
therefore investments in the obligations of such organizations may not, in the
aggregate, equal or exceed 25% of the Fund's total assets.
Year 2000 Issue. Like other mutual funds and financial or business organizations
around the world, The World Funds, Inc. (the "Company") could be adversely
affected if its computer systems or the computer systems of its service
providers do not properly process and calculate date-related information and
data as of and after January 1, 2000. This is commonly known as the "Year 2000
Issue". The Company has taken steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to computer systems that it uses and to
obtain reasonable assurances that comparable steps are being taken by its major
service providers. These steps include identifying system problems, remediation
and testing the system fixes. The Company and each of its major service
providers are in the stage of testing the system fixes that have been
implemented. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Company.
MANAGEMENT ORGANIZATION AND CAPITAL STRUCTURE
Adviser - Third Millennium Investment Advisors LLC (the "Adviser"), 1185 Avenue
of the Americas, New York, New York 10036, manages the investments of the Fund
pursuant to an Investment Advisory Agreement (the "Advisory Agreement" ), dated
September 21, 1998. The Adviser is responsible for effecting all security
transactions on behalf of the Fund, including the allocation of principal
business and portfolio brokerage and the negotiation of commissions. In placing
orders with brokers and dealers, the Adviser will attempt to obtain the best
price and execution of orders. Prior to the Fund's inception, the Adviser had no
previous experience managing a mutual fund.
The Fund pays the Adviser a monthly investment advisory fee at an annual rate of
1.75% on the first $125 million of assets; 1.50% on assets in excess of $125
million and not more than $250 million; and 1.25% on assets over $250 million of
the Fund's average daily net assets. These fees are higher than those charged by
most other investment companies, but are comparable to investment companies with
investment objectives and policies similar to the Fund's investment objectives
and policies.
In the interest of limiting expenses of the Fund, the Adviser has entered into
an expense limitation agreement with the Fund. The Adviser has agreed to waive
or limit its fees and to assume other expenses so that the total annual
operating expenses of the Fund are limited to 2.75%. The limit does not apply to
interest, taxes, brokerage commissions, other expenditures capitalized in
accordance with generally accepted accounting principles and other extraordinary
expenses not incurred in the ordinary course of business.
The Adviser has assembled an Advisory Committee to assist the Adviser in
evaluating the securities market environment and to provide the portfolio
manager with specific industry and company recommendations for their
consideration. The following persons are members of the Advisory Committee:
E. Wayne Nordberg, retired in September, 1998, from Lord, Abbott & Co.,
where he was a Partner since 1988, most recently in charge of Equity
Investments, and before that, in charge of Equity Research. A Member of
the Financial Analysts Federation and the New York Society of Security
Analysts, he received his BA in Economics from Lafayette College.
Oleg Yachnik, President and founder of OLMA, Moscow, Russia, ranked by
Kommersant Daily among the top 25 Russian financial companies. Mr.
Yachnik received a PhD in 1982 from Bauman Moscow High Technical
College and is a member, since 1996, of the Board of Directors of
NAUFOR (the self-regulatory brokers' association) and of the RTS
(Russian Trading System), as well as a member, since 1996, of the
governing committee of MICEX (the Moscow Currency Exchange).
Alexander Pevnitsky, General Director of the brokerage company "Pride,"
which is located in Novosibirsk, Russia and is ranked seventh among
regional brokers in Russia. He received a PhD in mathematics and
economics from Novosibirsk State University.
Yury Bovkun, General Director of "Pride Holding," ranked by Kommersant
Daily fifth among the regional financial firms in Russia. He is a
member of the Board of Directors of the RTS.
Jim Melcher is President of Balestra Capital, an asset management firm
located at 1185 Avenue of the Americas, New York, N.Y. He is a graduate
of Columbia University and is a registered investment adviser.
John T. Connor, Jr. is Chairman of the Adviser, Vice President of the
World Funds and a portfolio manager of the Fund. Since 1993, Mr. Connor
has been Chairman of ROSGAL, a Russian financial company licensed by
the Ministry of Finance of the Russian Federation, and of its
affiliate, Rosgal Insurance, an insurance company separately licensed
by the Ministry of Finance. Both companies have their principal
business offices on the same premises in Moscow, Russia. A Phi Beta
Kappa, highest honors graduate of Williams College, and a graduate of
Harvard Law School, Mr. Connor previously chaired the pension committee
of a NYSE-listed company and authored the lead article in an American
Bar Association journal on "Russia's Securities Markets" (Fall 1996).
Alexei Moskvin, ROSGAL's Director of Equity Investment since 1993 and a
portfolio manager of the Fund. Mr. Moskvin received a PhD in 1985 from
Novosibirsk State University and holds a Financial Broker and Money
Manager Certificate granted by the Ministry of Finance of the Russian
Federation.
The Fund's portfolio managers , since the inception of the Fund on October 1,
1998, are John T. Connor, Jr. and Alexei Moskvin. In addition, the Adviser may
retain the services of other full-time professionals in portfolio management.
The portfolio managers operate under the supervision of the Investment
Committee, which is comprised of the two portfolio managers and Mr. Melcher.
Each of the above named individuals, except Mr. Nordberg, is a principal,
officer or employee of the Adviser.
The Adviser has also established a Consultant Committee. The Consultant
Committee is comprised of former U.S. Ambassador to the Soviet Union Jack F.
Matlock, Jr. and Professor Marvin Zonis. The Consultant Committee will be
responsible for providing the Advisory Committee and the portfolio managers with
periodic updates on political and macroeconomic conditions and trends in Russia
and their potential implications for the overall investment climate in Russia.
These updates will enhance the Adviser's ability to oversee and invest the
assets of the Fund.
Ambassador Matlock is currently the George F. Kennan Professor at the
Institute for Advanced Study in Princeton, New Jersey. Ambassador in
Moscow for four years under Presidents Reagan and Bush, he earlier
served in the Reagan White House as Special Assistant to the President
for National Security Affairs and served three previous tours of duty
in Moscow for a total of eleven years duty in the Soviet Union. His
book, Autopsy on an Empire, was published by Random House in 1995 and
he has written extensively on Russia's modern history and politics. He
is a summa cum laude graduate of Duke University.
Marvin Zonis is a Professor at the Chicago Business School where he
teaches International Political Economy and is the Principal in an
international consulting firm bearing his name. Marvin Zonis +
Associates created the Political Stability Index, the first useful
quantitative model for assessing country risk. The index is used with
clients to manage risk in political, economic and investment
decisions. It also serves as the basis for preparing Country Analysis
Reports, which are daily analyses of changing risk profiles in the
major developed and emerging markets. He was educated at Yale
University and Harvard Business School and received his PhD in
Political Science from MIT.
SHAREHOLDER INFORMATION
The Fund's share price, called its net asset value per share or NAV per share,
is determined and shares are priced as of the close of trading on the New York
Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern Time) on each business day
("Valuation Time") that the NYSE is open. As of the date of this prospectus, the
Fund is informed that the NYSE observes the following holidays: New Year's Day,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. NAV per share
is computed by adding the total value of the investments and other assets of the
Fund, subtracting any liabilities of the Fund and then dividing by the total
number of Fund shares outstanding.
Shares are bought, sold or exchanged at the NAV next determined after a request
has been received in proper form. Any request received in proper form, before
the Valuation Time, will be processed the same business day. Any request
received in proper form, after the Valuation Time, will be processed the next
business day.
The Fund's securities are valued at current market prices. Investments in
securities traded on the national securities exchanges or included in the NASDAQ
National Market System are valued at the last reported sale price. Other
securities traded in the over-the-counter market and listed securities for which
no sales are reported on a given 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. 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. Depositary Receipts 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.
Securities 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 value of a foreign security is determined as of the close of
trading on the foreign exchange on which it is traded or as of the scheduled
close of trading on the NYSE, whichever is earlier. Portfolio securities that
are listed on foreign exchanges may experience a change in value on days when
shareholders will not be able to purchase or redeem shares of the Fund.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times.
PURCHASING SHARES
Shares of the Fund may be purchased directly from First Dominion Capital Corp.
(the "Distributor") or through brokers or dealers who are members of the
National Association of Securities Dealers, Inc. When an investor acquires
shares of the Fund from a securities broker dealer, the investor may be charged
a transaction fee by that broker dealer. The minimum initial investment in the
Fund is $1,000 and additional investments must be $100 or more. The Fund retains
the right to refuse to accept an order.
Purchases by Mail - For initial purchases, the account application form, which
accompanies the prospectus, should be completed, signed and mailed to Fund
Services, Inc. (the "Transfer Agent") together with your check payable to the
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 social security number(s).
Investing by Wire - You may purchase shares by requesting your bank to transmit
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. Once you
have arranged to purchase shares by wire, please complete and mail the Account
Application promptly to the Transfer Agent. This application is required to
complete the Fund's records. You will not have access to your shares until the
Fund's records are complete. Once your account is opened, you may make
additional investments using the wire procedure described above. Be sure to
include your name and account number in the wire instructions you provide your
bank.
Plan of Distribution - The Fund has a Plan of Distribution or "12b-1 Plan" under
which it may finance activities primarily intended to sell shares, provided the
categories of expenses are approved in advance by the Board of Directors of the
Company and the expenses paid under the Plan were incurred within the preceding
12 months and accrued while the Plan is in effect.
REDEEMING SHARES
You may redeem your shares 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 the information and documents necessary for your request to be
considered 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 NAV next determined after the
Transfer Agent receives the redemption request in proper order. A two percent
(2%) redemption fee is deducted from proceeds of Fund shares redeemed less than
three hundred sixty (360) days after purchase. Payment will be made promptly,
but no later than the seventh day following the receipt of the request in proper
order. The Company may suspend the right to redeem shares for any period during
which the NYSE is closed or the U.S. 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 after
the suspension is terminated.
If you sell shares through a securities dealer or investment professional, it is
such person's responsibility to transmit the order to the Fund in a timely
fashion. Any loss to you resulting from failure to do so must be settled between
you and such person.
Delivery of the proceeds of a redemption of shares purchased and paid for by
check shortly before the receipt of the redemption request may be delayed until
the Fund determines that the Transfer Agent has completed collection of the
purchase, check which may take up to 14 days. Also, payment of the proceeds of a
redemption request for an account for which purchases were made by wire may be
delayed until the Fund receives a completed application for the account to
permit the Fund to verify the identify of the person redeeming the shares, and
to eliminate the need for backup withholding.
Redemption by Mail - To redeem shares by mail, send a written request for
redemption, signed by the registered owner(s) exactly as the account is
registered. Certain written requests to redeem shares may require signature
guarantees. For example, signature guarantees may be required if you sell a
large number of shares, if your address of record on the Account Application has
been changed within the last 30 days, or if you ask that the proceeds be sent to
a different person or address. Signature guarantees are used to help protect you
and the Fund. You can obtain a signature guarantee from most banks or securities
dealers, but not from a Notary Public. Please call the Transfer Agent at (800)
628-4077 to learn if a signature guarantee is needed or to make sure that it is
completed appropriately in order to avoid any processing delays.
Redemption by Telephone - You may redeem your shares by telephone provided that
you requested this service on your initial Account Application. If you request
this service at a later date, you must send a written request, along with a
signature guarantee to the Transfer Agent. Once your telephone authorization is
in effect, you may redeem shares by calling the Transfer Agent at 800-628-4077.
There is no charge for establishing this service, but the Transfer Agent will
charge your account a $10 service fee for each telephone redemption. The
Transfer Agent may change the charge for this service at any time without prior
notice.
Redemption by Wire - If you request 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
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.
Automatic Investment Plan - Existing shareholders, who wish to make regular
monthly investments in amounts of $100 or more, may do so through the Automatic
Investment Plan. Under the Plan, your designated bank or other financial
institution debits a pre-authorized amount from your account on or about the
15th day of each month and applies the amount to the purchase of shares. To use
this service, you must authorize the transfer of funds by completing the Plan
section of the account application and sending a blank voided check.
Exchange Privileges - You may exchange all or a portion of your shares for the
shares of certain other funds having different investment objectives, provided
the shares of the fund you are exchanging into are registered for sale in your
state of residence. Your account may be charged $10 for a telephone exchange
fee. An exchange is treated as a redemption and a purchase and may result in
realization of a gain or loss on the transaction.
Dividends and Capital Gain Distributions - Dividends from net investment income,
if any, are declared and paid annually. The Fund intends to distribute annually
any net capital gains.
Distributions will automatically be reinvested in additional shares of the Fund,
unless you elect to have the distributions paid to you in cash. There are no
sales charges or transaction fees for reinvested dividends and all shares will
be purchased at NAV. If the investment in shares is made within an IRA, all
dividends and capital gain distributions must be reinvested.
Unless you are investing through a tax deferred retirement account, such as an
IRA, it is not to your advantage to buy shares of the Fund shortly before the
next distribution, because doing so can cost you money in taxes. This is known
as "buying a dividend". To avoid buying a dividend, check the Fund's
distribution schedule before you invest.
DISTRIBUTION AND TAXES
In general, Fund distributions are taxable to you as either ordinary income
(includes short-term capital gains) or long-term capital gains. This is true
whether you reinvest your distributions in additional shares of a Fund or
receive them in cash. Any capital gains the Fund distributes are taxable to you
as long-term capital gains no matter how long you have owned your shares. Every
January, you will receive a statement that shows the tax status of distributions
you received for the previous year. Distributions declared in December but paid
in January are taxable as if they were paid in December.
When you sell shares of a Fund, you may have a capital gain or loss. For tax
purposes, an exchange of your shares of the Fund for shares of a different fund
of the Company is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Foreign exchange gains or
losses realized on the sale of securities generally are treated as ordinary
income or loss by a Fund and may increase or decrease Fund distributions to you.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult with your tax adviser about the federal, state, local or foreign tax
consequences of your investment in the Fund.
By law, the Fund must withhold 31% of your taxable distribution and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS has notified you that you are subject to
backup withholding and instructs a Fund to do so.
DISTRIBUTION ARRANGEMENTS
The Fund is offered through financial supermarkets, investment advisers and
consultants, financial planners, brokers, dealers and other investment
professionals, and directly through the Distributor. The shares are offered and
sold without any sales charges imposed by the Fund or the Distributor. However,
investment professionals who offer shares may request fees from their individual
clients. If you invest through a third party, the policies and fees may be
different than those described in the Prospectus. For example, third parties may
charge transaction fees or set different minimum investment amounts.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned [or
lost] on an investment in the Fund (assuming reinvestment of all dividends and
distributions). The Fund's financial highlights for the period presented have
been audited by Tait, Weller and Baker, independent auditors, whose unqualified
report thereon is included in the SAI. The Fund's financial statements, notes to
financial statements and report of independent accountants are included in the
SAI as well as in the Fund's Annual Report to Shareholders (the "Annual
Report"). Additional performance information for the Fund is included in the
Annual Report. The Annual Report and the SAI are available at no cost from the
Fund at the address and telephone number noted on the back page of this
Prospectus. The following information should be read in conjunction with the
financial statements and notes thereto.
For A Share Outstanding Throughout The Period
- --------------------------------------------------------------------------------
Period Ended
August 31, 1999 *
------------------------
Per Share Operating Performance
Net asset value, beginning of period $10.00
-------------------------
Income from investment operations-
Net investment loss (0.16)
Net realized and unrealized gain on investments 4.33
-------------------------
-------------------------
Total from investment operations 4.17
------------------------
Less distributions-
Distributions from net investment income -
Distributions from realized gains on investments -
----------------------
Total distributions -
------------------------
=========================
Net asset value, end of period $14.17
=========================
Total Return 41.70%***
=========================
Ratios/Supplemental Data
Net assets, end of period (000's) $1,313
Ratio of expenses to average net assets or more
Before expense waivers and reimbursements 15.92% **
After expense waivers and reimbursements 2.75% **
Ratio of net investment loss to average net assets
Before expense waivers and reimbursements (15.26%) **
After expense waivers and reimbursements (2.08%) **
Portfolio turnover rate 14.43%
* Commencement of operations was October 1, 1998
** Annualized
*** Not annualized
See Notes to Financial Statements
For investors who want more information about the Fund, the following documents
are available free upon request:
Annual & Semiannual Reports:
Additional information about the Fund's investments is available in the Fund's
Annual and Semiannual Reports to Shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund and is incorporated into this prospectus by
reference.
You can receive free copies of reports and SAI, request other information and
discuss your questions about the Fund by contacting the Fund directly at:
THE WORLD FUNDS, INC.
1500 FOREST AVENUE, SUITE 223
RICHMOND, VIRGINIA 23229
TELEPHONE: 1-800-527-9525
E-MAIL: [email protected]
You can review the Fund's reports and SAIs at the Public Reference Room of the
SEC. You can receive text-only copies:
For a fee, by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009 or call 1-800-SEC-0330 Free from the SEC's Internet
Website at http://www.sec.gov.
Investment Company Act file no. 811-8255
Information on the tax character of distributions: The Funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held Fund shares for a full year, a Fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the Fund.
Election to be taxes as a regulated investment company: Each Fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the Funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualifications of a Fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such Fund's earnings and profits.
Excise tax distribution requirements: To avoid federal excise taxes, the
Internal Revenue Code requires a Fund to distribute to you by December 31 of
each year, at a minimum the following amounts 98% of its taxable ordinary income
earned during the twelve month period ending October 31 and 100% of any
undistributed amounts from the prior year. Each Fund intends to declare and pay
these amounts in December (or in January that are treated by you as received in
December) to avoid these excise taxes, but can give no assurances that its
distributions will be sufficient to eliminate all taxes.
Redemption of fund shares: Redemption and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your Fund
shares, or exchange your Fund shares for shares of a different fund of the
Company, the IRS will require that you report a gain or loss on your redemption
or exchange. If you hold your shares as a capital asset, the gain or loss that
you realize will be capital gain or loss and will be long-term or short-term,
generally depending on how long you hold your shares. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by a Fund on those shares.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you buy other shares in such Fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you purchase.
U.S. government obligations: Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
Dividends received deduction for corporations: Because the Fixed Income Fund's
income consists of interest rather than dividends, no portion of its
distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the Fixed Income
Fund for the most recent calendar year qualified for such deduction, and it is
anticipated that none of the current year's dividends will so qualify.
The Equity Fund did not pay a dividend for the most recent fiscal year end. In
the future, if the shareholder is a corporation, a percentage of the dividends
paid by the Equity Fund may qualify for the dividends-received deduction. You
will be permitted in some circumstances to deduct these qualified dividends,
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with respect
to dividends designated by the Equity Fund as eligible for such treatment. All
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculations.
Investment in complex securities: The Funds may invest in complex securities,
such as original issue discount obligations, the shares of passive foreign
investment companies and others. These investments may be subject to numerous
special and complex tax rules. These rules could affect whether gains and losses
recognized by a Fund are treated as ordinary income or capital gain, accelerate
the recognition of income to Fund and/or defer a Fund's ability to recognize
losses, and, in limited cases, subject a Fund to U.S. federal income tax on
income from certain of its foreign securities. In turn, these rules may affect
the amount, timing or character of the income distributed to you by a Fund.
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of the Funds to that of
other mutual funds and to relevant indices in advertisements or in reports to
shareholders, performance will be stated in terms of total return or yield. Both
"total return" and "yield" figures are based on the historical performance of a
Fund, show the performance of a hypothetical investment and are not intended to
indicate future performance.
YIELD INFORMATION
From time to time, the Funds may advertise a yield figure. A portfolio's yield
is a way of showing the rate of income the portfolio earns on its investments as
a percentage of the portfolio's share price. Under the rules of the SEC, yield
must be calculated according to the following formula:
6
YIELD = 2[( A-B + 1) -1]
CD
Where:
A = dividends and interest earned during the period. B = expenses accrued
forr the period (net of reimbursements). C = the average daily number of
shares outstanding during the
period that were entitled to receive dividends. D = the maximum
offering price per share on the last day of the period.
A Fund's yield, as used in advertising, is computed by dividing the Fund's
interest and dividend income for a given 30-day period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by a Fund's net asset value ("NAV") at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. Income is calculated for purposes of yield
quotations in accordance with standardized methods applicable to all stock and
bond mutual funds. Dividends from equity investments are treated as if they were
accrued on a daily basis, solely for the purposes of yield calculations. In
general, interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from income on a
daily basis, and is increased with respect to bonds trading at a discount by
adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation. Income calculated for the purpose
of calculating a Fund's yield differs from income as determined for other
accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yield quoted for a
Fund may differ from the rate of distributions the Fund paid over the same
period or the rate of income reported in the Fund's financial statements.
TOTAL RETURN PERFORMANCE
Under the rules of the SEC, fund advertising performance must include total
return quotes, "T" below, calculated according to the following formula:
n
P(1+ T) = ERV
Where:
P = a hypothetical initial payment $1,000 T = average annual total return
N = number of years (l, 5 or 10)
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).
The average annual total return will be calculated under the foregoing formula
and the time periods used in advertising will be based on rolling calendar
quarters, updated to the last day of the most recent quarter prior to submission
of the advertising for publication, and will cover prescribed periods. When the
period since inception is less than one year, the total return quoted will be
the aggregate return for the period. In calculating the ending redeemable value,
all dividends and distributions by a Fund are assumed to have been reinvested at
NAV as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the prescribed periods (or fractional
portions thereof) that would equate the initial amount invested to the ending
redeemable value.
The average annual total returns for the Funds as of August 31, 1999 are
as follows:
Fund One Year Commencement of Operations*
---- -------- -----------------------------
Equity Fund 35.21% 16.68% (10/14/97* to 8/31/99)
Fixed Income Fund (1.31%) 2.14% (1/27/98* to 8/31/99)
The Funds may also from time to time include in such advertising an aggregate
total return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately each Fund's performance with other measures of investment return. The
Fund may quote an aggregate total return figure in comparing each Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, Russell Indices, the
Value Line Composite Index, the Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency Index,
Merrill Lynch Intermediate Agency Index, Morgan Stanley Capital International
Europe, Australia, Far East Index or the Morgan Stanley Capital International
World Index. For such purposes, each Fund calculates its aggregate total return
for the specified periods of time by assuming the investment of $1,000 in shares
of the applicable Fund and assuming the reinvestment of each dividend or other
distribution at NAV on the reinvestment date. Percentage increases are
determined by subtracting the initial value of the investment from the ending
value and by dividing the remainder by the beginning value. To calculate its
average annual total return, the aggregate return is then annualized according
to the SEC's formula for total return quotes outlined above.
The Funds may also advertise the performance rankings assigned by various
publications and statistical services, including but not limited to, SEI, Lipper
Mutual Performance Analysis, Intersec Research Survey of Non-U.S. Equity Fund
Returns, Frank Russell International Universe, and any other data which may be
reported from time to time by Dow Jones & Company, Morningstar, Inc., Chase
Investment Performance, Wilson Associates, Stanger, CDA Investment Technologies,
Inc., the Consumer Price Index ("CPI"), The Bank Rate Monitor National Index, or
IBC/Donaghue's Average U.S. Government and Agency, or as appears in various
publications, including but not limited to, The Wall Street Journal, Forbes,
Barron's Fortune, Money Magazine, The New York Times, Financial World, Financial
Services Week, USA today and other national or regional publications.
FINANCIAL INFORMATION
Financial Highlights, Statements and Reports of Independent Accountants. You can
receive free copies of reports, request other information and discuss your
questions about the Fund by contacting the Fund directly at:
THE WORLD FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
Telephone: (800) 527-9525
e-mail: [email protected]
The books of the Fund will be audited at least once each year by Tait, Weller
and Baker, of Philadelphia, PA, independent public accountants.
The Fund's audited financial statements and notes thereto for the year ended
August 31, 1999 and the unqualified report of Tait, Weller & Baker, on such
financial statements (the "Report") are incorporated by reference in this SAI
and are included in the Fund's 1999 annual report to shareholders (the "Annual
Report"). A copy of the Annual Report accompanies this SAI and an investor may
obtain a copy of the Annual Report by writing to the Fund or calling <PAGE>
THE WORLD FUNDS, INC.
(THE "COMPANY")
1500 FOREST AVENUE, SUITE 223, RICHMOND, VA 23229
1-800-527-9525
STATEMENT OF ADDITIONAL INFORMATION
THIRD MILLENNIUM RUSSIA FUND
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current Prospectus of the Third Millennium
Russia Fund (the "Fund") dated December 29, 1999. You may obtain the Prospectus
of the Fund, free of charge, by writing to The World Funds, Inc. at 1500 Forest
Avenue, Suite 223, Richmond, VA 23229 or by calling 1-800-527-9525.
The Fund's audited financial statements and notes thereto for the year ended
August 31, 1999 and the unqualified report of Tait, Weller & Baker, the Fund's
public accountants, on such financial statements (the "Report") are incorporated
by reference in this SAI and are included in the Fund's 1999 Annual Report to
Shareholders (the "Annual Report"). A copy of the Annual Report accompanies this
SAI and an investor may obtain a copy of the Annual Report, free of charge, by
writing to the Fund or calling 1-800-527-9525
The date of this SAI is December 29, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
General Information
Investment Objective
Strategies and Risks
Investment Programs
Other Investments
Investment Restrictions
Management of the Company
Principal Securities Holders
Investment Adviser and Advisory Agreement
Management-Related Services
Portfolio Transactions
Portfolio Turnover
Capital Stock and Dividends
Additional Information about Purchases and Sales
Tax Status
Investment Performance
Financial Information
<PAGE>
GENERAL INFORMATION
The World Funds, Inc. (the "Company") was organized as a Maryland corporation in
May, 1997. The Company is an open-end, management investment company (commonly
known as a "mutual fund"), registered under the Investment Company Act of 1940,
as amended (the "1940 Act"). This SAI relates to the Third Millennium Russia
Fund series of shares (the "Fund") of the Company. The Fund is a series of the
Company that invests in a non-diversified portfolio of securities and other
assets.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve capital appreciation by
investing in a non-diversified portfolio consisting primarily of equity
securities which includes securities convertible into equity securities, such
as, warrants, convertible bonds, debentures or convertible preferred stock.
All investments entail some market and other risks. For instance, there is no
assurance that the investment adviser will achieve the investment objective of
the Fund. You should not rely on an investment in the Fund as a complete
investment program.
STRATEGIES AND RISKS
The following discussion of investment techniques and instruments supplements,
and should be read in conjunction with, the investment information in the Fund's
Prospectus. In seeking to meet its investment objective, the Fund may invest in
any type of security whose characteristics are consistent with its investment
program described below.
INVESTMENT PROGRAMS
Convertible Securities: The Fund may invest in convertible securities.
Traditional convertible securities include corporate bonds, notes and preferred
stocks that may be converted into or exchanged for common stock or other equity
securities, and other securities that also provide an opportunity for equity
participation. These securities are convertible either at a stated price or a
stated rate (that is, for a specific number of shares of common stock or other
equity securities). As with other fixed income securities, the price of a
convertible security generally varies inversely with interest rates. While
providing a fixed income stream, a convertible security also affords the
investor an opportunity, through its conversion feature, to participate in the
capital appreciation of the common stock into which it is convertible. As the
market price of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis and so may not experience market
value declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the price of a
convertible security tends to rise as a reflection of higher yield or capital
appreciation. In such situations, the price of a convertible security may be
greater than the value of the underlying common stock.
Warrants: The Fund may invest in warrants. Warrants are options to purchase
equity securities at a specific price for a specific period of time. They do not
represent ownership of the securities, but only the right to buy them. Hence,
warrants have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. The value of warrants is derived
solely from capital appreciation of the underlying equity securities. Warrants
differ from call options in that the underlying corporation issues warrants,
whereas call options may be written by anyone.
Debentures: Debentures are a general debt obligation backed only by the
integrity of the borrower and documented by an agreement called an
Indenture. An unsecured bond is a debenture.
Preferred Stock: Preferred stock is a class of capital stock that pays dividends
at a specified rate and that has preference over common stock in the payment of
dividends and the liquidation of assets. Preferred stock does not ordinarily
carry voting rights. Most preferred stock is cumulative; if dividends are passed
(not paid for any reason), they accumulate and must be paid before common stock
dividends. Passed dividend on non-cumulative preferred stock is generally gone
forever. Participating preferred stock entitles its holders to share in profits
above and beyond the declared dividend, along with common shareholders, as
distinguished from nonparticipating preferred, which is limited to stipulated
dividend. Adjustable rate preferred stock pays a dividend that is adjustable,
usually quarterly, based on changes in the Treasury bill rate or other money
market rates. Convertible preferred stock is exchangeable for a given number of
common shares and thus tends to be more volatile than non-convertible preferred,
which behaves more like a fixed-income bond.
Illiquid Securities: The Fund may invest up to 15% of its net assets in illiquid
securities. For this purpose, the term "illiquid securities" means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the securities.
Illiquid securities include generally, among other things, certain written
over-the-counter options, securities or other liquid assets as cover for such
options, repurchase agreements with maturities in excess of seven days, certain
loan participation interests and other securities whose disposition is
restricted under the federal securities laws.
Debt Securities: The Fund may invest in debt securities. It generally will
invest in securities rated Baa or higher by Moody's Investor Service, Inc.
("Moody's") or BBB or higher by Standard & Poor's Rating Group ("S&P") or
foreign securities not subject to standard credit ratings, which the Adviser
believes are of comparable quality. Under normal circumstances, the Fund will
have at least 65% of its assets invested in common stocks or securities
convertible into common stocks.
Debt securities consist of bonds, notes, government and government agency
securities, zero coupon securities, convertible bonds, asset-backed and
mortgage-backed securities, and other debt securities whose purchase is
consistent with the Fund's investment objective. The Fund's investments may
include international bonds that are denominated in foreign currencies,
including the European Currency Unit or "Euro." International bonds are defined
as bonds issued in countries other than the United States. The Fund's
investments may include debt securities issued or guaranteed by supranational
organizations, corporate debt securities, and bank or holding company debt
securities.
Strategic Transactions. The Adviser does not, as a general rule, intend to
regularly enter into strategic transactions for the purpose of reducing currency
and market risk, for two reasons. First, since financial derivatives in Russian
markets currently must be tailor-made to the Fund's specifications, they are
extremely costly and illiquid instruments, and as such do not offer a
cost-effective way to minimize currency and market risk. Second, the Fund is
intended for investors with a long-term investment horizon and it is the
Adviser's hope that any short-term losses due to fluctuations in local
currencies or stock market values will be compensated over the long term by the
capital appreciation of the portfolio securities. Notwithstanding the foregoing,
the Adviser may, from time-to-time as circumstances dictate, engage in strategic
transactions as described below.
Currency Transactions. Currency risk is assessed separately from equity
analysis. To balance undesirable currency risk the Fund may enter into forward
contracts to purchase or sell foreign currencies in anticipation of the Fund's
currency requirements, and to protect against possible adverse movements in
foreign exchange rates. Although such contracts may reduce the risk of loss due
to a decline in the value of the currency which is sold, they also limit any
possible gain which might result should the value of the currency rise. Foreign
investments which are not U.S. dollar denominated may require the Fund to
convert assets into foreign currencies or convert assets and income from foreign
currencies to dollars. Normally, exchange transactions will be conducted on a
spot or cash basis at the prevailing rate in the foreign exchange market.
However, the investment policies permit the Fund to enter into forward foreign
currency exchange contracts and other currency transactions in order to provide
protection against changes in foreign exchange rates, as further described
below. Any transactions in foreign currencies will be designed to protect the
dollar value of the assets composing or selected to be acquired or sold for the
investment portfolio of the Fund; the Fund will not speculate in foreign
currencies.
If the Fund enters into a currency hedging transaction, it will comply with the
asset segregation requirements described below.
The Fund may purchase and write covered call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
securities. The purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event of
rate movements adverse to the Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. In connection with such
transactions, the Fund will segregate assets sufficient to meet its obligations.
When the Fund's obligation is denominated in a foreign currency, the Fund will
own that currency or assets denominated in that currency, or a currency or
securities which the Adviser anticipates will move along with the hedged
currency.
The Fund may enter into contracts for the purchase or sale for future delivery
of foreign currencies ("foreign currency futures"). This investment technique
will be used only to hedge against anticipated future changes in exchange rates
which otherwise might adversely affect the value of the portfolio securities or
adversely affect the prices of securities that the Fund intends to purchase or
sell at a later date. The successful use of currency futures will usually depend
on the Adviser's ability to forecast currency exchange rate movements correctly.
Should exchange rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of foreign currency futures or may actually realize losses.
The Fund is authorized to use financial futures, currency futures, and options
on such futures for certain hedging purposes subject to conditions of regulatory
authorities (including margin requirements) and limits established by the
Company's Board of Directors to avoid speculative use of such techniques.
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, exchange-listed currency futures,
exchange-listed and over-the-counter ("OTC") options on currencies and currency
swaps.. 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 specified 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. In specific
transaction hedging, the Fund enters into a currency transaction with respect to
specific assets or liabilities of the Fund, in connection with the purchase or
sale of its portfolio securities or the receipt of income therefrom. In position
hedging, the Fund enters into a currency transaction with respect to portfolio
security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
Cross Hedging: 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.
Proxy Hedging: 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 U.S.
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 buying U.S. dollars. The amount of
the contract would not exceed the value of the Fund's securities denominated in
linked currencies. For example, if the Adviser concludes that the Japanese yen
is linked to the Euro, the Fund holds securities denominated in yen and the
Adviser believes that the value of yen will decline against the U.S. dollar, the
Adviser may enter into a contract to sell Euros and buy U.S. dollars.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the 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 the Fund is engaging in proxy hedging.
Currency transactions are subject to certain risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These government actions can result in
losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause the Fund's hedges to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Currency exchange rates for a country's currency may fluctuate based on
factors extrinsic to that country's economy.
Use of Segregated and Other Special Accounts: Many strategic transactions and
currency transactions, in addition to other requirements, require that the Fund
segregate cash or liquid high grade securities with its custodian to the extent
the Fund's obligations are not otherwise "covered" through the ownership of the
underlying security, financial instruments or currency. In general, either the
full amount of any obligation by the Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund on foreign currencies will require the Fund to hold the
currencies subject to the call or to segregate cash or liquid high grade
securities sufficient to purchase and deliver the currencies if the call is
exercised. A currency contract which obligates the Fund to buy or sell currency
will generally require the Fund to hold an amount of that currency or to
segregate cash or liquid high grade securities equal to the amount of the Fund's
obligation.
Strategic transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund also enter into offsetting transactions
so that its combined position, coupled with any segregated assets, equals its
net outstanding obligation in related options and strategic transactions. For
example, if the Fund held a forward contract, instead of segregating assets, the
Fund could purchase a put option on the same forward contract with a strike
price as high or higher than the price of the contract held. Other strategic
transactions may also be offered in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction, no segregation is
required, but if the offsetting transaction terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Russian Government T-Bills ("GKOs"). To the extent that the Fund's assets are
not invested in Russian equity securities, and to provide liquidity, the Fund's
assets may be invested in: (i) debt securities issued by Russian companies or
issued or guaranteed by the Russian Government (such as its T-Bills or so-called
"GKOs") or a Russian governmental entity, as well as debt securities of
governmental issuers outside Russia; (ii) equity securities of issuers outside
Russia which the Adviser believes will experience growth in revenue and profits
from participation in the development of the economies of the Commonwealth of
Independent States ("CIS"); and (iii) short-term debt securities of the type
described under Other Principal Risks-Temporary Investments in the Fund's
Prospectus. The Fund may invest in debt securities that the Adviser believes,
based upon factors such as relative interest rate levels and foreign exchange
rates, offer opportunities for long-term capital appreciation. It is likely that
many of the debt securities in which the Fund will invest will be unrated and,
whether or not rated, the debt securities may have speculative characteristics.
Under present economic and political conditions in Russia, the Fund does not
intend to invest in GKOs.
Other Securities: The Board of Directors may, in the future, authorize the Fund
to invest in securities other than those listed in this SAI and in the
Prospectus, provided that such investments would be consistent with the Fund's
investment objective and that such investments would not violate the Fund's
fundamental investment policies or restrictions.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies and Restrictions: The Fund has adopted the
following fundamental investment restrictions which cannot be changed without
approval by vote of a "majority of the outstanding voting securities" of the
Fund. All other investment policies and practices described in this Prospectus
are not fundamental, meaning that the Board of Directors may change them without
the approval of shareholders. As used herein, a "majority of the outstanding
voting securities" means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented and
(ii) more than 50% of the outstanding shares. There is no assurance the Fund
will be able to achieve its investment objective. As a matter of fundamental
policy, the Fund may not:
o As to 50% of its assets, purchase the securities of any issuer (other than
obligations issued or guaranteed as to principal and interest by the
Government of the United States or any agency or instrumentality thereof), if
as a result of such purchase, more than 5% of its total assets would be
invested in the securities of such issuer.
o 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 or, more than 10% of any class of the
outstanding stock or securities of such issuer.
o Act as an underwriter of securities of other issuers, except that the Fund
may invest up to 10% of the value of its total assets (at the 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.
o Buy or sell commodities or commodity contracts, provided that the Fund may
utilize not more than 1% of its assets for deposits or commissions required
to enter into forward foreign currency contracts, and financial futures
contracts for hedging purposes as described in the Prospectus. (Such deposits
or commissions are not required for forward foreign currency contracts).
o Borrow money except 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. Notwithstanding the foregoing, to avoid the
untimely disposition of assets to meet redemptions, the Fund may borrow up
to 33 1/3%, of the value of its assets to meet redemptions, provided that
it may not make other investments while such borrowings are outstanding.
o Make loans, except that the Fund may (1) lend portfolio securities; and (2)
enter into repurchase agreements secured by U.S. Government securities.
o Invest more than 25% of its total assets in securities of one or more issuers
having their principal business activities in the same industry, provided
that there is no limitation with respect to investments in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
o 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.
o Invest in interests in oil, gas, or other mineral explorations or development
programs.
o Issue senior securities.
o Participate on a joint or a joint and several basis in any securities trading
account.
o Purchase or sell real estate (except that the Fund may invest in (i)
securities of companies which deal in real estate or mortgages, and (ii)
securities secured by real estate or interests therein, and that the Fund
reserves freedom of action to hold and to sell real estate acquired as a
result of the Fund's ownership of securities).
o Invest in companies for the purpose of exercising control.
o 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.
o Engage in short sales.
Non-Fundamental Policies and Restrictions: In addition to the fundamental
policies and investment restrictions described above, and the various general
investment policies described in the Prospectus and elsewhere in the SAI, the
Fund will be subject to the following investment restrictions, which are
considered non-fundamental and may be changed by the Board of Directors without
shareholder approval. As a matter of non-fundamental policy, the Fund may not:
o Invest more than 15% of its net assets in illiquid securities.
If a percentage restriction on investment or utilization of assets as set forth
under "Investment Restrictions" and "Investment Programs" 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.
In applying the fundamental policy and restriction concerning concentration set
forth above (i.e., not investing more than 25% of total assets in one industry):
(1) Investments in certain categories of companies will not be considered
to be investments in a particular industry. Examples of these
categories include: (i) financial service companies will be
classified according to the end users of their services, for example,
automobile finance, bank finance and diversified finance will each be
considered a separate industry; (ii) technology companies will be
divided according to their products and services, for example,
hardware, software, information services and outsourcing, or
telecommunications will each be a separate industry; and (iii)
utility companies will be divided according to their services, for
example, gas, gas transmission, electric and telephone will each be
considered a separate industry.
MANAGEMENT OF THE COMPANY
Directors and Officers. The Company is governed by a Board of Directors, which
is responsible for protecting the interest of shareholders. The Directors are
experienced business persons who meet throughout the year to oversee the
Company's activities, review contractual arrangements with companies that
provide services to the Fund, and review performance. The names and addresses of
the Directors and officers of the Company, together with information as to their
principal occupations during the past five years, are listed below. The Director
who is considered " an interested person" as defined in Section 2(a)(19) of the
1940 Act, as well as those persons affiliated with the Adviser and the principal
underwriter, and officers of the Company, are noted with an asterisk (*).
Name, Address Position(s) Held Principal
Occupation(s)
and Birthdate With Registrant During the Past 5 Years
- ---------------------------------------------------------------------------
*John Pasco, III Chairman, Director Mr. Pasco is Treasurer and
1500 Forest Avenue and Treasurer Director of Commonwealth
Richmond, VA 23229 Shareholder Services, Inc.,
(4/10/45) ("CSS") the Company's
Administrator, since 1985;
President and Director of First
Dominion Capital Corp.,
("FDCC")the Company's principal
underwriter. Director and
shareholder of Fund Services
Inc., the Company's Transfer
and Disbursing Agent, since
1987; shareholder of
Commonwealth Fund Accounting,
Inc.which provides bookkeeping
services to Star Bank; and
Chairman,Director and Treasurer
of Vontobel Funds, Inc., a
registered investment company
since March, 1997. Mr. Pasco is
also a certified public
accountant.
Samuel Boyd, Jr. Director Mr. Boyd is Manager of the
10808 Hob Nail Court Customer Services
Potomac, MD 20854 Operations and Accounting
(9/18/40) Division of the
Potomac Electric Power Company
since August, 1978; and
Director of Vontobel Funds,
Inc., a registered investment
company since March, 1997. Mr.
Boyd is also a certified public
accountant.
William E. Poist Director Mr. Poist is a financial
5272 River Road and tax consultant through his
Bethesda, MD 20816 firm, Management Consulting for
(6/11/36) Professionals since 1968;
Director of Vontobel Funds,
Inc., a registered investment
company since March, 1997.
Mr. Poist is also a certified
public accountant.
Paul M. Dickinson Director Mr. Dickinson is President of
8704 Berwickshire Drive Alfred J. Dickinson, Inc.
Richmond, VA 23229 Realtors since April, 1971;
(11/11/47) and Director of Vontobel Funds,
Inc. a registered investment
company since March, 1997.
*Jane H. Williams Vice President of Ms. Williams is the
3000 SandHill Road the Company and Executive Vice President of
Suite 150 President of the Sand Hill Advisors, Inc.
Menlo Park, CA 94025 Sand Hill Portfolio since 1982.
(6/28/48) Manager Fund series
*Leland H. Faust President of Mr. Faust is President of CSI
One Montgomery St. the CSI Equity Capital Management, Inc. since
Suite 2525 Fund and the CSI 1978. Mr. Faust is also a
San Francisco, CA 94104 Fixed Income Fund Partner in the law firm
(8/30/46) Taylor & Faust(8/30/46)
since September, 1975.
*F. Byron Parker, Jr. Secretary Mr. Parker is Secretary of
810 Lindsay Court CSS and FDCC since 1986;
Richmond, VA 23229 Secretary of Vontobel
(1/26/43) Funds, Inc., a registered
investment company since
March, 1997; and Partner in
the law firm Mustian & Parker.
*Franklin A.Trice,III Vice President of Mr. Trice is President of
P.O. Box 8535 the Company and Virginia Management Investment
Richmond, VA 23226-0535 President of the Corp. since May, 1998; and a
(12/25/63) New Market Fund registered representative of
series FDCC,the Company's underwriter
since September, 1998. Mr.
Trice was a broker
with Scott & Stringfellow
from March, 1996 to May, 1998
and with Craigie, Inc.
from March, 1992 to
January, 1996.
*John T. Connor, Jr. Vice President of President of Third Millennium
515 Madison Ave., the Company and Investment Advisors, LLC since
24th Floor President of the April, 1998; and Chairman of
New York, NY 10022 Third Millennium ROSGAL, a Russian financial
(6/16/41) Russia Fund series company and of its affiliated
ROSGAL Insurance since 1993.
Compensation of Directors: The Company does not compensate the Director who is
an officer or employees of FDCC. The other , or "independent", Directors receive
an annual retainer of $1,000.00 and a fee of $200.00 for each of the five series
of the Company for each meeting of the Directors which they attend in person or
by telephone. Directors are reimbursed for travel and other out-of-pocket
expenses. The Company does not offer any retirement benefits for Directors. As
of December 29, 1999 the officers and Directors, individually and as a group,
owned beneficially less than 1% of the outstanding shares of the Fund.
For the fiscal period ended August 31, 1999, the Directors received the
following compensation from the Company:
Aggregate Compensation Total
Name and From the Fund for Pension or Retirement Compensation
Position Fiscal Year Ended Benefits Accrued as from the
Held August 31, 1999(1) Part of Fund Expenses Company
- ---- ------------------ --------------------- -------
John Pasco,III, 0 N/A 0
Director
Samuel Boyd, Jr., $1,800 N/A $9,000
Director
William E. Poist, $1,800 N/A $9,000
Director
Paul M. Dickinson, $1,800 N/A $9,000
Director
(1) This amount represents the aggregate amount of compensation paid to the
Directors by the Fund for service on the Board of Directors for the Fund's
fiscal year ended August 31, 1999.
PRINCIPAL SECURITIES HOLDERS
As of December 29, 1999, the following persons owned of record or beneficially
shares of the Fund in the following amounts. Donaldson, Lufkin Jenrette
Securities Corporation, Inc., P. O. Box 2052, Jersey City, New Jersey 07303-9998
owned of record 56,007.189 shares (or 55.118%); Barry Hershey, 381 Garfield
Road, Concord, Massachusetts 01742 owned of record
10,383.179 shares (or 10.218%).
INVESTMENT ADVISER AND ADVISORY AGREEMENT
Third Millennium Investment Advisors LLC (the "Adviser"), 1185 Avenue of the
Americas, New York, New York 10036, manages the investments of the Fund The
Adviser is registered as an investment adviser under the Investment Advisers Act
of 1940, as amended (the "Advisers Act"). The Adviser is an independent,
privately-held corporation. Mr. John T. Connor, Jr., Vice President of the
Company and President of the Fund, is President of the Adviser. The Adviser
provides investment advisory services pursuant to an Investment Advisory
Agreement (the "Advisory Agreement" ), dated September 21, 1998 The Advisory
Agreement is effective for a period of two years from September 21, 1998, and
may be renewed annually provided such renewal is approved annually by: 1) the
Company's Board of Directors; or 2) by a majority vote of the outstanding voting
securities of the Company and a majority of the Directors who are not
"interested persons" of the Company. The Advisory Agreements will automatically
terminate in the event of their "assignment," as that term is defined in the
1940 Act, and may be terminated without penalty at any time upon 60 days'
written notice to the other party by: (i) the majority vote of all the Directors
or by vote of a majority of the outstanding voting securities of the Fund; or
(ii) the Adviser.
The Adviser is responsible for effecting all security transactions on behalf of
the Fund, including the allocation of principal business and portfolio brokerage
and the negotiation of commissions. In placing orders with brokers and dealers,
the Adviser will attempt to obtain the best price and execution of orders.
The Fund is obligated to pay the Adviser a monthly investment advisory fee at an
annual rate of 1.75% on the first $125 million of average daily net assets of
the Fund; 1.50% on average daily net assets of the Fund in excess of $125
million and not more than $250 million; and 1.25% on average daily net assets of
the Fund over $250 million. These fees are higher than those charged by most
other investment companies, but are comparable to investment companies with
investment objectives and policies similar to the Fund's investment objectives
and policies.
In the interest of limiting expenses of the Fund, the Adviser has entered into
an expense limitation agreement with the Fund. The Adviser has agreed to waive
or limit its fees and to assume other expenses so that the total annual
operating expenses of the Fund are limited to 2.75% through December 31, 2001.
The limit does not apply to interest, taxes, brokerage commissions, other
expenditures capitalized in accordance with generally accepted accounting
principles and other extraordinary expenses not incurred in the ordinary course
of business. For the period ended August 31, 1999, the Adviser did not receive
any compensation, waived fees of $12,305 and reimbursed expenses of $79,740.
Pursuant to the terms of the Advisory Agreement, the Adviser pays all expenses
incurred by it in connection with its activities thereunder, except the cost of
securities (including brokerage commissions, if any) purchased for the Fund and
brokerage commissions and related costs for the sale of such securities. The
services furnished by the Adviser under the Advisory Agreement are not
exclusive, and the Adviser is free to perform similar services for others.
MANAGEMENT-RELATED SERVICES
Administration. Pursuant to the Administrative Services Agreement with the
Company, dated September 21, 1998 (the "Service Agreements"), Commonwealth
Shareholder Services, Inc. ("CSS"), 1500 Forest Avenue, Suite 223, Richmond,
Virginia 23229, serves as the administrator of the Fund. CSS supervises all
aspects of the operation of the Fund, except those performed by the Adviser.
John Pasco III, Chairman of the Board of the Company, is the sole owner of CSS.
CSS provides certain administrative services and facilities for the Fund,
including preparing and maintaining certain books and records, monitoring
compliance with state and federal regulatory requirements, backup of the pricing
of shares of the Fund, administrative duties in connection with execution of
portfolio trades, certain services in connection with Fund accounting),
providing shareholder services, administrative services and blue-sky filings.
As administrator, CSS receives asset-based fees, computed daily and paid monthly
at annual rates of 0.20% of the average daily net assets of the Fund. CSS
receives an hourly fee, plus certain out-of-pocket expenses, for shareholder
servicing and state securities law matters.
As provided in the Administrative Agreement, the Fund reimbursed CSS $18,584 for
the period ended August 31, 1999
Custodian and Accounting Services. Pursuant to a Custodian Agreement and
Accounting Agency Agreement with the Company dated August 19, 1997, Brown
Brothers Harriman & Co. ("BBH"), 40 Water Street, Boston Massachusetts, 02109,
acts as the custodian of the Fund's securities and cash and as the Fund's
accounting services agent. With the consent of the Company, BBH has designated
The Depository Trust Company of New York as its agent to secure a portion of the
assets of the Fund. BBH is authorized to appoint other entities to act as
sub-custodians to provide for the custody of foreign securities which may be
acquired and held by the Fund outside the U.S. Such appointments are subject to
appropriate review by the Company's Board of Directors. As the accounting
services agent of the Fund, BBH maintains and keeps current the books, accounts,
records, journals or other records of original entry relating to the Fund's
business. For the period ended August 31, 1999, BBH received fees of $52,195
from the Fund.
Transfer Agent. Pursuant to a Transfer Agent Agreement with the Company dated
August 19, 1997, Fund Services, Inc. ("FSI") acts as the Company's transfer and
disbursing agent. FSI is located at 1500 Forest Avenue, Suite 111, Richmond, VA
23229. John Pasco, III, Chairman of the Board of the Company and an officer and
shareholder of CSS (the Administrator of the Fund), owns one-third of the stock
of FSI. Therefore, FSI may be deemed to be an affiliate of the Company and CSS.
FSI provides certain shareholder and other services to the Company, including
furnishing account and transaction information and maintaining shareholder
account records. FSI is responsible for processing orders and payments for share
purchases. FSI mails proxy materials (and receives and tabulates proxies),
shareholder reports, confirmation forms for purchases and redemptions,
Prospectuses and SAIs to shareholders. FSI disburses income dividends and
capital distributions and prepares and files appropriate tax-related information
concerning dividends and distributions to shareholders.
Distributor. First Dominion Capital Corp. (the "Distributor"), 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, serves as the principal underwriter
and national distributor of the Fund's shares pursuant to a Distribution
Agreement dated August 19, 1997. John Pasco, III, Chairman of the Board of
the Company, owns 100% of the Distributor, and is its President, Treasurer
and a Director. The Distributor is registered as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc. (the "NASD").
The offering of the Fund's shares is continuous.
The Fund has adopted a Distribution Plan (the "Plan") in accordance with Rule
12b-1 under the 1940 Act. The Plan provides that the Fund will pay a fee to the
Distributor at an annual rate of 0.25% of the Fund's average daily net assets.
The fee is paid to the Distributor as reimbursement for expenses incurred for
distribution-related activity. For the period ended August 31, 1999, the
Distributor waived fees of $1,813 and the Distributor received no compensation.
Independent Accountants. The Company's independent accountants, Tait, Weller &
Baker, audit the Company's annual financial statements, assist in the
preparation of certain reports to the U.S. Securities and Exchange Commission
(the "SEC"), and prepare the Company's tax returns. Tait, Weller & Baker is
located at 8 Penn Center Plaza, Suite 800, Philadelphia, PA 19103.
PORTFOLIO TRANSACTIONS
It is the policy of the Adviser, in placing orders for the purchase and sale of
the Fund's securities, to seek to obtain the best price and execution for
securities transactions, taking into account such factors as price, commission,
where applicable, (which is negotiable in the case of U.S. national securities
exchange transactions but which is generally fixed in the case of foreign
exchange transactions), size of order, difficulty of execution and the skill
required of the executing broker/dealer. After a purchase or sale decision is
made by the Adviser, the Adviser arranges for execution of the 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 the
Fund may obtain better prices or executions on a commission basis or by dealing
with other than a primary market maker.
The Adviser, when placing transactions, may allocate a portion of the Fund's
brokerage to persons or firms providing the Adviser with investment
recommendations, statistical, research or similar services useful to the
Adviser's investment decision-making process. The term "investment
recommendations or statistical, research or similar services" means (1) 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 (2) analyses and reports concerning issuers, industries,
securities, economic factors and trends, and portfolio strategy. Such services
are one of the many ways the Adviser 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 the Fund may be used by the
Adviser for the benefit of the Fund and 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, the Fund
may consider sales of its shares as a factor in the selection of brokers to
execute portfolio transactions. The Adviser may be 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 the receipt of research, market or statistical information.
Except for implementing the policy stated above, there is no intention to place
portfolio transactions with particular brokers or dealers or groups thereof.
The Board of Directors of the Company has adopted policies and procedures
governing the allocation of brokerage to affiliated brokers. The Adviser has
been instructed not to place transactions with an affiliated broker-dealer,
unless that broker-dealer can demonstrate to the Company that the Fund will
receive (1) a price and execution no less favorable than that available from
unaffiliated persons, and (2) a price and execution equivalent to that which
that broker-dealer would offer to unaffiliated persons in a similar transaction.
At its Board meetings the Board reviews all transactions that have been placed
pursuant to those policies and procedures.
When two or more clients managed by the Adviser are simultaneously engaged in
the purchase or sale of the same security, the transactions are allocated in a
manner deemed equitable to each client. In some cases this procedure could have
a detrimental effect on the price or volume of the security as far as the Fund
is concerned. In other cases, however, the ability to participate in volume
transactions will be beneficial to the Fund. The Board of Directors of the
Company believes that these advantages, when combined with the other benefits
available because of the Adviser's organization, outweigh the disadvantages that
may exist from this treatment of transactions.
PORTFOLIO TURNOVER
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
portfolio turnover rate involves greater transaction expenses to the Fund and
may result in the realization of net capital gains, which would be taxable to
shareholders when distributed. The Adviser makes purchases and sales for the
Fund's portfolio whenever necessary, in the Adviser's opinion, to meet the
Fund's objective. The Adviser anticipates that the average annual portfolio
turnover rate of each of the Fund will be less than 100%.
CAPITAL STOCK AND DIVIDENDS
The Company is a series investment company that currently offers one class of
shares. The Company is authorized to issue 500,000,000 shares of common stock,
with a par value of $0.01 per share. The Company has currently allocated
50,000,000 shares to the Fund and 200,000,000 shares to other series of the
Company. Each share of the Fund has equal dividend, voting, liquidation and
redemption rights and there are no conversion or preemptive rights. Shares of
the Fund and of the other series of the Company do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of the
Company voting for the election of Directors can elect all of the Directors if
they choose to do so. In such event, the holders of the remaining shares of the
Company will not be able to elect any person to the Board of Directors. Shares
will be maintained in open accounts on the books of FSI.
If they deem it advisable and in the best interests of shareholders, the
Directors may create additional series of shares, each of which represents
interests in a separate portfolio of investments and is subject to separate
liabilities, and may create multiple classes of shares of such series, which may
differ from each other as to expenses and dividends. If the Directors create
additional series or classes of shares, shares of each series or class are
entitled to vote as a series or class only to the extent required by the 1940
Act or as permitted by the Directors. Upon the Company's liquidation, all
shareholders of a series would share pro-rata in the net assets of such series
available for distribution to shareholders of the series, but, as shareholders
of such series, would not be entitled to share in the distribution of assets
belonging to any other series.
A shareholder of the Fund will automatically receive all income dividends and
capital gain distributions in additional full and fractional shares of the Fund
at its net asset value as of the date of payment unless the shareholder elects
to receive such dividends or distributions in cash. The reinvestment date
normally precedes the payment date by about seven days although the exact timing
is subject to change. Shareholders will receive a confirmation of each new
transaction in their account. The Company will confirm all account activity,
including the payment of dividend and capital gains distributions and
transactions made as a result of the Automatic Investment Plan described below.
Shareholders may rely on these statements in lieu of stock certificates.
ADDITIONAL INFORMATION ABOUT PURCHASES AND SALES
Purchasing Shares. You may purchase shares of the Fund directly from the
Distributor or through brokers or dealers who are members of the NASD. When you
acquire or redeem shares through a securities broker or dealer, you may be
charged a transaction fee. The offering price per share is equal to the net
asset value ("NAV") per share next determined after the Fund receives your
purchase order. The minimum initial investment for the Fund $1,000. Subsequent
investments must be $100 or more. The Fund reserves the right to reject any
purchase order and to suspend the offering of shares of the Fund. The Company
may waive the minimum initial investment requirement for purchases made by
directors, officers and employees of the Company. The Company may also waive the
minimum investment requirement for purchases by its affiliated entities and
certain related advisory accounts and retirement accounts (such as IRAs). You
may purchase shares of a Fund by mail or wire.
Eligible Benefit Plans. An eligible benefit plan is an arrangement available to
the (1) employees of an employer (or two or more affiliated employers) having
not less than ten employees at the plan's inception (2) 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 five initial participants with accounts investing or invested
in shares of one or more of the Fund and/or certain other funds.
The initial purchase by the eligible benefit plan along with prior purchases by
or for the benefit of the initial participants of the plan must aggregate not
less than $5,000. Subsequent purchases must be at least $50 per account and must
aggregate at least $250. The eligible benefit plan must make purchases using a
single order and a single check or federal funds wire. The eligible benefit plan
may not make purchases more often than monthly. The Company will establish a
separate account for each employee, spouse or child for which purchases are
made. The Company may modify the requirements for initiating or continuing
purchases or stop offering shares to such a plan at any time without prior
notice.
Selling Shares. You may redeem shares of the Fund at any time and in any amount.
The Company's procedure is to redeem shares at the NAV per share next determined
after the Transfer Agent receives the redemption request in proper order. A two
percent (2%) redemption fee is deducted from proceeds of Fund shares redeemed
less than three hundred sixty (360) days after purchase. Payment will be made
promptly, but no later than the seventh day following the receipt of the request
in proper order. The Company may suspend the right to redeem shares for any
period during which the NYSE is closed or the U.S. 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 after the suspension is terminated. The Adviser reserves the right to
waive the redemption fee for its clients.
Small Accounts. Due to the relatively higher cost of maintaining small accounts,
the Company may deduct $10 per year from your account or may redeem the shares
in your account, if it has a value of less than $1,000. The Company will advise
you in writing sixty (60) days prior to deducting the annual fee or closing your
account, during which time you may purchase additional shares in any amount
necessary to bring the account back to $1,000. The Company will not close your
account if it falls below $1,000 solely because of a market decline.
Special Shareholder Services. As described briefly in the Prospectus, the
Fund offers the following shareholder services:
Regular Account: A regular account allows a shareholder to make voluntary
investments and/or withdrawals at any time. Regular accounts are available to
individuals, custodians, corporations, trusts, estates, corporate retirement
plans and others. You may use the Account Application provided with the
Prospectus to open a regular account.
Telephone Transactions: You may redeem shares or transfer into another fund if
you request this service on your initial Account Application. If you do not
elect this service at that time, you may do so at a later date by sending a
written request and signature guarantee to FSI.
The Fund employs reasonable procedures designed to confirm the authenticity of
your telephone instructions and, if it does not, it may be liable for any losses
caused by unauthorized or fraudulent transactions. As a result of this policy, a
shareholder that authorizes telephone redemption bears the risk of losses, which
may result from unauthorized or fraudulent transactions which the Fund believes
to be genuine. When you request a telephone redemption or transfer, you will be
asked to respond to certain questions. The Company has designed these questions
to confirm your identity as a shareholder of record. Your cooperation with these
procedures will protect your account and the Fund from unauthorized
transactions.
Invest-A-Matic Account: Any shareholder may utilize this feature which allows
shareholders to make automatic monthly investments into Fund their account. Upon
your request, FSI will withdraw a fixed amount each month from a shareholder's
checking account and apply that amount to the purchase of additional shares of
the Fund. This feature does not require you to make a commitment for a fixed
period of time. You may change the monthly investment, skip a month or
discontinue your Invest-A-Matic Plan as desired by notifying FSI. In order to
open an Invest-A-Matic Account, you must complete a separate application. To
obtain an application, or to receive more information, please call the offices
of the Company at 1-800-527-9525.
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). 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 that govern contributions made by individuals with earned
income. A special IRA program is available for corporate employers under which
the employers may establish IRA accounts for their employees in lieu of
establishing corporate retirement plans. Known as SEP-IRA's (Simplified Employee
Pension-IRA), they free the corporate employer of many of the recordkeeping
requirements of establishing and maintaining a corporate retirement plan trust.
If you have received a lump sum distribution from another qualified retirement
plan, you may rollover all or part of that distribution into your Fund IRA. A
rollover contribution is not subject to the limits on annual IRA contributions.
By acting within applicable time limits of the distribution you can continue to
defer Federal Income Taxes on your rollover contribution and on any income that
is earned on that contribution.
Roth IRA: A Roth IRA permits certain taxpayers to make a non-deductible
investment of up to $2,000 per year. Provided an investor does not withdraw
money from his or her Roth IRA for a five-year period, beginning with the first
tax year for which contribution was made, deductions from the investor's Roth
IRA would be tax free after the investor reaches the age of 59-1/2. Tax free
withdrawals may also be made before reaching the age of 59-1/2 under certain
circumstances. Please consult your financial and/or tax professional as to your
eligibility to invest in a Roth IRA. An investor may not make a contribution to
both a Roth IRA and a regular IRA in any given year.
An annual limit of $2,000 applies to contributions to regular and Roth IRAs. For
example, if a taxpayer contributes $2,000 to a regular IRA for a year, he or she
may not make any contribution to a Roth IRA for that year.
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. You may wish to
consult with your attorney or other tax adviser for specific advice concerning
your 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 series 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 for
all series except the Sand Hill Portfolio Manager Fund which is $25,000). You
must complete an Exchange Privilege Authorization Form to make an exchange.
Also, 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. Your 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). FSI will charge your account a $10 service fee each time you make
such 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.
TAX STATUS
Distributions and Taxes.
Distributions of net investment income. The Fund receive income generally in the
form of dividends and interest on their investments. This income, less expenses
incurred in the operation of the Fund, constitutes the Fund's net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
Distributions of capital gains. The Fund may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the Fund. Any net capital gains realized by the Fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the Fund.
Effect of foreign investments on distributions. Most foreign exchange gains
realized on the sale of securities are treated as ordinary income by the Fund.
Similarly, foreign exchange losses realized by the Fund on the sale of
securities are generally treated as ordinary losses by the Fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce the Fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce the Fund's ordinary income
distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the Fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, the Fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the Fund. If this election is made, the year-end statement you receive from the
Fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or (subject to limitations) claim a foreign tax
credit for such taxes against your U.S. federal income tax. The Fund will
provide you with the information necessary to complete your individual income
tax return if it makes this election.
Information on the tax character of distributions. The Fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held Fund shares for a full year, the Fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the Fund.
Election to be taxed as a regulated investment company. The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the Fund generally does not pay federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of Fund's earnings and profits.
Excise tax distribution requirements. To avoid federal excise taxes, the
Internal Revenue Code requires the Fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. The Fund intends to declare and pay
these amounts in December (or in January that are treated by you as received in
December) to avoid these excise taxes, but can give no assurances that its
distributions will be sufficient to eliminate all taxes.
Redemption of Fund shares. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your Fund
shares, or exchange your Fund shares for shares of a different series of the
Company, the IRS will require that you report a gain or loss on your redemption
or exchange. If you hold your shares as a capital asset, the gain or loss that
you realize will be capital gain or loss and will be long-term or short-term,
generally depending on how long you hold your shares. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you buy other shares in such Fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you purchase.
U.S. Government Obligations. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the Fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of the Fund to that of
other mutual funds and to relevant indices in advertisements or in reports to
shareholders, performance will be stated in terms of total return or yield. Both
"total return" and "yield" figures are based on the historical performance of a
Fund, show the performance of a hypothetical investment and are not intended to
indicate future performance.
Yield Information. From time to time, the Fund may advertise a yield figure. A
portfolio's yield is a way of showing the rate of income the portfolio earns on
its investments as a percentage of the portfolio's share price. Under the rules
of the SEC, yield must be calculated according to the following formula:
Yield = 2[(a-b +1)-1]6
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The Fund's yield, as used in advertising, is computed by dividing the Fund's
interest and dividend income for a given 30-day period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's NAV at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purposes of yield quotations in
accordance with standardized methods applicable to all stock and bond mutual
funds. Dividends from equity investments are treated as if they were accrued on
a daily basis solely for the purposes of yield calculations. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses generally are excluded
from the calculation. Income calculated for the purpose of calculating the
Fund's yield differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the compounding
assumed in yield calculations, the yield quoted for the Fund may differ from the
rate of distributions the Fund paid over the same period or the rate of income
reported in the Fund's financial statements.
Total Return Performance. Under the rules of the SEC, fund advertising
performance must include total return quotes, "T" below, calculated according to
the following formula:
P(1+T)n= ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1,5 or 10)
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).
The average annual total return will be calculated under the foregoing formula
and the time periods used in advertising will be based on rolling calendar
quarters, updated to the last day of the most recent quarter prior to submission
of the advertising for publication, and will cover prescribed periods. When the
period since inception is less than one year, the total return quoted will be
the aggregate return for the period. In calculating the ending redeemable value,
all dividends and distributions by a Fund are assumed to have been reinvested at
NAV as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the prescribed periods (or fractional
portions thereof) that would equate the initial amount invested to the ending
redeemable value.
The total return for the Fund for the period ended August 31, 1999 is 41.70%.
The Fund may also from time to time include in such advertising an aggregate
total return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately the Fund's performance with other measures of investment return. The
Fund may quote an aggregate total return figure in comparing the Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, Russell Indices, the
Value Line Composite Index, the Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency Index,
Merrill Lynch Intermediate Agency Index, Morgan Stanley Capital International
Europe, Australia, Far East Index or the Morgan Stanley Capital International
World Index. For such purposes, the Fund calculates its aggregate total return
for the specific periods of time by assuming the investment of $10,000 in shares
of the Fund and assuming the reinvestment of each dividend or other distribution
at NAV on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. To calculate its average annual
total return, the aggregate return is then annualized according to the SEC's
formula for total return quotes outlined above. The Fund may also advertise the
performance rankings assigned by the various publications and statistical
services, including but not limited to, SEI, Lipper Mutual Performance Analysis,
Intersec Research Survey of Non-U.S. Equity Fund Returns, Frank Russell
International Universe, and any other data which may be reported from time to
time by Dow Jones & Company, Morningstar, Inc., Chase Investment Performance,
Wilson Associates, Stanger, CDA Investment Technologies, Inc., the Consumer
Price Index ("CPI"), The Bank Rate Monitor National Index, or IBC/Donaghue's
Average U.S. Government and Agency, or as appears in various publications,
including but not limited to, The Wall Street Journal, Forbes, Barron's,
Fortune, Money Magazine, The New York Times, Financial World, Financial Services
Week, USA Today and other national or regional publications.
FINANCIAL INFORMATION
Financial Highlights, Statements and Reports of Independent Accountants. You can
receive free copies of reports, request other information and discuss your
questions about the Fund by contacting the Fund directly at:
THE WORLD FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
Telephone: (800) 527-9525
e-mail: [email protected]
The books of the Fund will be audited at least once each year by Tait, Weller
and Baker, of Philadelphia, PA, independent public accountants.
The Fund's audited financial statements and notes thereto for the year ended
August 31, 1999 and the unqualified report of Tait, Weller & Baker, on such
financial statements (the "Report") are incorporated by reference in this SAI
and are included in the Fund's 1999 annual report to shareholders (the "Annual
Report"). A copy of the Annual Report accompanies this SAI and an investor may
obtain a copy of the Annual Report, free of charge, by writing to the Fund or
calling (800)-527-9525. <PAGE>
holder separates ("strips") the
interest coupons from the underlying principal of the U.S. Treasury security.
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal 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 the
U.S. Treasury obligation is stripped, the principal and coupons may be sold
separately. Typically, the coupons are sold individually or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discounted obligations that are similar
to zero coupon securities that the Treasury sells directly.
International Bonds: International bonds are defined as bonds issued in
countries other than the United States. The Fund's investments in international
bonds 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, foreign
corporate debt securities, bank or holding company debt securities and other
debt securities including those convertible into common stock.
Mortgage-Backed and Asset-Backed Securities: Mortgage-backed securities include,
but are not limited to, securities issued by the Government National Mortgage
Association and the Federal Home Loan Mortgager Association. Mortgage-backed
securities represent ownership in specific pools of mortgage loans. Unlike
traditional bonds which pay principal only at maturity; mortgage-backed
securities make unscheduled principal payments to the investor as principal
payments are made on the underlying loans in each pool. Like other fixed-income
securities, when interest rates rise, the value of a mortgage-backed security
will decline. However, when interest rates decline, the value of a
mortgage-backed security with prepayment features may not increase as much as
other fixed-income securities.
Asset-backed securities participate in, or are secured by and payable from, a
stream of payments generated by particular assets, such as credit card, motor
vehicle or trade receivables. They may be pass-through certificates which are
similar to mortgage-backed commercial paper, which is issued by an entity
organized for the sole purpose of issuing the commercial paper and purchasing
the underlying assets. The credit quality of asset-backed securities depends
primarily on the quality of the underlying assets and the level of any credit
support provided. The weighted average lives of mortgage-backed and asset-backed
securities are likely to be substantially shorter than their stated final
maturity dates would imply because of the effect of scheduled and unscheduled
principal prepayments. Pay-downs of mortgage-backed and asset-backed securities
may result in income or loss being realized earlier than anticipated for tax and
accounting purposes.
Convertible Securities: The Fund may invest in convertible securities.
Traditional convertible securities include corporate bonds, notes and preferred
stocks that may be converted into or exchanged for common stock, and other
securities that also provide an opportunity for equity participation. These
securities are convertible either at a stated price or a stated rate (that is,
for a specific number of shares of common stock or other security). As with
other fixed income securities, the price of a convertible security generally
varies inversely with interest rates. While providing a fixed income stream, a
convertible security also affords the investor an opportunity, through its
conversion feature, to participate in the capital appreciation of the common
stock into which it is convertible. As the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis and so they may not experience market value declines to the same extent as
the underlying common stock. When the market price of the underlying common
stock increases, the price of a convertible security tends to rise as a
reflection of the value of the underlying common stock. To obtain such an
opportunity for a higher yield or capital appreciation, the Fund may have to pay
more for a convertible security than the value of the underlying common stock.
The Fund will generally hold common stock it acquires upon conversion of a
convertible security for so long as the Investment Adviser anticipates such
stock will provide the Fund with opportunities that are consistent with its
investment objective and policies.
Warrants: The Fund may invest up to 5% of its net assets (no more than 2% in
securities not listed on a national exchange) in warrants. The value of warrants
is derived solely from capital appreciation of the underlying equity securities.
Warrants have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. Warrants are options to purchase
equity securities at a specific price for a specific period of time. If the Fund
does not exercise or dispose of a warrant prior to its expiration, it will
expire worthless. They do not represent ownership of the securities, but only
the right to buy them. Warrants differ from call options in that warrants are
issued by the underlying corporation, whereas call options may be written by
anyone.
Investment Companies: The Fund may invest up to 10% of its assets in shares of
closed-end investment companies. Investments in such investment companies are
subject to limitations under the Investment Company Act of 1940, as amended (the
"1940 Act"). Investment in closed-end funds is subject to the willingness of
investors to sell their shares in the open market and the Fund may have to pay a
substantial premium to acquire shares of closed-end funds in the open market.
The yield of such securities will be reduced by the operating expenses of such
companies. Under the 1940 Act limitations, the Fund may not own more than 3% of
the total outstanding voting stock of any other investment company nor may it
invest more than 5% of its assets in any one investment company or invest more
than 10% of its assets in securities of all investment companies combined.
Investors in the Fund should recognize that by investing in investment companies
indirectly through the Fund, they will bear not only their proportionate share
of the Fund's expenses (including operating costs and investment advisory and
administrative fees) but also, indirectly, similar expenses of the underlying
investment company. Finally, investors should recognize that, as a result of the
Fund's policies of investing in other investment companies, they may receive
taxable capital gains distributions to a greater extent than would be the case
if they invested directly in the underlying investment companies.
Illiquid Securities: The Fund may invest up to 15% of its net assets in illiquid
securities. The term "illiquid securities" means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. Illiquid
securities include generally, among other things, certain written
over-the-counter options, securities or other liquid assets as cover for such
options, repurchase agreements with maturities in excess of seven days, certain
loan participation interests and other securities whose disposition is
restricted under the federal securities laws.
When-Issued Securities: The Fund may purchase securities on a when-issued or
forward delivery basis for payment and delivery at a later date. The price and
yield are generally fixed on the date of commitment to purchase. During the
period between purchase and settlement, no interest accrues to the Fund. At the
time of settlement, the market value of the security may be more or less than
the purchase price. The Fund's net asset value reflects gains or losses on such
commitments each day, and the Fund segregates liquid assets each day sufficient
to meet the Fund's obligations to pay for the securities.
Strategic Transactions: The Fund may, but is not required to, utilize various
other investment strategies described below which use derivative investments to
hedge various market risks (such as changes in interest rates, currency exchange
rates, and securities prices) or to enhance potential gain.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange listed put and call options on securities or securities indices,
and enter into various currency transactions such as currency forward contracts,
or options on currencies (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used (1) to attempt to protect
against possible changes in the market value of securities held in, or to be
purchased for, the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, (2) to protect the Fund's unrealized gains
in the value of its portfolio securities, (3) to facilitate the sale of such
securities for investment purposes, or (4) to establish a position in the
options markets as a temporary substitute for purchasing or selling particular
securities. The Fund may use any or all of these investment techniques at any
time and there is no particular strategy that dictates the use of one technique
rather than another, as use of any Strategic Transaction is a function of
numerous variables, including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
The risks associated with Strategic Transactions include possible default by the
other party to the transaction, illiquidity and, to the extent the Investment
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may (1) result in losses to the
Fund, (2) force the sale or purchase of portfolio securities at inopportune
times or for prices higher than (in the case of put options) or lower than (in
the case of call options) current market values, (3) limit the amount of
appreciation the Fund can realize on its investments or (4) cause the Fund to
hold a security it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors,
including the imposition of exchange controls, suspension of settlements, or the
inability to deliver or receive a specified currency. Although the use of
options transactions for hedging should tend to minimize the risk of loss due to
a decline in the value of the hedged position, at the same time it tends to
limit any potential gain which might result from an increase in value of such
position. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized.
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (1) other complex foreign political, legal and economic factors,
(2) less availability than in the United States of data on which to make trading
decisions, (3) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States, and (5) lower trading volume and
liquidity.
Put and Call Options: A put option gives the purchaser of the option, upon
payment of a premium, the right to sell, and the writer the obligation to buy,
the underlying security, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. The purchase of
a put option will constitute a short sale for federal tax purposes. The purchase
of a put at a time when the substantially identical security held long has not
exceeded the long term capital gain holding period could have adverse tax
consequences. The holding period of the long position will be cut off so that
even if the security held long is delivered to close the put, short term gain
will be recognized. If substantially identical securities are purchased to close
the put, the holding period of the securities purchased will not begin until the
closing date. The holding period of the substantially identical securities not
delivered to close the short sale will commence on the closing of the short
sale.
A call option, upon payment of a premium, gives the purchaser of the option the
right to buy, and the seller the obligation to sell, the underlying instrument
at the exercise price. The Fund's purchase of a call option on a security,
securities index, currency or other instrument might be intended to protect the
Fund against an increase in the price of the underlying security.
An American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. The Fund is authorized
to purchase and sell exchange listed options only. Exchange listed options are
issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
such options. The discussion below uses the OCC as an example, but is also
applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options are each settled for
the net amounts, if any, by which the option is "in the money" (i.e., where the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised. Frequently, rather than taking or making delivery
of the underlying security through the process of exercising the option, listed
options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon liquidity of
the option market. Among the possible reasons for the absence of a liquid option
market on an exchange are: (1) insufficient trading interest in certain options;
(2) restrictions on transactions imposed by an exchange; (3) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (4) interruption of the normal operations of the OCC or an exchange; (5)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (6) a decision by one or more exchanges to discontinue the trading of
options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell exchange-listed call options on securities that
are traded in U.S. and foreign securities exchanges and on securities indices
and currencies. All calls sold by the Fund must be "covered" (i.e., the Fund
must own the securities subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell exchange-listed put options on securities
(whether or not it holds the above securities in its portfolio), and on
securities indices and currencies. The Fund will not sell put options if, as a
result, more than 25% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options. In selling put options,
there is a risk that the Fund may be required to buy the underlying security at
a disadvantageous price above the market price. For tax purposes, the purchase
of a put is treated as a short sale which may cut off the holding period for the
security so it is treated as generating gain on securities held less than three
months or short term capital gain (instead of long term) as the case may be.
Options on Securities Indices and Other Financial Indices: The Fund may also
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement. This means an option on an index gives the holder the right to
receive, upon exercise of the option an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call or is
less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments making up the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
Currency Transactions: The Fund may engage in currency transactions with
counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. The Fund's
currency transactions may include forward currency contracts and exchange listed
options on currencies. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract.
The Fund's dealings in forward currency contracts will be limited to hedging
involving either specific transactions or portfolio positions. In specific
transaction hedging, the Fund enters into a currency transaction with respect to
specific assets or liabilities of the Fund, in connection with the purchase or
sale of its portfolio securities or the receipt of income therefrom. In position
hedging, the Fund enters into a currency transaction with respect to portfolio
security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has, or in which the Fund
expects, to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which a fund's
portfolio is exposed is difficult to hedge or to hedge against the U.S. dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Investment Adviser considers that the Japanese
yen is linked to the Euro, the Fund holds securities denominated in yen and the
Investment Adviser believes that the value of yen will decline against the U.S.
dollar, the Investment Adviser may enter into a contract to sell Euros and buy
U.S. dollars. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to a fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Furthermore, there is the risk that the perceived linkage between various
currencies may not be present or may not be present during the particular time
that a fund is engaging in proxy hedging. If the Fund enters into a currency
hedging transaction, it will comply with the asset segregation requirements
described below.
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These government actions can result in
losses to a fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause the Fund's hedges to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Currency exchange rates for a country's currency may fluctuate based on
factors extrinsic to that country's economy.
Use of Segregated and Other Special Accounts: Many Strategic Transactions, in
addition to other requirements, require that a fund segregate cash or liquid
high grade securities with its custodian to the extent fund obligations are not
otherwise "covered" through the ownership of the underlying security, financial
instruments or currency. In general, either the full amount of any obligation by
a fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by a fund will require the
fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate cash or
liquid high grade securities sufficient to purchase and deliver the securities
if the call is exercised. A call option sold by a fund on an index will require
the fund to own portfolio securities which correlate with the index or segregate
cash or liquid high grade securities equal to the excess of the index value over
the exercise price on a current basis. A put option written by a fund requires
the fund to segregate cash or liquid, high grade securities equal to the
exercise price.
Except when a fund enters into a forward contract for the purchase or sale of a
security denominated in a particular currency, which requires no segregation, a
currency contract which obligates a fund to buy or sell currency will generally
require the fund to hold an amount of that currency or liquid securities
denominated in that currency equal to the fund's obligations or to segregate
cash or liquid high grade securities equal to the amount of the fund's
obligation.
OCC issued and exchange listed index options will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the Fund,
or the in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Fund sells a call option on an
index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. OCC issued and exchange listed
options sold by the Fund other than those that provide for cash settlement
generally settle with physical delivery, and the Fund will segregate an amount
of assets equal to the full value of the option.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund also enter into offsetting transactions
so that its combined position, coupled with any segregated assets, equals its
net outstanding obligation in related options and Strategic Transactions. For
example, the Fund could purchase a put option if the strike price of that option
is the same or higher than the strike price of a put option sold by the Fund.
Moreover, if the Fund held a forward contract instead of segregating assets, the
Fund could purchase a put option on the same forward contract with a strike
price as high or higher than the price of the contract held. Other Strategic
Transactions may also be offered in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction, no segregation is
required, but if the offsetting transaction terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
In order for the Fund to qualify as a regulated investment company, the Fund's
activities involving Strategic Transactions may be limited by the requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended.
Restricted Securities: The Fund may invest in restricted securities. Generally,
"restricted securities" are securities which have legal or contractual
restrictions on their resale. In some cases, these legal or contractual
restrictions may impair the liquidity of a restricted security; in others, the
legal or contractual restrictions may not have a negative effect on the
liquidity of the security. Restricted securities which are deemed by the
Investment Adviser to be illiquid will be included in the Fund's policy which
limits investments in illiquid securities.
Indexed Securities: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities, or structured notes, are usually debt
securities whose value at maturity, or coupon rate, is determined by reference
to a specific instrument or index. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices.
Other Securities: The Board of Directors may, in the future, authorize the Fund
to invest in securities other than those listed in this SAI and in the
Prospectus, provided such investments would be consistent with the Fund's
investment objective and would not violate the Fund's fundamental investment
policies or restrictions.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies and Restrictions: The Fund has adopted the
following fundamental investment restrictions which cannot be changed without
approval by vote of a "majority of the outstanding voting securities" of the
Fund. As a matter of fundamental policy, the Fund may not:
(1) Purchase any security if, as a result of such purchase less than 75% of
its assets would consist of cash and cash items, U.S. Government
securities, securities of other investment companies, and securities of
issuers in which it has not invested more than 5% of its assets;
(2) Purchase the securities of any issuer (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
as a result, more than 10% of the outstanding voting securities of any
issuer would be held by the Fund;
(3) Borrow money; except through reverse repurchase agreements, or from banks
for temporary or emergency purposes and then only in an amount not in
excess of 20% of the value of its net assets. The Fund may borrow money to
avoid the untimely disposition of assets to meet redemptions, in an amount
up to 20% of the value of its net assets, provided it maintains asset
coverage of 300% in connection with borrowings, and does not make other
investments while such outstanding borrowings exceed 5% of its total
assets;
(4) Invest more than 25% of its total assets in securities of companies in the
same industry;
(5) Act as an underwriter of securities of other issuers, except to the extent
that it may be deemed to be an underwriter in connection with the
disposition of its portfolio securities;
(6) Make loans, except (i) loans of its portfolio securities and (ii) it may
enter into repurchase agreements and purchase debt securities in
accordance with its investment objective;
(7) Issue senior securities, (except it may engage in transactions such as
those permitted by the SEC release IC-10666);
(8) Purchase or sell real estate, however liquid securities of companies which
deal in real estate or interests therein would not be deemed to be an
investment in real estate; and
(9) Purchase or sell commodities or commodity contracts;
Non-Fundamental Policies and Restrictions: In addition to the fundamental
policies and investment restrictions described above, and the various general
investment policies described in the Prospectus and elsewhere in the SAI, the
Fund will be subject to the following investment restrictions, which are
considered non-fundamental and may be changed by the Board of Directors without
shareholder approval. As a matter of non-fundamental policy, the Fund does not
intend to:
(1) Purchase or sell futures contracts or options thereon; (2) Make short sales
of securities; (3) Make loans of portfolio securities; (4) Purchase or sell real
estate limited partnership interests; (5) Purchase or retain securities of any
open-end investment company;
purchase securities of closed-end investment companies except by purchase
in the open market where no commission or profit to a sponsor or dealer
results from such purchase; however, it may acquire investment company
securities in connection with a plan of merger, consolidation,
reorganization or acquisition of assets; in any event, it may not purchase
more than 3% of the outstanding voting securities of another investment
company, may not invest more than 5% of its assets in another investment
company, and may not invest more than 10% of its assets in all investment
companies combined;
(6) Borrow, pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(7) Purchase securities on margin, except that it may obtain such short-term
credits as are necessary for the clearance of transactions, and provided
that margin payments in connection with futures contracts and options on
futures contracts, if any, shall not constitute purchasing securities on
margin;
(8) Invest more than 15% of its net assets in securities which are illiquid or
not readily marketable, including repurchase agreements which are not
terminable within 7 days (normally no more than 5% of its net assets will
be invested in such securities);
(9) Purchase put options on write covered call options if, as a result, more
than 25% of its total assets would be hedged with options;
(10) Write put options if, as a result, its total obligations upon exercise of
written put options would exceed 25% of its total assets;
(11) Purchase call options if, as a result, the current value of options
premiums for call options purchased would exceed 5% of its total assets;
and
(12) Purchase warrants, valued at the lower of cost or market, in excess of 5%
of the value of its net assets; provided that no more than 2% of its net
assets may be warrants that are not listed on the New York Stock Exchange
or the American Stock Exchange.
*NOTE: Items (9), (10) and (11) above do not apply to options attached to,
or purchased as a part of, their underlying securities.
In applying the fundamental and non-fundamental policy concerning concentration:
(1) The percentage restriction on investment or utilization of assets 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; and
(2) Investments in certain categories of companies will not be considered to be
investments in a particular industry. Examples of these categories include:
(i) financial service companies will be classified according to the end
users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; (ii)
technology companies will be divided according to their products and
services, for example, hardware, software, information services and
outsourcing, or telecommunications will each be a separate industry; and
(iii) utility companies will be divided according to their services, for
example, gas, gas transmission, electric and telephone will each be
considered a separate industry.
In order to satisfy certain state regulatory requirements the Fund has agreed
that, so long as its shares are offered for sale in such state(s), it will not:
(1) invest in interests in oil, gas, or other mineral exploration or
development programs;
(2) invest more than 5% of its total assets in the securities of any issuers
which have (together with their predecessors) a record of less than three
years continuous operations; and
(3) purchase or retain any securities if (i) one or more officers or Directors
of the Company or the Fund's Investment Adviser individually own or would
own, directly or beneficially, more than 1/2 of 1 per cent of the
securities of such issuer, and (ii) in the aggregate such persons own or
would own more than 5% of such securities.
MANAGEMENT OF THE COMPANY
Directors and Officers
The Company is governed by a Board of Directors, which is responsible for
protecting the interest of shareholders. The Directors are experienced business
persons who meet throughout the year to oversee the Company's activities, review
contractual arrangements with companies that provide services to the Fund, and
review performance. The names and addresses of the Directors and officers of the
Company, together with information as to their principal occupations during the
past five years, are listed below. The Directors who are considered "interested
persons" as defined in Section 2(a)(19) of the 1940 Act, as well as those
persons affiliated with the Investment Adviser and principal underwriter, and
officers of the Company, are noted with an asterisk (*).
Name, Address Position(s) Held Principal
Occupation(s)
and Birthdate With Registrant During the Past 5 Years
- ---------------------------------------------------------------------------
*John Pasco, III Chairman, Director Mr. Pasco is
and Treasurer Treasurer and
1500 Forest Avenue and Treasurer Director of Commonwealth
Richmond, VA 23229 Shareholder Services, Inc.,
(4/10/45) the Company's Administrator,
since 1985; President and
Director of First Dominion
Capital Corp., the
Company's principal
underwriter. Director and
shareholder of Fund
Services Inc., the Company's
Transfer and Disbursing
Agent, since 1987;
shareholder of Commonwealth
Fund Accounting, Inc. which
provides bookkeeping
services to Star Bank; and
Chairman, Director and
Treasurer of Vontobel
Funds, Inc., a registered
investment company since
March, 1997. Mr. Pasco is
also a certified public
accountant.
Samuel Boyd, Jr. Director Mr. Boyd is Manager of the
10808 Hob Nail Court Customer Services Operations
Potomac, MD 20854 and Accounting Division of
(9/18/40) the Potomac Electric Power
Company since August, 1978;
and Director of Vontobel
Funds, Inc., a registered
investment company since
March, 1997. Mr. Boyd is
also a certified
public accountant.
William E. Poist Director Mr. Poist is a financial and
5272 River Road tax consultant through his
Bethesda, MD 20816 firm, Management Consulting
(6/11/36) for Professionals since
1968; Director of Vontobel
Funds, Inc., a registered
investment company since
March, 1997. Mr. Poist is
also a certified public
accountant.
Paul M. Dickinson Director Mr.Dickinson is President of
8704 Berwickshire Dr. Alfred J. Dickinson, Inc.
Richmond, VA 23229 Realtors since April, 1971;
(11/11/47) and Director of Vontobel
Funds, Inc. a registered
investment company
since March, 1997.
*Jane H. Williams Vice President of Ms.Williams is the Executive
3000 Sand Hill Road the Company and Vice President of Sand Hill
Suite 150 President of the Advisors, Inc. since 1982.
Menlo Park, CA 94025 Sand Hill Portfolio
(6/28/48) Manager Fund
*Leland H. Faust President of Mr. Faust is President of
One Montgomery St. the CSI Equity CSI Capital Management, Inc.
Suite 2525 Fund and the CSI since 1978. Mr.Faust is also
San Francisco, CA 94104 Fixed Income Fund a Partner in the law firm
(8/30/46) Taylor & Faust since
December, 1975.
*F. Byron Parker, Jr. Secretary Mr. Parker is Secretary of
810 Lindsay Court Commonwealth Shareholder
Richmond, VA 23229 Services, Inc. and First
(1/26/43) Dominion Capital Corp. since
1986; Secretary of Vontobel
Funds, Inc., a registered
investment company since
March, 1997; and Partner
in the law firm Mustian &
Parker.
*Franklin A. Trice, III Vice President of Mr. Trice is President of
P.O. Box 8535 the Company and Virginia Management
Richmond, Va 23226-0535 President of the Investment Corp.
(12/25/63) New Market Fund since May, 1998; and a
registered representative of
First Dominion
Capital Corp, the Company's
underwriter since September,
1998. Mr. Trice was a broker
with Scott & Stringfellow
from March, 1996 to
May, 1998 and with Craigie,
Inc. from March, 1992 to
January, 1996.
*John T. Connor, Jr. Vice President of President of Third Millennium
515 Madison Ave., the Company and Investment Advisors, LLC
24th Floor President of the since April, 1998; and
New York, NY 10022 Third Millennium Chairman of ROSGAL, a Russian
(6/16/41) Russia Fund financial company and of its
affiliated ROSGAL Insurance
since 1993.
Compensation of Directors: The Company does not compensate the Director who is
an officer of the Investment Adviser of the Company. The other, or
"independent," Directors receive an annual retainer of $1,000 and a fee of $200
for each meeting of the Directors which they attend in person or by telephone.
Directors are reimbursed for travel and other out-of-pocket expenses. The
Company does not offer any retirement benefits for Directors. As of December 29,
1999 the officers and Directors, individually and as a group, owned beneficially
less than 1% of the outstanding shares of the Fund.
For the fiscal period ended August 31, 1999, the Directors received the
following compensation from the Company:
Aggregate Compensation Total
Name and From the Fund Pension or Retirement Compensation
Position Fiscal Year Ended Benefits Accrued as from the
Held August 31, 1999(1) Part of Fund Expenses Company
- --------------------------------------------------------------------------
John Pasco, III, 0 N/A 0
Director
Samuel Boyd, Jr., 1,800 N/A 9,000
Director
William E. Poist, 1,800 N/A 9,000
Director
Paul M. Dickinson, 1,800 N/A 9,000
Director
(1) This amount represents the aggregate amount of compensation paid to the
Directors for service on the Board of Directors for the Fund's fiscal year ended
August 31, 1999.
CONTROL PERSONS - PRINCIPAL HOLDERS OF SECURITIES
To the best knowledge of the Fund as of December 29, 1999, the following persons
own of record or beneficially own 5% or more of the Fund's shares and own such
amounts indicated:
(1) Kaplan Co., 5300 Stevens Creek #380, San Jose, CA 95129 57,734.60 shares
outstanding (or 6.061%); and,
(2) Arthur and Anna Kull 280 West Harvest Run, Idaho Falls, ID 83404
929,631.96 shares outstanding (or 5..647%).
INVESTMENT ADVISER AND ADVISORY AGREEMENT
Sand Hill Advisors, Inc. (the "Investment Adviser"), 3000 Sand Hill Road,
Building Three, Suite 150, Menlo Park, CA 94025, is the Fund's investment
adviser. The Investment Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 as amended, the "Advisers Act". The Investment
Adviser is an independent, privately-held corporation.
Ms. Jane H. Williams has been the portfolio manager of the Fund since its
inception in January of 1995. Ms. Williams is also the President of the
Fund, Vice President of the Company, and Executive Vice President and a
Director of the Investment Adviser which was founded in September of 1982 by
Ms. Williams. Ms. Williams owns 35.46% of the stock of the Investment
Adviser.
Effective June 1, 1998, Gary K. Conway began co-managing the Fund with Ms.
Williams. Mr. Conway is President and co-founder of the Investment Adviser.
He owns 35.46% of the stock of the Investment Adviser.
The Investment Adviser serves as investment adviser to the Fund pursuant to an
Investment Advisory Agreement (the "Advisory Agreement"). The Advisory Agreement
is effective for a period of two years from August 19, 1997, and may be renewed
annually thereafter. The Advisory Agreement will automatically terminate in the
event of its "assignment" as that term is defined in the 1940 Act, and may be
terminated without penalty at any time upon 60 days' written notice to the other
party by: (i) the majority vote of all the Directors or by vote of a majority of
the outstanding voting securities of the Fund; or (ii) the Investment Adviser.
Under the Advisory Agreement, the Investment Adviser, subject to the supervision
of the Directors, provides a continuous investment program for the Fund,
including investment research and management with respect to securities,
investments and cash equivalents, in accordance with the Fund's investment
objective, policies, and restrictions as set forth in the Prospectus and this
SAI. The Investment Adviser is responsible for effecting all security
transactions on behalf of the Fund, including the allocation of principal
business and portfolio brokerage and the negotiation of commissions. The
Investment Adviser also maintains books and records with respect to the
securities transactions of the Fund and furnishes to the Directors such periodic
or other reports as the Directors may request.
The Fund is obligated to pay the Investment Adviser a monthly fee equal to an
annual rate of 1.00% of the Fund's average daily net assets. If the average
daily net assets of the Fund exceed $100 million, the Investment Adviser is
entitled to a fee of an annual rate of 0.75% on such excess. The Investment
Adviser has voluntarily agreed to waive all or a portion of its advisory fee or
make payments to the Fund in order to maintain the Fund's total operating
expenses at an annual rate not to exceed 1.90%. The Investment Adviser earned
fees of $53,649 from the Fund and waived $34,043 of its fees in the year ended
December 31, 1996. The Investment Adviser received $80,675 from the Fund for the
year ended December 31, 1997 and $80,943 from the Fund for the period ended
August 31, 1998. For the year ended August 31, 1999, the Investment Adviser
received $126,902 from the Fund.
Pursuant to the terms of the Advisory Agreement, the Investment Adviser pays all
expenses incurred by it in connection with its activities thereunder, except the
cost of securities (including brokerage commissions, if any) purchased for the
Fund. The services furnished by the Investment Adviser under the Advisory
Agreement are not exclusive, and the Investment Adviser is free to perform
similar services for others.
MANAGEMENT-RELATED SERVICES
ADMINISTRATION
Pursuant to an Administrative Services Agreement with the Company dated August
19, 1997 (the "Administrative Agreement"), Commonwealth Shareholder Services,
Inc. ("CSS"), 1500 Forest Avenue, Suite 223, Richmond, Virginia 23229, serves as
administrator of the Fund and supervises all aspects of the operation of the
Fund except those performed by the Investment Adviser. John Pasco, III, Chairman
of the Board of the Company, is the sole owner of CSS. CSS provides certain
administrative services and facilities for the Fund, including preparing and
maintaining certain books, records, and monitoring compliance with state and
federal regulatory requirements.
As administrator, CSS receives, respectively, an asset-based administrative fee,
computed daily and paid monthly, at the annual rate of 0.20% subject to a
minimum amount of $15,000 per year for a period of two years from the date of
the Administrative Agreement. Thereafter, the minimum administrative fee is
$30,000 per year. CSS receives an hourly rate, plus certain out-of-pocket
expenses, for shareholder servicing and state securities law matters. CSS
received fees of $17,681 and $22,263 for the years ended December 31, 1996 and
1997, and for the period ended August 31, 1998 CSS received fees of $21,247. For
the period ended August 31, 1999, CSS received fees of $42,731.
CUSTODIAN AND ACCOUNTING SERVICES
Pursuant to a Custodian Agreement with the Company dated August 19, 1997, Star
Bank acts as the custodian of the Fund's securities and cash. Portfolio
securities purchased for the Fund are maintained in the custody of the custodian
and may be entered into the Federal Reserve Book Entry System of the security
depository system of the Depository Trust Corporation. Star Bank maintains a
separate account in the name of the Fund. Star Bank is responsible for holding
and making payments of all cash received for the account of the Fund.
Star Bank may make payments from the Fund for the purchase of securities,
payment of interest, taxes, fees and other operating expenses. As the custodian,
Star Bank is authorized to endorse and collect checks, drafts or other orders
for payment and is responsible for the release or delivery of portfolio
securities and monitoring compliance with the regulatory requirements of the
Treasury Department, Internal Revenue Service and the laws of the states. Star
Bank is compensated on the basis of an annual fee based on the market value of
assets of the Fund and fees for certain transactions.
Pursuant to an Accounting Service Agreement dated October 14, 1997 (the
"Accounting Agreement"), Star Bank, 425 Walnut Street, P.O. Box 1118,
Cincinnati, Ohio 45201-1118, is responsible for accounting relating to the Fund
and its investment transactions; maintaining certain books and records of the
Fund; determining daily the net asset value per share of the Fund; and preparing
security position, transaction and cash position reports. Star Bank also
monitors periodic distributions of gains or losses on portfolio sales and
maintains a daily listing of portfolio holdings. Star Bank is responsible for
providing expenses accrued and payment reporting services, tax-related financial
information to the Company, and for monitoring compliance with the regulatory
requirements relating to maintaining accounting records.
Star Bank received fees of $51,123, $16,800 and $19,705 for the years ended
December 31, 1996 and 1997, and for the period ended August 31, 1998,
respectively. For the period ended August 31, 1999, Star Bank received fees of
$19,865.
TRANSFER AGENT
Pursuant to a Transfer Agency Agreement with the Company dated August 19, 1997,
Fund Services, Inc. ("FSI") acts as the Company's transfer, dividend disbursing
and redemption agent. FSI is located at 1500 Forest Avenue, Suite 111, Richmond,
VA 23229. John Pasco, III, Chairman of the Board of the Company owns one-third
of the voting shares of FSI, and therefore, FSI may be deemed to be an affiliate
of the Company and CSS.
FSI provides certain shareholder and other services to the Company, including
furnishing account and transaction information and maintaining shareholder
account records. FSI is responsible for processing orders for shares and
ensuring appropriate participation with the National Securities Clearing
Corporation for transactions in the Fund's shares. FSI receives and processes
redemption requests and administers distribution of redemption proceeds. FSI
also handles shareholder inquiries and provides routine account information. In
addition, FSI prepares and files appropriate tax related information concerning
dividends and distributions to shareholders.
Under the Transfer Agency Agreement, FSI is compensated pursuant to a schedule
of services, and is reimbursed for out-of-pocket expenses. The schedule calls
for a minimum payment of $16,500 per year. FSI received fees of $24,190, $19,313
and $11,535 for the years ended December 31,1996 and 1997, and for the period
ended August 31, 1998, respectively. For the period ended August 31, 1999, FSI
received fees of $21,565.
DISTRIBUTOR
First Dominion Capital Corp. ("FDCC"), located at 1500 Forest Avenue, Suite 223,
Richmond, Virginia 23229, serves as the principal underwriter and national
distributor for the shares of the Fund pursuant to a Distribution Agreement
dated August 19, 1997 (the "Distribution Agreement"). John Pasco, III, Chairman
of the Board of the Company, owns 100% of FDCC, and is its President, Treasurer
and a Director. FDCC is registered as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. (the "NASD"). The offering of
the Fund's shares is continuous.
INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Tait, Weller & Baker, audit the Company's
annual financial statements, assists in the preparation of certain reports to
the U.S. Securities and Exchange Commission (the "SEC"), and prepares the
Company's tax returns. Tait, Weller & Baker is located at 8 Penn Center Plaza,
Suite 800, Philadelphia, PA 19103.
PORTFOLIO TRANSACTIONS
It is the policy of the Investment Adviser, in placing orders for the purchase
and sale of the 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 the skill required of the executing broker/dealer. After a purchase or sale
decision is made by the Investment Adviser, the Investment Adviser arranges for
execution of the 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 the
Fund may obtain better prices or executions on a commission basis or by dealing
with other than a primary market maker.
The Investment Adviser, when placing transactions, may allocate a portion of the
Fund's brokerage to persons or firms providing it with investment
recommendations or statistical, research or similar services useful in its
decision making process. The term "investment recommendations or statistical,
research or similar services" means: (1) 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 (2)
analyses and reports concerning issuers, industries, securities, economic
factors and trends, and portfolio strategy. The Investment Adviser may 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 Investment Adviser 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 the Fund may be used by the Investment Adviser
for the benefit of the Fund and 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, the Fund
may consider sales of its shares as a factor in the selection of brokers to
execute portfolio transactions. The Investment Adviser is not authorized, when
placing portfolio transactions for the Fund, to pay a brokerage commission in
excess of that which another broker might have charged for executing the same
transaction solely on the basis of execution. 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 Investment Adviser are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated in a manner deemed equitable to each client. In some cases this
procedure could have a detrimental effect on the price or volume of the security
as far as the Fund is concerned. In other cases, however, the ability to
participate in volume transactions will be beneficial to the Fund. The Board of
Directors of the Company believes that these advantages, when combined with the
other benefits available because of the Investment Adviser's organization,
outweigh the disadvantages that may exist from this treatment of transactions.
PORTFOLIO TURNOVER
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
portfolio turnover 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. The Investment Adviser makes purchases and sales
for the Fund's portfolio whenever necessary, in its opinion, to meet the Fund's
objective. The Investment Adviser anticipates that the Fund's average annual
portfolio turnover rate will be less than 100%.
CAPITAL STOCK AND DIVIDENDS
The Company is a series investment company that currently offers one class of
shares. The Company is authorized to issue 500,000,000 shares of common stock,
with a par value of $0.01 per share. The Company has currently allocated
50,000,000 shares to the Fund and 200,000,000 shares to other series of the
Company. Each share has equal dividend, voting, liquidation and redemption
rights. There are no conversion or preemptive rights. Shares of the Fund 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. In such event, the holders of the remaining shares will
not be able to elect any person to the Board of Directors. Shares will be
maintained in open accounts on the books of the Transfer Agent.
If they deem it advisable and in the best interests of shareholders, the
Directors may create additional series of shares, each of which represents
interests in a separate portfolio of investments and is subject to separate
liabilities, and may create multiple classes of shares of such series, which may
differ from each other as to expenses and dividends. If additional series or
classes of shares are created, shares of each series or class are entitled to
vote as a series or class only to the extent required by the 1940 Act or as
permitted by the Directors. Upon the Company's liquidation, all shareholders of
a series would share pro-rata in the net assets of such series available for
distribution to shareholders of the series, but, as shareholders of such series,
would not be entitled to share in the distribution of assets belonging to any
other series.
A shareholder will automatically receive all income dividends and capital gain
distributions in additional full and fractional shares of the Fund at their net
asset value as of the date of payment unless the shareholder elects to receive
such dividends or distributions in cash. The reinvestment date normally precedes
the payment date by about seven days although the exact timing is subject to
change. Shareholders will receive a confirmation of each new transaction in
their account. The Company will confirm all account activity, including the
payment of dividend and capital gain distributions and transactions made as a
result of the Automatic Investment Plan described below. Shareholders may rely
on these statements in lieu of stock certificates.
ADDITIONAL INFORMATION ABOUT PURCHASES AND SALES
PURCHASING SHARES
The Fund reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund. Under certain circumstances the Company or the
Investment Adviser 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 Fund may also change or waive policies concerning minimum investment
amounts at any time.
ELIGIBLE BENEFIT PLANS.
An eligible benefit plan is a arrangement available to the (1) employees of an
employer (or two or more affiliated employers) having not less than ten
employees at the plan's inception, or (2) such an employer on behalf of
employees of a trust or plan for such employees, which provides or purchases
through periodic payroll deductions or otherwise. There must be at least five
initial participants with accounts investing or invested in shares of one or
more of the Fund and/or certain other funds.
The initial purchase b the eligible benefit plan along with prior purchases by
or for the benefit of the initial participants of the plan must aggregate not
less than $5,000. Subsequent purchases must be at least $50 per account and must
aggregate at least $250. He eligible benefit plan must make purchases using a
single order and a single check or federal funds wire. The eligible benefit plan
may not make purchases more often than monthly. The Company will establish a
separate account for each employee, spouse or child for which purchases are
made. The Company may modify the requirements for initiating or continuing
purchases or stop offering shares to such a plan at any time without prior
notice.
SELLING SHARES
You may sell your shares by giving instructions to the Transfer Agent by mail or
by telephone.
The Board of Directors may suspend the right of redemption or postpone the date
of payment during any period when (a) trading on the New York Stock Exchange is
restricted as determined by the SEC or such exchange is closed for other than
weekends and holidays, (b) the SEC has by order permitted such suspension, or
(c) an emergency, as defined by rules of the SEC, exists during which time the
sale of Fund shares or valuation of securities held by the Fund are not
reasonably practicable.
SMALL ACCOUNTS
Due to the relative higher cost of maintaining small accounts, the Fund may
deduct $10 per year from your account, if, as a result of redemption or exchange
of shares, the total investment remaining in the account has a value of less
than $25,000. Shareholders will receive 60 days' written notice to increase the
account value above $25,000 before the fee is to be deducted. A decline in the
market value of your account alone would not require you to bring your
investment up to this minimum.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the Prospectus, the Fund offers the following
shareholder services:
Regular Account: The regular account allows for voluntary investments to be made
at any time. Available to individuals, custodians, corporations, trusts,
estates, corporate retirement plans and others, investors are free to make
additions and withdrawals to or from their account as often as they wish. Simply
use the Account Application provided with the Prospectus to open your account.
Telephone Transactions: A shareholder may redeem shares or transfer into another
fund by telephone if this service is requested at the time the shareholder
completes the initial Account Application. If you do not elect this telephone
service at that time, you may do so at a later date by putting your request in
writing to the Transfer Agent and having your signature guaranteed.
The Fund employs reasonable procedures designed to confirm the authenticity of
instructions communicated by telephone and, if the procedures are followed the
Fund will not 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 identify as a
shareholder of record. Cooperation with these procedures helps to protect the
account and the Fund from unauthorized transactions.
Invest-A-Matic Accounts: 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 or
savings 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.
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.
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 employees 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 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 contributions.
By acting within applicable time limits of the distribution you can continue to
defer federal income taxes on your rollover contribution and on any income that
is earned on that contribution.
Roth IRA: A Roth IRA permits certain taxpayers to make a non-deductible
investment of up to $2,000 per year. Provided an investor does not withdraw
money from his or her Roth IRA for a five-year period, beginning with the first
tax year for which a contribution was made, deductions from the investor's Roth
IRA would be tax free after the investor reaches the age of 59-1/2. Tax free
withdrawals may also be made before reaching the age of 59-1/2 under certain
circumstances. Please consult your financial and/or tax professional as to your
eligibility to invest in a Roth IRA. An investor may not make a contribution to
both a Roth IRA and a regular IRA in any given year. An annual limit of $2,000
applies to contributions to regular and Roth IRAs. For example, if a taxpayer
contributes $2,000 to a regular IRA for a year, he or she may not make any
contribution to a Roth IRA for that year.
How to Establish Retirements 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 Adviser 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 registered for sale in the shareholder's state of residence.
The account must meet the minimum investment requirements (currently $25,000). A
written request must have been completed and 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 dollar amount 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 telephone 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
redeeming 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.
TAX STATUS
DISTRIBUTIONS AND TAXES
Distributions of net investment income: The Fund receives income generally in
the form of interest and other income on their investments. This income, less
expenses incurred in the operation of the Fund, constitutes net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or reinvest them in additional shares.
Distribution of capital gains: The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the Fund. Any net capital gains realized by the Fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminated excise or income taxes on the Fund.
Effect of foreign investments on distributions: Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
Fund. Similarly, foreign exchange losses realized by the Fund on the sale of
debt securities are generally treated as ordinary losses. These gains when
distributed will be taxable to you as ordinary dividends, and any losses will
reduce the Fund's ordinary income otherwise available for distribution to you.
This treatment could increase or reduce the Fund's ordinary income distributions
to you, and may cause some or all of its previously distributed income to be
classified as return of capital.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of its total assets at the end of the
fiscal year are invested in securities of foreign corporations, it may elect to
pass-through to you your pro rata share of foreign taxes paid by it. If this
election is made, the year-end statement you receive from the Fund will show
more taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. The Fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.
Information on the tax character of distributions: The Fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of the tax status for federal income
tax purposes shortly after the close of each calendar year. If you have not held
Fund shares for a full year, the Fund may designate and distribute to you, as
ordinary income or capital gain, a percentage of income that is not equal to the
actual amount of such income earned during the period of your investment in the
Fund.
Election to be taxed as a regulated investment company: The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the Fund generally pay no federal income tax on the income and gains it
distributes to you. The Board reserves the right not to maintain the
qualifications of the Fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the Fund's earnings and profits.
Excise tax distribution requirements: To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to shareholders by December
31 of each year, at a minimum the following amounts: 98% of its taxable ordinary
income earned during the twelve month period ending October 31, and 100% of any
undistributed amounts from the prior year. The Fund intends to declare and pay
these amounts in December (or in January which must be treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
Redemption of Fund shares: Redemption and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. If you redeem or
exchange your Fund shares for shares of a different fund within the Company, the
IRS will require that you report a gain or loss on your redemption or exchange.
The gain or loss that you realize will be either a long-term or short-term
capital gain or loss depending on how long you held your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the Fund on those shares.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you buy other shares in such Fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you purchase.
U.S. government obligations: Many states grant tax-free status to dividends paid
to shareholders from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by the Fund. Investments in Government National Mortgage Association or
Federal National Mortgage Association securities, bankers' acceptances,
commercial paper and repurchase agreements collateralized by U.S. government
securities do not generally qualify for tax-free treatment. The rules on
exclusion of this income are different for corporations.
Dividends received deduction for corporations: Because the Fund's income
includes corporate dividends, if the shareholder is a corporation, a portion of
its distributions may qualify for the intercorporate dividends-received
deduction. You will be permitted in some circumstances to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to pay
on these dividends. The dividends-received deduction will be available only with
respect to dividends designated by the Fund as eligible for such treatment. All
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculations.
Investment in complex securities: The Fund may invest in complex securities,
such as original issue discount obligations, the shares of passive foreign
investment companies and others. These investments may be subject to numerous
special and complex tax rules. These rules could affect whether gains and losses
recognized by the Fund are treated as ordinary income or capital gain,
accelerate the recognition of income to the Fund and/or defer the Fund's ability
to recognize losses, and, in limited cases, subject the Fund to U.S. federal
income tax on income from certain of its foreign securities. In turn, these
rules may affect the amount, timing or character of the income distributed to
you by the Fund.
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of the Fund to that of
other mutual funds and to relevant indices, in advertisements or in reports to
shareholders, The Fund states performance in terms of total return or yield.
Both "total return" and "yield" figures are based on the historical performance
of the Fund, show the performance of a hypothetical investment and are not
intended to indicate future performance.
YIELD INFORMATION
From time to time, the Fund may advertise a yield figure. A portfolio's yield is
a way of showing the rate of income the portfolio earns on its investments as a
percentage of the portfolio's share price. Under the rules of the SEC, yield
must be calculated according to the following formula:
6
YIELD = 2[( A-B + 1) -1]
CD
Where:
A = dividends and interest earned during the period. B = expenses accrued
for the period (net of reimbursements). C = the average daily number of
shares outstanding during the
period
that were entitled to receive dividends.
D = the maximum offering price per share on the last day of the
period.
A fund's yield, as used in advertising, is computed by dividing the fund's
interest and dividend income for a given 30-day period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by a fund's net asset value ("NAV") at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. Income is calculated for purposes of yield
quotations in accordance with standardized methods applicable to all stock and
bond mutual funds. Dividends from equity investments are treated as if they were
accrued on a daily basis, solely for the purposes of yield calculations. In
general, interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from income on a
daily basis, and is increased with respect to bonds trading at a discount by
adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation. Income calculated for the purpose
of calculating a fund's yield differs from income as determined for other
accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yield quoted for a
fund may differ from the rate of distributions the fund paid over the same
period or the rate of income reported in the fund's financial statements.
TOTAL RETURN PERFORMANCE
Under the rules of the SEC, fund advertising performance must include total
return quotes, "T" below, calculated according to the following formula:
n
P(1+ T) = ERV
Where:
P = a hypothetical initial payment $1,000, T = average annual total
return, N = number of years (l, 5 or 10),
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).
The average annual total return will be calculated under the foregoing formula
and the time periods used in advertising will be based on rolling calendar
quarters, updated to the last day of the most recent quarter prior to submission
of the advertising for publication, and will cover prescribed periods. When the
period since inception is less than one year, the total return quoted will be
the aggregate return for the period. In calculating the ending redeemable value,
all dividends and distributions by the Fund are assumed to have been reinvested
at NAV as described in the prospectus on the reinvestment dates during the
period. Total return, or "T" in the formula above, is computed by finding the
average annual compounded rates of return over the prescribed periods (or
fractional portions thereof) that would equate the initial amount invested to
the ending redeemable value.
The average annual total returns for the Fund as of August 31, 1999, are
as follows:
One Year 23.22%
Commencement of Operations 13.52%
(January 1, 1995)
The Fund may also from time to time include in such advertising an aggregate
total return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately the Fund's performance with other measures of investment return. The
Fund may quote an aggregate total return figure in comparing the Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, Russell Indices, the
Value Line Composite Index, the Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency Index,
Merrill Lynch Intermediate Agency Index, Morgan Stanley Capital International
Europe, Australia, Far East Index or the Morgan Stanley Capital International
World Index. For such purposes, the Fund calculates its aggregate total return
for the specified periods of time by assuming the investment of $1,000 in shares
of the Fund and assuming the reinvestment of each dividend or other distribution
at NAV on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. To calculate its average annual
total return, the aggregate return is then annualized according to the SEC's
formula for total return quotes outlined above.
The Fund may also advertise the performance rankings assigned by various
publications and statistical services, including but not limited to, SEI, Lipper
Mutual Fund Performance Analysis, Intersec Research Survey of Non-U.S. Equity
Fund Returns, Frank Russell International Universe, and any other data which may
be reported from time to time by Dow Jones & Company, Morningstar, Inc., Chase
Investment Performance, Wilson Associates, Stanger, CDA Investment Technologies,
Inc., the Consumer Price Index ("CPI"), The Bank Rate Monitor National Index, or
IBC/Donaghue's Average U.S. Government and Agency, or as appears in various
publications, including but not limited to, The Wall Street Journal, Forbes,
Barron's Fortune, Money Magazine, The New York Times, Financial World, Financial
Services Week, USA today and other national or regional publications.
FINANCIAL INFORMATION
Financial Highlights, Statements and Reports of Independent Accountants. You can
receive free copies of reports, request other information and discuss your
questions about the Fund by contacting the Fund directly at:
THE WORLD FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
Telephone: (800) 527-9525
e-mail: [email protected]
The books of the Fund will be audited at least once each year by Tait, Weller
and Baker, of Philadelphia, PA, independent public accountants.
The Fund's audited financial statements and notes thereto for the year ended
August 31, 1999 and the unqualified report of Tait, Weller & Baker, on such
financial statements (the "Report") are incorporated by reference in this SAI
and are included in the Fund's 1999 annual report to shareholders (the "Annual
Report"). A copy of the Annual Report accompanies this SAI and an investor may
obtain a copy of the Annual Report by writing to the Fund or calling
(800)-527-9525.
<PAGE>
THE WORLD FUNDS, INC.
(THE "COMPANY")
1500 FOREST AVENUE, SUITE 223, RICHMOND, VA 23229
1-800-527-9525
STATEMENT OF ADDITIONAL INFORMATION
THE NEW MARKET FUND
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current Prospectus of The New Market Fund (the
"Fund") dated December 29, 1999. You may obtain the Prospectus of the Fund, free
of charge, by writing to The World Funds, Inc. at 1500 Forest Avenue, Suite 223,
Richmond, VA 23229 or by calling 1-800-527-9525.
The Fund's audited financial statements and notes thereto for the year ended
August 31, 1999 and the unqualified report of Tait, Weller & Baker, the Fund's
public accountants, on such financial statements (the "Report") are incorporated
by reference in this SAI and are included in the Fund's 1999 Annual Report to
Shareholders (the "Annual Report"). A copy of the Annual Report accompanies this
SAI and an investor may obtain a copy of the Annual Report, free of charge, by
writing to the Fund or calling 1-800-527-9525.
The date of this SAI is December 29, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
General Information 3
Investment Objective 3
Strategies and Risks 3
Investment Programs 3
Other Investments 6
Investment Restrictions 6
Management of the Company 8
Principal Securities Holders 10
Investment Manager, Adviser and Agreements 10
Management-Related Services 11
Portfolio Transactions 13
Portfolio Turnover 13
Capital Stock and Dividends 14
Distribution 14
Plan of Distribution ("12b-1 Plan") 15
Sales at Net Asset Value 16
Additional Information about Purchases and Sales
16
Tax Status 18
Investment Performance 19
Financial Information 22
<PAGE>
GENERAL INFORMATION
The World Funds, Inc. (the "Company") was organized as a Maryland corporation in
May, 1997. The Company is an open-end, management investment company (commonly
known as a "mutual fund"), registered under the Investment Company Act of 1940,
as amended (the "1940 Act"). This SAI relates to The New Market Fund series of
shares (the "Fund")of the Company. The Fund is a series of the Company that
invests in a non-diversified portfolio of securities and other assets.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve long-term growth of capital
by investing in a non-diversified portfolio consisting primarily of equity
securities which includes securities convertible into equity securities, such
as, warrants, convertible bonds, debentures or convertible preferred stock.
All investments entail some market and other risks. For instance, there is no
assurance that the investment adviser will achieve the investment objective of
the Fund. You should not rely on an investment in the Fund as a complete
investment program.
STRATEGIES AND RISKS
The following discussion of investment techniques and instruments supplements,
and should be read in conjunction with, the investment information in the Fund's
Prospectus. In seeking to meet its investment objective, the Fund may invest in
any type of security whose characteristics are consistent with its investment
program described below.
INVESTMENT PROGRAMS
Convertible Securities: The Fund may invest in convertible securities.
Traditional convertible securities include corporate bonds, notes and preferred
stocks that may be converted into or exchanged for common stock or other equity
securities, and other securities that also provide an opportunity for equity
participation. These securities are convertible either at a stated price or a
stated rate (that is, for a specific number of shares of common stock or other
equity securities). As with other fixed income securities, generally the price
of a convertible security varies inversely with interest rates. While providing
a fixed income stream, a convertible security also affords the investor an
opportunity, through its conversion feature, to participate in the capital
appreciation of the common stock into which it is convertible. As the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the price of a convertible
security tends to rise as a reflection of higher yield or capital appreciation.
In such circumstances, the price of a convertible security may be greater than
the underlying value of the common stock.
Warrants: The Fund may invest in warrants. Warrants are options to purchase
equity securities at a specific price for a specific period of time. They do not
represent ownership of the securities, but only the right to buy them. Hence,
warrants have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. The value of warrants is derived
solely from capital appreciation of the underlying equity securities. Warrants
differ from call options in that the underlying corporation issues warrants,
whereas call options may be written by anyone.
Debentures: The Fund may invest in debentures which are general debt
obligations backed only by the integrity of the borrower and documented by an
agreement called an indenture. An unsecured bond is a debenture.
Convertible Preferred Stock: The Fund may invest in preferred stock which is a
class of capital stock that pays dividends at a specified rate and that has
preference over common stock in the payment of dividends and the liquidation of
assets. Preferred stock does not ordinarily carry voting rights.
Most preferred stock is cumulative; if dividends are passed (not paid for any
reason), they accumulate and must be paid before common dividends. A passed
dividend on noncumulative preferred stock is generally gone forever.
Participating preferred stock entitles its holders to share in profits above and
beyond the declared dividend, along with common shareholders, as distinguished
from nonparticipating preferred, which is limited to the stipulated dividend.
Adjustable rate preferred stock pays a dividend that is adjustable, usually
quarterly, based on changes in the treasury bill rate or other money market
rates. Convertible preferred stock is exchangeable for a given number of common
shares and thus tends to be more volatile than nonconvertible preferred, which
behaves more like a fixed-income bond.
Illiquid Securities: The Fund may invest up to 15% of its net assets in illiquid
securities. For this purpose, the term "illiquid securities" means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the securities.
Illiquid securities include generally, among other things, certain written
over-the-counter options, securities or other liquid assets as cover for such
options, repurchase agreements with maturities in excess of seven days, certain
loan participation interests and other securities whose disposition is
restricted under the federal securities laws.
Depositary Receipts: American Depositary Receipts ("ADRs") are receipts
typically issued in the U.S. by a bank or trust company evidencing ownership of
an underlying foreign security. The Fund may invest in ADRs which are structured
by a U.S. bank without the sponsorship of the underlying foreign issuer. In
addition to the risks of foreign investment applicable to the underlying
securities, such unsponsored ADRs may also be subject to the risks that the
foreign issuer may not be obligated to cooperate with the U.S. bank, may not
provide additional financial and other information to the bank or the investor,
or that such information in the U.S. market may not be current.
Like ADRs, European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), and Registered Depositary Certificates ("RDCs") represent receipts for
a foreign security. However, they are issued outside of the U.S. The Fund may
invest in ADRs, EDRs, GDRs or RDCs .
U.S. Government Securities: The Fund may invest in U.S. Government securities.
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. Some U.S. Government securities,
such as U.S. Treasury bills, notes and bonds, and securities guaranteed by the
Government National Mortgage Association ("GNMA"), are supported by the full
faith and credit of the United States; others, such as those of the Federal Home
Loan Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
instrumentality.
U.S. Government securities include (1) securities that have no interest coupons
(see "Zero Coupon Securities" below) or have been stripped of their unmatured
interest coupons, (2) individual interest coupons from such securities that
trade separately, and (3) evidences of receipt of such securities. Such
securities that pay no cash income are purchased at a deep discount from their
value at maturity. Because interest on zero coupon and stripped securities is
not distributed on a current basis, but is, in effect, compounded, such
securities tend to be subject to greater market risk than interest-paying fixed
income securities.
Municipal Securities: The Fund may invest in municipal securities. These
securities are debt obligations issued by or on behalf of the government of
states, territories or possessions of the United States, the District of
Columbia and their political subdivisions, agencies and instrumentalities. The
interest on municipal 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 classifications 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
who 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
facilities.
Corporate Debt Securities: The Fund may invest in "investment grade" corporate
debt securities. The Fund will invest in securities rated Baa or higher by
Moody's Investors Service, Inc. ("Moody's"), or Standard & Poor's Ratings Group
("S&P") at the time of purchase, or unrated securities which Virginia Management
Investment Corporation, the Fund's investment manager (the "Manager"), believes
to be of comparable quality. Securities rated as BBB are generally regarded as
having adequate capacity to pay interest and repay principal.
Zero Coupon Securities: The Fund may invest in zero coupon securities. Certain
zero coupon securities are convertible into common stock and offer the
opportunity for capital appreciation as increases (or decreases) in the market
value of such securities follow 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 stock as they usually
are issued with intermediate to short maturities (15 years or less) and are
issued with options and/or redemption features exercisable by the holder of the
securities entitling the holder to redeem the securities and receive a defined
cash payment.
Zero coupon securities also include securities issued directly as zero coupon
securities by the U.S. Treasury, and U.S. Treasury bonds or notes which have
their unmatured interest coupons separated by their holder, typically a
custodian bank or investment brokerage firm. The holder separates ("strips") the
interest coupons from the underlying principal of the U.S. Treasury security.
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal 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. Purchasers
of stripped obligations acquire, in effect, discounted obligations that are
similar to zero coupon securities that the Treasury sells directly. Once the
U.S. Treasury obligation is stripped, the principal and coupons may be sold
separately. Typically, the coupons are sold individually or grouped with other
coupons with like maturity dates and sold bundled in such form.
Repurchase Agreements: As a means of earning income for periods as short as
overnight, the Fund may enter into repurchase agreements that are collateralized
by U.S. Government securities. Under a repurchase agreement, the Fund acquires a
security, subject to the seller's agreement to repurchase that security at a
specified time and price. A purchase of securities under repurchase agreements
is considered to be a loan by the Fund. The Manager 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 seller of the repurchase
agreement. If the seller becomes insolvent, the Fund's right to dispose of the
securities held as collateral may be impaired and the Fund may incur extra
costs. Repurchase agreements for periods in excess of seven days may be deemed
to be illiquid.
Covered Call Options: The Fund may write (sell) covered call options, including
those that trade in the over-the counter ("OTC") market, and will receive a
premium that is designed to increase its return on securities or to provide a
partial hedge against declines in the market value of its portfolio securities.
The Fund will not engage in such transactions for speculative purposes. A call
option gives the purchaser the right, and obligates the writer to sell, in
return for a premium paid to the writer by the purchases, a particular security
at a predetermined or "exercise" price during the period of the option. A call
option is "covered" if the writer owns the underlying security that is the
subject of the call option. The writing of call options is subject to risks,
including the risk that the Fund will not be able to participate in any
appreciation in the value of the securities above the exercise price. OTC call
options are sold to securities dealers, financial institutions or other parties
(counterparty) through a direct bilateral agreement with the Counterparty. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. [The Fund will sell only OTC call options
that are subject to a buy-back provision permitting the Fund to require the
Counterparty to sell the option back to the Fund at a formula price within seven
days]
Unless the parties provide otherwise, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to take
delivery of the security underlying an OTC call option it has entered into with
the Fund or fails to make a cash settlement payment due in accordance with the
terms of that option, the Fund will lose any premium it paid for the option as
well as any anticipated benefit of the transaction. Accordingly, the Manager
must assess the creditworthiness of each such Counterparty or any guarantor or
credit enhancement of the Counterparty's credit to determine the likelihood that
the terms of the OTC option will be satisfied. [The Fund will engage in OTC call
option transactions only with United States government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers," or
broker dealers, domestic or foreign banks or other financial institutions which
have received (or the guarantors of the obligation of which have received) a
short-term credit rating of A-1 from S&P or P-1 from Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO")] The staff of the SEC currently takes the position that portfolio
securities "covering" the amount of a Fund's obligation pursuant to an OTC call
option sold by it (the cost of the sell-back plus the in-the-money amount, if
any) are illiquid, and are subject to the Fund's limitation on investing no more
than 15% of its assets in illiquid securities.
OTHER INVESTMENTS
The Board of Directors may, in the future, authorize the Fund to invest in
securities other than those listed in this SAI and in the prospectus, provided
such investments would be consistent with the Fund's investment objective and
that such investments would not violate the Fund's fundamental investment
policies or restrictions.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies and Restrictions: The Fund has adopted the
following fundamental investment restrictions, which cannot be changed without
approval by vote of a "majority of the outstanding voting securities" of the
Fund. As a matter of fundamental policy, the Fund may not:
o As to 50% of its assets, purchase the securities of any issuer (other than
obligations issued or guaranteed as to principal and interest by the
Government of the United States or any agency or instrumentality thereof), if
as a result of such purchase, more than 5% of its total assets would be
invested in the securities of such issuer.
o 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 or, more than 10% of any class
of the outstanding stock or securities of such issuer.
o Act as an underwriter of securities of other issuers, except that the Fund
may invest up to 10% of the value of its total assets (at the 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.
o Buy or sell commodities or commodity contracts.
o Borrow money except 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. Notwithstanding the foregoing,
to avoid the untimely disposition of assets to meet redemptions, the
Fund may borrow up to 33 1/3%, of the value of its assets to meet
redemptions, provided that it may not make other investments while such
borrowings are outstanding.
o Make loans.
o Invest more than 25% of its total assets in securities of one or more issuers
having their principal business activities in the same industry, provided
that there is no limitation with respect to investments in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
o 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.
o Invest in interests in oil, gas, or other mineral explorations or development
programs.
o Issue senior securities.
o Participate on a joint or a joint and several basis in any securities
trading account.
o Purchase or sell real estate (except that the Fund may invest in (i)
securities of companies which deal in real estate or mortgages, and (ii)
securities secured by real estate or interests therein, and that the Fund
reserves freedom of action to hold and to sell real estate acquired as a
result of the Fund's ownership of securities).
o Invest in companies for the purpose of exercising control.
o 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.
o Engage in short sales.
Non-Fundamental Policies and Restrictions: In addition to the fundamental
policies and investment restrictions described above, and the various general
investment policies described in the Prospectus and elsewhere in the SAI, the
Fund will be subject to the following investment restrictions, which are
considered non-fundamental and may be changed by the Board of Directors without
shareholder approval. As a matter of non-fundamental policy, the Fund may not:
1. Invest more than 15% of its net assets in illiquid securities.
2. Engage in arbitrage transactions. If a percentage restriction on investment
or utilization of assets as set forth under "Investment Restrictions" and
"Investment Programs" 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.
In applying the fundamental policy and restriction concerning concentration set
forth above (i.e., not investing more than 25% of total assets in one industry):
Investments in certain categories of companies will not be considered to be
investments in a particular industry. Examples of these categories include: (i)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; (ii) technology companies
will be divided according to their products and services, for example, hardware,
software, information services and outsourcing, or telecommunications will each
be a separate industry; and (iii) utility companies will be divided according to
their services, for example, gas, gas transmission, electric and telephone will
each be considered a separate industry.
MANAGEMENT OF THE COMPANY
Directors and Officers. The Company is governed by a Board of Directors, which
is responsible for protecting the interest of shareholders. The Directors are
experienced business persons who meet throughout the year to oversee the
Company's activities, review contractual arrangements with companies that
provide services to the Fund, and review performance. The names and addresses of
the Directors and officers of the Company, together with information as to their
principal occupations during the past five years, are listed below. The Director
who is considered an "interested person" as defined in Section 2(a)(19) of the
1940 Act, as well as those persons affiliated with the Manager, the other
investment advisors of the Company and the principal underwriter, and officers
of the Company, are noted with an asterisk (*).
MANAGEMENT OF THE COMPANY
Name, Address Position(s) Held Principal
Occupation(s)
and Age With Registrant During the Past 5 Years
- ---------------------------------------------------------------------------
*John Pasco, III Chairman, Director Mr. Pasco is Treasurer and
1500 Forest Ave. and Treasurer Director of
Richmond, VA 23229 Commonwealth Shareholder
54 Services, Inc., ("CSS") the
Company's Administrator, since
1985; President and
Director of First Dominion
Capital Corp., ("FDCC") the
Company's principal underwriter.
Director and shareholder of
Fund Services Inc., the Company's
Transfer and Disbursing Agent,
since 1987; shareholder of
Commonwealth Fund Accounting,
Inc. which provides bookkeeping
services to Star Bank; and
Chairman, Director and
Treasurer of Vontobel Funds,
Inc., a registered investment
company since March,
1997. Mr. Pasco is also a
certified public accountant.
Samuel Boyd, Jr. Director Mr. Boyd is Manager of the
10808 Hob Nail Court Customer Services Operations and
Potomac, MD 20854 Accounting Division of the Potomac
59 Electric Power Company since
August, 1978; and Director
of Vontobel Funds, Inc., a
registered investment company
since March, 1997. Mr. Boyd is
also a certified public
accountant.
William E. Poist Director Mr. Poist is a financial and tax
5272 River Road consultant through his firm,
Bethesda, MD 20816 Management Consulting for
63 Professionals since 1968;
Director of Vontobel Funds, Inc.,
a registered investment company
since March, 1997. Mr. Poist is
also a certified public
accountant.
Paul M. Dickinson Director Mr. Dickinson is President of
8704 Berwickshire Drive Alfred J. Dickinson, Inc.Realtors
Richmond, VA 23229 since April, 1971; and Director of
52 Vontobel Funds, Inc. a
registered investment company
since March, 1997.
*Jane H. Williams Vice President of Ms. Williams is the Executive
3000 Sand Hill Road the Company and Vice President of Sand Hill
Suite 150 President of the Advisors, Inc. since 1982.
Menlo Park, CA 94025 Sand Hill Portfolio
51 Manager Fund series
*Leland H. Faust President of Mr. Faust is President of CSI
One Montgomery St. the CSI Equity Capital Management, Inc. since
Suite 2525 Fund and the CSI 1978. Mr.Faust is also a Partner
San Francisco, CA 94104 Fixed Income Fund in the law firm Taylor & Faust
53 since September, 1975.
*F. Byron Parker, Jr. Secretary Mr. Parker is Secretary of
810 Lindsay Court CSS and FDCC since 1986;
Richmond, VA 23229 Secretary of Vontobel
(1/26/43) Funds, Inc., a registered
investment company since March,
1997; and Partner in the law
firm Mustian & Parker.
*Franklin A. Trice, III Vice President of Mr.Trice is President of Virginia
P.O. Box 8535 the Company and Management Investment
Richmond, VA 23226-0535 President of the Corporation since May, 1998; and
(12/25/63) New Market Fund a registered epresentative of
FDCC, the Company's underwriter
since September, 1998. Mr. Trice
was a broker with Scott &
Stringfellow from March,
1996 to May, 1998 and with
Craigie, Inc. from March, 1992
to January, 1996.
*John T. Connor, Jr. Vice President of President of Third Millennium
515 Madison Ave., the Company and Investment Advisors, LLC since
24th Floor President of the April, 1998; and Chairman of
New York, NY 10022 Third Millennium ROSGAL, a Russian financial
(6/16/41) Russia Fund company and of its affiliated
ROSGAL Insurance since 1993.
Compensation of Directors: The Company does not compensate the Director who is
an officer of FDCC. The other, or "independent," Directors receive an annual
retainer of $1,000 and a fee of $200 for each of the five series of the
Company for each meeting of the Directors which they attend in person or by
telephone. Directors are reimbursed for travel and other out-of-pocket expenses.
The Company does not offer any retirement benefits for Directors. As of December
29, 1999 the officers and Directors, individually and as a group, owned
beneficially less than 1% of the outstanding shares of the Fund.
For the fiscal period ended August 31, 1999, the Directors received the
following compensation from the Company:
Aggregate Compensation Total
Name and From the Fund, for Pension or Retirement Compensation
Position Fiscal Year Ended Benefits Accrued as from the
Held August 31, 1999(1) Part of Fund Expenses Company
- ---- ------------------ --------------------- -------
John Pasco, III, 0 N/A 0
Director
Samuel Boyd, Jr., $1,800 N/A $9,000
Director
William E. Poist, $1,800 N/A $9,000
Director
Paul M. Dickinson, $1,800 N/A $9,000
Director
(1) This amount represents the aggregate amount of compensation paid to the
Directors by the Fund for: a service on the Board of Directors for the Fund's
fiscal year ended August 31, 1999.
PRINCIPAL SECURITIES HOLDERS
To the best knowledge of the Fund, as of December 29, 1999, the following
persons owned of record or beneficially 5% or more of the shares of the Fund in
the amounts indicated for each: Suzanne L. Read, 305 Jefferson Street,
Lexington, VA 24450 owned of record 34,353.863 shares (or 10.601%).
INVESTMENT MANAGER, ADVISER AND AGREEMENTS
Investment Manager. Virginia Management Investment Corporation (the
"Manager"), 7800 Rockfalls Drive, Richmond, Virginia 23225 is the Fund's
investment manager. The Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act").
The Manager is an independent, privately held corporation. Mr. Franklin A.
Trice, III, Vice President of the Company and President of the Fund, is
President of the Manager.
The Manager serves as investment adviser to the Fund pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). The Advisory Agreement is
effective for a period of two years from September 21, 1998, and may be renewed
annually thereafter. The Advisory Agreement will automatically terminate in the
event of its "assignment" as that term is defined in the 1940 Act, and may be
terminated without penalty at any time upon 60 days' written notice to the other
party by: (i) the majority vote of all the Directors or by vote of a majority of
the outstanding voting securities of the Fund; or (ii) the Manager. Under the
Advisory Agreement, the Manager, subject to the supervision of the Directors,
provides a continuous investment program for the Fund, including investment
research and management with respect to securities, investments and cash
equivalents, in accordance with the Fund's investment objective, policies, and
restrictions as set forth in the Prospectus and this SAI. The Manager is
responsible for effecting all security transactions on behalf of the Fund,
including the allocation of principal business and portfolio brokerage and the
negotiation of commissions. The Manager also maintains books and records with
respect to the securities transactions of the Fund and furnishes to the
Directors such periodic or other reports as the Directors may request.
The Fund is obligated to pay the Manager a monthly management fee at an annual
rate equal to 1% of the average daily net assets of the Fund. In the interest of
limiting expenses of the Fund, the Manager has entered into an expense
limitation agreement with the Fund. The Manager has agreed to waive or limit its
fees and to assume other expenses so that the total annual operating expenses of
the Fund are limited to 1.99%. The limit does not apply to interest, taxes,
brokerage commissions, other expenditures capitalized in accordance with
generally accepted accounting principles and other extraordinary expenses not
incurred in the ordinary course of business. For the period ended August 31,
1999, the Manager did not receive any compensation, waived fees of $19,278 and
reimbursed expenses of $19,451.
Pursuant to the terms of the Advisory Agreement, the Manager pays all expenses
incurred by it in connection with its activities thereunder, except the cost of
securities (including brokerage commissions, if any) purchased for the Fund and
brokerage commissions and related costs for the sale of such securities. The
services furnished by the Manager under the Advisory Agreement are not
exclusive, and the Manager is free to perform similar services for others.
Investment Adviser: The Manager has entered into an Investment Advisory
Agreement (the "Sub-Advisory Agreement") with The London Company of Virginia
established in 1994 and located at Riverfront Plaza, West Tower, 901 East Byrd
Street, Suite 1350A, Richmond, Virginia 23219 (the "Investment Adviser").
Stephen Goddard has been the President and principal shareholder of the
Investment Adviser since its inception and has been the portfolio manager of the
Fund since its inception on October 1, 1998. Mr. Goddard is also a director and
shareholder of the Manager. Mr. Goddard has thirteen years experience in senior
portfolio management, security analysis and finance.
The Investment Adviser provides the Manager with investment analysis and timing
advice, research and statistical analysis relating to the management of the
portfolio securities of the Fund. The investment recommendations of the
Investment Adviser are subject to the review and approval of the Manager (acting
under the supervision of the Company's Board of Directors). The Manager, from
its management fee, pays the Investment Adviser one-half of the management fee
received from the Fund.
MANAGEMENT-RELATED SERVICES
Administration. Pursuant to the Administrative Services Agreement with the
Company, dated September 21, 1998 (the "Service Agreements"), Commonwealth
Shareholder Services, Inc. ("CSS"), 1500 Forest Avenue, Suite 223, Richmond,
Virginia 23229, serves as the administrator of the Fund. CSS supervises all
aspects of the operation of the Fund, except those performed by the Manager and
Investment Adviser. John Pasco III, Chairman of the Board of the Company, is the
sole owner of CSS. CSS provides certain administrative services and facilities
for the Fund, including preparing and maintaining certain books, records, and
monitoring compliance with state and federal regulatory requirements.
As administrator, CSS receives asset-based fees, computed daily and paid monthly
at annual rates of 0.20% of the average daily net assets of the Fund (for the
services of CSS, which include compliance with regulatory matters, backup of the
pricing of shares of the Fund, administrative duties in connection with
execution of portfolio trades, and certain services in connection with Fund
accounting). CSS receives an hourly fee, plus certain out-of-pocket expenses,
for shareholder servicing and state securities law matters. For the period ended
August 31, 1999, CSS received $18,283 from the Fund.
Custodian and Accounting Services. Pursuant to a Custodian Agreement with the
Company dated August 21, 1998, Star Bank, 425 Walnut Street, P.O. Box 1118,
Cincinnati, Ohio 45201-1118, acts as the custodian of the Fund's securities and
cash. Portfolio securities purchased for the Fund are maintained in the custody
of the custodian and may be entered into the Federal Reserve Book Entry System
of the security depository system of the Depository Trust Corporation. Star Bank
maintains a separate account in the name of the Fund. Star Bank is responsible
for holding and making payments of all cash received for the account of the
Fund.
Star Bank may make payments from the Fund for the purchase of securities,
payment of interest, taxes, fees and other operating expenses. As the custodian,
Star Bank is authorized to endorse and collect checks, drafts or other orders
for payment and is responsible for the release or delivery of portfolio
securities and monitoring compliance with the regulatory requirements of the
Treasury Department, Internal Revenue Service and the laws of the states. Star
Bank is compensated on the basis of an annual fee based on the market value of
assets of the Fund and fees for certain transactions.
Pursuant to an Accounting Service Agreement dated August 21, 1998 (the
"Accounting Agreement"), Star Bank, is responsible for accounting relating to
the Fund and its investment transactions; maintaining certain books and records
of the Fund; determining daily the net asset values per share of the Fund; and
preparing security position, transaction and cash position reports. Star Bank
also monitors periodic distributions of gains or losses on portfolio sales and
maintains a daily listing of portfolio holdings. Star Bank is responsible for
providing expenses accrued and payment reporting services and tax-related
financial information to the Company, and for monitoring compliance with the
regulatory requirements relating to maintaining accounting records. For the
period ended August 31, 1999, Star Bank received fees of $11,349 from the Fund.
Transfer Agent. Pursuant to a Transfer Agent Agreement with the Company dated
August 19, 1997, Fund Services, Inc. ("FSI") acts as the Company's transfer and
disbursing agent. FSI is located at 1500 Forest Avenue, Suite 111, Richmond, VA
23229. John Pasco, III, Chairman of the Board of the Company and an officer and
shareholder of CSS (the Administrator of the Fund), owns one-third of the stock
of FSI. Therefore, FSI may be deemed to be an affiliate of the Company and CSS.
FSI provides certain shareholder and other services to the Company, including
furnishing account and transaction information and maintaining shareholder
account records. FSI is responsible for processing orders and payments for share
purchases. FSI mails proxy materials (and receives and tabulates proxies),
shareholder reports, confirmation forms for purchases and redemptions,
prospectuses and SAIs to shareholders. FSI disburses income dividends and
capital distributions and prepares and files appropriate tax-related information
concerning dividends and distributions to shareholders. For the period ended
August 31, 1999, FSI received $10,948 from the Fund.
Distributor. First Dominion Capital Corp. (the "Distributor"), 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, serves as the principal underwriter and
national distributor for the shares of the Fund pursuant to a Distribution
Agreement dated August 19, 1997. John Pasco, III, Chairman of the Board of the
Company, owns 100% of the Distributor, and is its President, Treasurer and a
Director. The Distributor is registered as a broker-dealer and is a member of
the National Association of Securities Dealers, Inc. The offering of the Fund's
shares is continuous.
Independent Accountants. The Company's independent accountants, Tait, Weller &
Baker, audit the Company's annual financial statements, assist in the
preparation of certain reports to the U.S. Securities and Exchange Commission
(the "SEC"), and prepare the Company's tax returns. Tait, Weller & Baker is
located at 8 Penn Center Plaza, Suite 800, Philadelphia, PA 19103.
PORTFOLIO TRANSACTIONS
It is the policy of the Manager and the Investment Adviser (together "the
Advisers"), in placing orders for the purchase and sale of the Fund's
securities, to seek to obtain the best price and execution for securities
transactions, taking into account such factors as price, commission, where
applicable, (which is negotiable in the case of U.S. national securities
exchange transactions but which is generally fixed in the case of foreign
exchange transactions), size of order, difficulty of execution and the skill
required of the executing broker/dealer. After a purchase or sale decision is
made by the Advisers, the Advisers arrange for execution of the 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 the
Fund may obtain better prices or executions on a commission basis or by dealing
with other than a primary market maker.
The Advisers, when placing transactions, may allocate a portion of the Fund's
brokerage to persons or firms providing the Advisers with investment
recommendations, statistical, research or similar services useful to the
Advisers' investment decision-making process. The term "investment
recommendations or statistical, research or similar services" means (1) 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 (2) analyses and reports concerning issuers, industries,
securities, economic factors and trends, and portfolio strategy. Such services
are one of the many ways the Advisers 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 the Fund may be used by the
Advisers for the benefit of the Fund and 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, the Fund
may consider sales of its shares as a factor in the selection of brokers to
execute portfolio transactions. The Advisers may authorize, 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 the receipt of investment recommendations, or statistical,
research or similar services. 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 Manager of Investment Adviser are
simultaneously engaged in the purchase or sale of the same security, the
transactions are allocated in a manner deemed equitable to each client. In some
cases this procedure could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, the
ability to participate in volume transactions will be beneficial to the Fund.
The Board of Directors of the Company believes that these advantages, when
combined with other benefits available because of the Manager's and Investment
Adviser's organizations outweigh the disadvantages that may exist from this
treatment of transactions.
PORTFOLIO TURNOVER
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
portfolio turnover rate involves greater transaction expenses to the Fund and
may result in the realization of net capital gains, which would be taxable to
shareholders when distributed. The Advisers make purchases and sales for the
Fund's portfolio whenever necessary, in the Advisers' opinion, to meet the
Fund's objective. The Advisers anticipate that the average annual portfolio
turnover rate of the Fund will be less than 50%.
CAPITAL STOCK AND DIVIDENDS
The Company is a series investment company that currently offers one class of
shares. The Company is authorized to issue 500,000,000 shares of common stock,
with a par value of $0.01 per share. The Company has currently allocated
50,000,000 shares to the Fund and 200,000,000 shares to other series of the
Company. Each share of the Fund has equal dividend, voting, liquidation and
redemption rights and there are no conversion or preemptive rights. Shares of
the Fund and of the other series of the Company do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of the
Company voting for the election of Directors can elect all of the Directors if
they choose to do so. In such event, the holders of the remaining shares of the
Company will not be able to elect any person to the Board of Directors. Shares
will be maintained in open accounts on the books of FSI.
If they deem it advisable and in the best interests of shareholders, the
Directors may create additional series of shares, each of which represents
interests in a separate portfolio of investments and is subject to separate
liabilities, and may create multiple classes of shares of such series, which may
differ from each other as to expenses and dividends. If the Directors create
additional series or classes of shares, shares of each series or class are
entitled to vote as a series or class only to the extent required by the 1940
Act or as permitted by the Directors. Upon the Company's liquidation, all
shareholders of a series would share pro-rata in the net assets of such series
available for distribution to shareholders of the series, but, as shareholders
of such series, would not be entitled to share in the distribution of assets
belonging to any other series.
A shareholder of the Fund will automatically receive all income dividends and
capital gain distributions in additional full and fractional shares of the Fund
at its net asset value as of the date of payment unless the shareholder elects
to receive such dividends or distributions in cash. The reinvestment date
normally precedes the payment date by about seven days although the exact timing
is subject to change. Shareholders will receive a confirmation of each new
transaction in their account. The Company will confirm all account activity,
including the payment of dividend and capital gains distributions and
transactions made as a result of the Automatic Investment Plan described below.
Shareholders may rely on these statements in lieu of stock certificates.
DISTRIBUTION
Shares of the Fund are offered for sale on a continuous basis at the net asset
value per share plus the applicable sales load.
First Dominion Capital Corp. (the "Distributor") receives commissions
consisting of that portion of the sales load remaining after the discounts which
it allows to investment dealers. The distributor retains 0.25% of the offering
price on sales through the dealer involving the maximum sales load.
The Fund's public offering price ("POP") per share is equal to the net asset
value per share next determined after receipt of a purchase order plus a sales
load. The sales load is reduced on purchases involving large amounts and may be
eliminated entirely in certain circumstances described below.
Sales Load As Percentage Of
Amount of Purchase at Net Amount Dealer Discount
the POP POP Invested as Percentage of
POP
$5,000 but under $100,000 2.75% 2.83% 2.25%
$100,000 but under $250,000 2.25% 2.30% 1.75%
$250,000 but under $500,000 1.50% 1.52% 1.25%
$500,000 but under $1 million 1.00% 1.01% 0.75%
$1 million or over 0.00% 0.00% 0.00%
There is a 1% redemption fee on shares that are held less than one year after
purchase.
In addition to the sales charge listed above, up to 0.50% of average net assets
is paid annually to qualified dealers for providing certain services (including
services to retirement plans) pursuant to the Fund's Plan of Distribution.
The Distributor may from time to time offer incentive compensation to dealers
(which sell shares of the Fund subject to sales charges) allowing such dealers
to retain an additional portion of the sales load. A dealer who receives all of
the sales load may be considered an underwriter of the Fund's shares.
In connection with promotion of the sales of the Fund, the Distributor may, from
time to time, offer (to all broker dealers who have a sales agreement with the
Distributor) the opportunity to participate in sales incentive programs (which
may include non-cash concessions). These non-cash concessions are in addition to
the sales load described in the Prospectus. The Distributor may also, from time
to time, pay expenses and fees required in order to participate in dealer
sponsored seminars and conferences, reimburse dealers for expenses incurred in
connection with pre-approved seminars, conferences and advertising, and may,
from time to time, pay or allow additional promotional incentives to dealers as
part of pre-approved sales contests.
Statement of Intention - The reduced sales charges and public offering price set
forth above and in the prospectus apply to purchases of $250,000 or more made
within a 13-month period pursuant to the terms of a written Statement of
Intention ("Statement") in the form provided by the Distributor and signed by
the purchaser. The Statement is not a binding obligation of the purchaser to
purchase the indicated amount. Shares equal to 1.50% (declining to 0% after an
aggregate of $1,000,000 has been purchased under the Statement) of the dollar
amount specified in the Statement will be held in escrow and capital gain
distributions on these escrowed shares will be credited to the shareholder's
account in shares (or paid in cash, if requested). If the intended investment is
not completed within the specified 13-month period, the purchaser will remit to
the Distributor the difference between the sales charge actually paid and the
sales charge which would have been paid if the total purchases had been made at
a single time. If the difference is not paid within 20 days after written
request by the Distributor or the securities dealer, the appropriate number of
escrowed shares will be redeemed to pay such difference [and any remaining
amount of the sales charge not paid by the escrowed shares will remain due and
payable to the Distributor].
In the case of purchase orders by the trustees of certain employee plans by
payroll deduction, the sales charge for the investments made during the 13-month
period will be based on the following: total investments made the first month of
the 13-month period times 13; as the period progresses the sales charge will be
based (1) on the actual investment made previously during the 13-month period,
plus (2) the current month's investments times the number of months remaining in
the 13-month period. There will be no retroactive adjustments in sales charges
on investments previously made during the 13-month period.
PLAN OF DISTRIBUTION
The Fund has a Plan of Distribution or "12b-1 Plan" (the "Plan") in accordance
with Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may finance
activities primarily intended to sell shares, provided that the categories of
expenses are approved in advance by the Board of Directors of the Company and
the expenses paid under the Plan are incurred within the preceding 12 months and
accrued while the Plan is in effect.
The Plan provides that the Fund will pay a fee to the Distributor at an annual
rate of 0.50% of the Fund's average daily net assets. The fee is paid to the
Distributor as reimbursement for expenses incurred for distribution-related
activity. For the period ended August 31, 1999, $9,639 of allowable distribution
expenses were waived by the Distributor and the Distributor retained no
compensation.
SALES AT NET ASSET VALUE
The front end sales charge is waived for purchases by the following types of
investors: any financial institution or Adviser regulated by Federal or state
governmental authority when the institution or adviser is purchasing shares for
its own account or for an account for which the institution or adviser is
authorized to make investment decisions (i.e., a discretionary account);
Directors, Officers and employees of the Company, the Manager, the Investment
Adviser, the Distributor, including members of the Distributor's, the Investment
Adviser's, and the Manager immediate families and their retirement accounts or
plans); Directors, Officers and employees of the Fund's service providers;
customers, clients or accounts of the Manager, the Investment Adviser, or other
investment advisers or financial planners who charge a fee for their services,
provided that shares purchased are held in the omnibus account of the broker or
agent placing the order; retirement accounts or plans, or deferred compensation
plans and trusts funding such plans for which a depository institution, trust
company or other fiduciary holds shares purchased through the omnibus account of
the broker or agent placing the order; and Eligible Benefit Plans (see "Eligible
Benefit Plans" on page [16].
The front end sales charge is also waived for any registered representatives,
employees, or principals of securities dealers (including members of their
immediate families) having a sales agreement with the Distributor.
The front end sales charge may also be waived for purchases made with the
redemption proceeds from other mutual fund companies on which you have
previously paid a front end sales charge or contingent deferred sales charge.
ADDITIONAL INFORMATION ABOUT PURCHASES AND SALES
Purchasing Shares: The Fund reserves the right to reject any purchase order and
to suspend the offering of shares of the Fund. Under certain circumstances the
Company, the Manager or the Investment Adviser 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 Fund may also change or waive policies
concerning minimum investment amounts at any time.
Eligible Benefit Plans. An eligible benefit plan is an arrangement available to
the (1) employees of an employer (or two or more affiliated employers) having
not less than ten employees at the plan's inception, or (2) 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 five initial participants with accounts investing or invested
in shares of one or more of the Fund and/or certain other funds.
The initial purchase by the eligible benefit plan along with prior purchases by
or for the benefit of the initial participants of the plan must aggregate not
less than $5,000. Subsequent purchases must be at least $50 per account and must
aggregate at least $250. The eligible benefit plan must make purchases using a
single order and a single check or federal funds wire. The eligible benefit plan
may not make purchases more often than monthly. The Company will establish a
separate account for each employee, spouse or child for which purchases are
made. The Company may modify the requirements for initiating or continuing
purchases or stop offering shares to such a plan at any time without prior
notice.
Selling Shares. You may redeem shares of the Fund at any time and in any amount.
The Company's procedure is to redeem shares at the NAV per share next determined
after the Transfer Agent receives the redemption request in proper order. A one
percent (1%) redemption fee is deducted from proceeds of Fund shares redeemed
less than one year after purchase. Payment will be made promptly, but no later
than the seventh day following the receipt of the request in proper order. The
Company may suspend the right to redeem shares for any period during which the
NYSE is closed or the U.S. 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 after the suspension is
terminated. The Adviser reserves the right to waive the redemption fee for their
clients.
Small Accounts. Due to the relatively higher cost of maintaining small accounts,
the Company may deduct $10 per year from your account or may redeem the shares
in your account, if it has a value of less than $1,000. The Company will advise
you in writing sixty (60) days prior to deducting the annual fee or closing your
account, during which time you may purchase additional shares in any amount
necessary to bring the account back to $1,000. The Company will not close your
account if it falls below $1,000 solely because of a market decline.
Special Shareholder Services. As described briefly in the Prospectus, the
Fund offers the following shareholder services:
Regular Account: A regular account allows a shareholder to make voluntary
investments and/or withdrawals at any time. Regular accounts are available to
individuals, custodians, corporations, trusts, estates, corporate retirement
plans and others. You may use the Account Application provided with the
Prospectus to open a regular account.
Telephone Transactions: You may redeem shares or transfer into another fund if
you request this service on your initial Account Application. If you do not
elect this service at that time, you may do so at a later date by sending a
written request and signature guarantee to FSI.
The Fund employs reasonable procedures designed to confirm the authenticity of
your telephone instructions and, if it does not, it may be liable for any losses
caused by unauthorized or fraudulent transactions. As a result of this policy, a
shareholder that authorizes telephone redemption bears the risk of losses, which
may result from unauthorized or fraudulent transactions which the Fund believes
to be genuine. When you request a telephone redemption or transfer, you will be
asked to respond to certain questions. The Company has designed these questions
to confirm your identity as a shareholder of record. Your cooperation with these
procedures will protect your account and the Fund from unauthorized
transactions.
Invest-A-Matic Account: Any shareholder may utilize this feature which allows
shareholders to make automatic monthly investments into their Fund account. Upon
your request, FSI will withdraw a fixed amount each month from a shareholder's
checking or savings account and apply that amount to the purchase of additional
shares of the Fund. This feature does not require you to make a commitment for a
fixed period of time. You may change the monthly investment, skip a month or
discontinue your Invest-A-Matic Plan as desired by notifying FSI. In order to
open an Invest-A-Matic Account, you must complete a separate application. To
obtain an application, or to receive more information, please call the offices
of the Company at 1-800-527-9525.
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). 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 that govern contributions made by individuals with earned
income. A special IRA program is available for corporate employers under which
the employers may establish IRA accounts for their employees in lieu of
establishing corporate retirement plans. Known as SEP-IRA's (Simplified Employee
Pension-IRA), they free the corporate employer of many of the recordkeeping
requirements of establishing and maintaining a corporate retirement plan trust.
If you have received a lump sum distribution from another qualified retirement
plan, you may rollover all or part of that distribution into your Fund IRA. A
rollover contribution is not subject to the limits on annual IRA contributions.
By acting within applicable time limits of the distribution you can continue to
defer Federal Income Taxes on your rollover contribution and on any income that
is earned on that contribution.
Roth IRA: A Roth IRA permits certain taxpayers to make a non-deductible
investment of up to $2,000 per year. Provided an investor does not withdraw
money from his or her Roth IRA for a 5-year period, beginning with the first tax
year for which contribution was made, deductions from the investor's Roth IRA
would be tax free after the investor reaches the age of 59-1/2. Tax free
withdrawals may also be made before reaching the age of 59-1/2 under certain
circumstances. Please consult your financial and/or tax professional as to your
eligibility to invest in a Roth IRA. An investor may not make a contribution to
both a Roth IRA and a regular IRA in any given year.
An annual limit of $2,000 applies to contributions to regular and Roth IRAs. For
example, if a taxpayer contributes $2,000 to a regular IRA for a year, he or she
may not make any contribution to a Roth IRA for that year.
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. You may wish to
consult with your attorney or other tax adviser for specific advice concerning
your 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 series 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 for
all series except the Sand Hill Portfolio Manager Fund which is $25,000). You
must complete an Exchange Privilege Authorization Form to make an exchange.
Also, 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. Your 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). FSI will charge your account a $10 service fee each time you make
such 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.
TAX STATUS
Distributions and Taxes.
Distributions of net investment income. The Fund receive income generally in the
form of dividends and interest on their investments. This income, less expenses
incurred in the operation of the Fund, constitutes the Fund's net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
Distributions of capital gains. The Fund may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the Fund. Any net capital gains realized by the Fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the Fund.
Effect of foreign investments on distributions. Most foreign exchange gains
realized on the sale of securities are treated as ordinary income by the Fund.
Similarly, foreign exchange losses realized by the Fund on the sale of
securities are generally treated as ordinary losses by the Fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce the Fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce the Fund's ordinary income
distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the Fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, the Fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the Fund. If this election is made, the year-end statement you receive from the
Fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or (subject to limitations) claim a foreign tax
credit for such taxes against your U.S. federal income tax. The Fund will
provide you with the information necessary to complete your individual income
tax return if it makes this election.
Information on the tax character of distributions. The Fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held Fund shares for a full year, the Fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the Fund.
Election to be taxed as a regulated investment company. The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the Fund generally does not pay federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of Fund's earnings and profits.
Excise tax distribution requirements. To avoid federal excise taxes, the
Internal Revenue Code requires the Fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. The Fund intends to declare and pay
these amounts in December (or in January that are treated by you as received in
December) to avoid these excise taxes, but can give no assurances that its
distributions will be sufficient to eliminate all taxes.
Redemption of Fund shares. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your Fund
shares, or exchange your Fund shares for shares of a different series of the
Company, the IRS will require that you report a gain or loss on your redemption
or exchange. If you hold your shares as a capital asset, the gain or loss that
you realize will be capital gain or loss and will be long-term or short-term,
generally depending on how long you hold your shares. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you buy other shares in such Fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you purchase.
U.S. Government Obligations. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the Fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of the Fund to that of
other mutual funds and to relevant indices in advertisements or in reports to
shareholders, performance will be stated in terms of total return or yield. Both
"total return" and "yield" figures are based on the historical performance of a
Fund, show the performance of a hypothetical investment and are not intended to
indicate future performance.
Yield Information. From time to time, the Fund may advertise a yield figure. A
portfolio's yield is a way of showing the rate of income the portfolio earns on
its investments as a percentage of the portfolio's share price. Under the rules
of the SEC, yield must be calculated according to the following formula:
Yield = 2[(a-b +1)-1]6
cd
where:
a = dividends and interest earned during the period. b = expenses accrued for
the period (net of reimbursements). c = the average daily number of shares
outstanding during the period that were entitled to receive dividends. d = the
maximum offering price per share on the last day of the period.
The Fund's yield, as used in advertising, is computed by dividing the Fund's
interest and dividend income for a given 30-day period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's NAV at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purposes of yield quotations in
accordance with standardized methods applicable to all stock and bond mutual
funds. Dividends from equity investments are treated as if they were accrued on
a daily basis solely for the purposes of yield calculations. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses generally are excluded
from the calculation. Income calculated for the purpose of calculating the
Fund's yield differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the compounding
assumed in yield calculations, the yield quoted for the Fund may differ from the
rate of distributions the Fund paid over the same period or the rate of income
reported in the Fund's financial statements.
Total Return Performance. Under the rules of the SEC, fund advertising
performance must include total return quotes, "T" below, calculated according to
the following formula:
P(1+T)n= ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1,5 or 10)
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).
The average annual total return will be calculated under the foregoing formula
and the time periods used in advertising will be based on rolling calendar
quarters, updated to the last day of the most recent quarter prior to submission
of the advertising for publication, and will cover prescribed periods. When the
period since inception is less than one year, the total return quoted will be
the aggregate return for the period. In calculating the ending redeemable value,
all dividends and distributions by a Fund are assumed to have been reinvested at
NAV as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the prescribed periods (or fractional
portions thereof) that would equate the initial amount invested to the ending
redeemable value.
The average annual total return for the Fund for the period ended August 31,
1999 is as follows: 13.20%
The Fund may also from time to time include in such advertising an aggregate
total return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately the Fund's performance with other measures of investment return. The
Fund may quote an aggregate total return figure in comparing the Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, Russell Indices, the
Value Line Composite Index, the Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency Index,
Merrill Lynch Intermediate Agency Index, Morgan Stanley Capital International
Europe, Australia, Far East Index or the Morgan Stanley Capital International
World Index. For such purposes, the Fund calculates its aggregate total return
for the specific periods of time by assuming the investment of $10,000 in shares
of the Fund and assuming the reinvestment of each dividend or other distribution
at NAV on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. To calculate its average annual
total return, the aggregate return is then annualized according to the SEC's
formula for total return quotes outlined above.
The Fund may also advertise the performance rankings assigned by the various
publications and statistical services, including but not limited to, SEI, Lipper
Mutual Performance Analysis, Intersec Research Survey of Non-U.S. Equity Fund
Returns, Frank Russell International Universe, and any other data which may be
reported from time to time by Dow Jones & Company, Morningstar, Inc., Chase
Investment Performance, Wilson Associates, Stanger, CDA Investment Technologies,
Inc., the Consumer Price Index ("CPI"), The Bank Rate Monitor National Index, or
IBC/Donaghue's Average U.S. Government and Agency, or as appears in various
publications, including but not limited to, The Wall Street Journal, Forbes,
Barron's, Fortune, Money Magazine, The New York Times, Financial World,
Financial Services Week, USA Today and other national or regional publications.
Comparisons and Advertisements
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements regarding the Fund may discuss, total
return, or Fund volatility as reported by various financial publications.
Advertisements may also compare total return or volatility (as calculated above)
to total return or volatility as reported by other investments, indices, and
averages. The following publications, indices, and averages may be used:
(a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks (Dow Jones Utilities
Average), and 20 transportation company stocks. Comparisons of performance
assume reinvestment of dividends.
(b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks
listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Analysis,
and Lipper Mutual Fund Indices - measures total return and average current
yield for the mutual fund industry. Ranks individual mutual fund
performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales charges.
(f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
(g) Mutual Fund Source Book and other material, published by Morningstar, Inc.
- 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 (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 total return or volatility, an investor should
keep in mind that the composition of the investments in the reported indices and
averages in not identical to the Fund's portfolio, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
figures. In addition, there can be no assurance that the Fund will continue its
performance as compared to such other averages.
FINANCIAL INFORMATION
Financial Highlights, Statements and Reports of Independent Accountants. You can
receive free copies of reports, request other information and discuss your
questions about the Fund by contacting the Fund directly at:
THE WORLD FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
Telephone: (800) 527-9525
e-mail: [email protected]
The books of the Fund will be audited at least once each year by Tait, Weller
and Baker, of Philadelphia, PA, independent public accountants.
The Fund's audited financial statements and notes thereto for the year ended
August 31, 1999 and the unqualified report of Tait, Weller & Baker, on such
financial statements (the "Report") are incorporated by reference in this SAI
and are included in the Fund's 1999 annual report to shareholders (the "Annual
Report"). A copy of the Annual Report accompanies this SAI and an investor may
obtain a copy of the Annual Report, free of charge, by writing to the Fund or
calling (800)-527-9525.
<PAGE>
PART C - OTHER INFORMATION
ITEM 23. EXHIBITS
(a) ARTICLES OF INCORPORATION.
(1) FORM OF Articles of Incorporation of the Registrant are herein
incorporated by reference to the Registrant's Initial Registration Statement on
Form N-1A (File Nos. 333-29289 and 811-8255), as filed with the Securities and
Exchange Commission (the "SEC") on June 16, 1997.
(2) Articles Supplementary.
a. FORM OF Re: the creation of the CSI Equity Fund and
CSI Fixed Income Fund dated July 29, 1997 are herein
incorporated by reference to Post-Effective Amendment Nos. 1/1 to
the
Registrant's Initial Registration Statement on Form N-1A (File Nos.
333-29289
and 811-8255), as filed with the SEC on August 1, 1997.
b. FORM OF Re: the creation of the Third Millennium
Russia Fund and
New Market Fund dated June 19, 1998 are herein
incorporated by reference to Post-Effective Amendment Nos. 4/4 to
the
Registrant's Registration Statement on Form N-1A (File Nos.
333-29289 and
811-8255), as filed with the SEC on July 8, 1998.
c. FORM OF Re: increasing the amount of authorized
shares are
herein incorporated by reference to Post-Effective Amendment Nos.
4/4 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-29289 and
811-8255), as filed with the SEC on July 8, 1998.
(b) BY-LAWS.
By-Laws of the Registrant are herein incorporated by reference to the
Registrant's Initial Registration Statement on Form N-1A (File Nos. 333-29289
and 811-8255), as filed with the SEC on June 16, 1997.
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS.
1. Specimen Share Certificates.
a. 1/ Re: Sand Hill Portfolio Manager Fund.
is herein incorporated by reference to the
Registrant's
Initial Registration Statement on Form N-1A (File Nos. 333-29289 and
811-8255) as filed with the SEC on June 16, 1997.
2/ Re: CSI Equity Fund and CSI Fixed Income Fund.
is herein incorporated by reference to
Post-Effective
Amendment Nos. 1/1 to the Registrant's Initial Registration
Statement on Form
N-1A (File Nos. 333-29289 and 811-8255), as filed with the SEC on
August 1,
1997.
3/ Re: Third Millenium Russia Fund and New
Market Fund. is
herein incorporated by reference to
Post-Effective
Amendment Nos. 4/4 of the Registrant's Registration Statement on
Form N-1A
(File Nos. 333-29289 and 811-8255) as filed with the SEC on July 8,
1998.
b. Applicable sections of Articles and By-Laws to be referenced in
future Post-Effective Amendment.
(d) INVESTMENT ADVISORY CONTRACTS.
(1) Re: Sand Hill Portfolio Manager Fund.
FORM OF Agreement dated August 19, 1997 between Sand
Hill Advisors,
Inc. and the Registrant is herein incorporated by reference to
Post-Effective
Amendment Nos. 2/2 to the Registrant's Registration Statement on
Form N-1A
(File Nos. 333-29289 and 811-8255), as filed with the SEC on
December 1, 1997.
(2) Re: CSI Equity Fund.
FORM OF Agreement dated October 14, 1997 between CSI
Capital
Management, Inc. and the Registrant is herein incorporated by
reference to
Post-Effective Amendment Nos. 2/2 to the Registrant's Registration
Statement
on Form N-1A (File Nos. 333-29289 and 811-8255), as filed with the
SEC on
December 1, 1997.
(3) Re: CSI Fixed Income Fund.
FORM OF Agreement dated October 14, 1997 between CSI
Capital
Management Inc. and the Registrant is herein incorporated by
reference to
Post-Effective Amendment Nos. 2/2 to the Registrant's Registration
Statement
on Form N-1A (File Nos. 333-29289 and 811-8255), as filed with the
SEC on
December 1, 1997.
(4) Re: Third Millenium Russia Fund. Agreement dated September 21, 1998
between
Third Millennium
Investment Advisors LLC and the Registrant is herein incorporated
by reference
to Post Effective Amendment No. 5 to the Registrant's Registration
Statement on
Form N-1A (File No. 811-8255), as filed with the SEC on December
30, 1998.
(5) Re: New Market Fund.
a. Agreement dated September 21, 1998 between Virginia Management
Investment Corporation and the Registrant is herein incorporated by reference to
Post Effective Amendment No. 5 to the Registrant's Registration Statement on
Form N-1A (File No. 811-8255), as filed with the SEC on December 30, 1998.
b. Agreement dated September 21, 1998 between Virginia Management
Investment Corporation and the London Company of Virginia is herein incorporated
by reference to Post Effective Amendment No. 5 to the Registrant's Registration
Statement on Form N-1A (File No. 811-8255), as filed with the SEC on December
30, 1998.
(e) UNDERWRITING CONTRACTS.
(1) Distribution Agreements.
Distribution Agreement dated September 21, 1998 between
First
Dominion Capital Corp. and the Registrant is herein incorporated by
reference
to Post-Effective Amendment No. 5 to the Registrant's Registration
Statement
on Form N-1A (File No. 811-8255), as filed with the SEC on December
30, 1998.
(f) BONUS OR PROFIT SHARING CONTRACTS.
Not Applicable.
(g) CUSTODIAN AGREEMENTS.
(1) Re: Sand Hill Portfolio Manager Fund.
FORM OF Agreement dated August 19, 1997 between Star
Bank, N.A. and
the Registrant is herein incorporated by reference to Post-Effective
Amendment No. 2/2 to the Registrant's Registration Statement on
Form N-1A
(File Nos. 333-29289 and 811-8255), as filed with the SEC on
December 1, 1997.
(2) Re: CSI Equity Fund and CSI Fixed Income Fund. FORM
OF Agreement
dated October 14, 1997 between Star Bank, N.A.
and the Registrant is herein incorporated by reference to
Post-Effective
Amendment No. 2/2 to the Registrant's Registration Statement on
Form N-1A
(File Nos. 333-29289 and 811-8255), as filed with the SEC on
December 1, 1997.
(3) Re: Third Millenium Russia Fund.
Agreement dated October 28, 1998 between Brown Brothers
Harriman &
Co. and the Registrant is herein incorporated by reference to
Post-Effective
Amendment No. 5 to the Registrant's Registration Statement on Form
N-1A (File
No. 811-8255), as filed with the SEC on December 30, 1998.
(4) RE: The New Market Fund.
Letter agreement dated August 21, 1998 adding the New Market Fund series to the
agreement dated October 14,1997 with CSI Equity Fund and CSI Fixed Income Fund
series.
(2) FOREIGN CUSTODY ARRANGEMENTS.
a. Re: Third Millenium Russia Fund.
Foreign Custody Manager Delegation Agreement dated
October 28,
1998 between Brown Brothers Harriman & Co. and the Registrant is
herein
incorporated by reference to Post-Effective Amendment No. 5 to the
Registrant's Registration Statement on Form N-1A (File No.
811-8255), as filed
with the SEC on December 30, 1998.
(h) OTHER MATERIAL CONTRACTS.
(1) Transfer Agency.
a. FORM OF Agreement dated August 19, 1997 between Fund Services,
Inc. and the Registrant is herein incorporated by reference to Post-Effective
Amendment Nos. 2/2 to the Registrant's Registration Statement on Form N-1A (File
Nos. 333-29289 and 811-8255), as filed with the SEC on December 1, 1997.
(2) Administrative Services.
a. Re: Sand Hill Portfolio Manager Fund.
FORM OF Agreement dated August 19, 1997 between
Commonwealth
Shareholder Services, Inc. and the Registrant is herein
incorporated by
reference to Post-Effective Amendment No. 2/2 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-29289 and
811-8255), as
filed with the SEC on December 1, 1997.
b. Re: CSI Equity Fund.
FORM OF Agreement dated October 14, 1997 between
Commonwealth
Shareholder Services, Inc. and the Registrant is herein
incorporated by
reference to Post-Effective Amendment Nos. 2/2 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-29289 and
811-8255), as
filed with the SEC on December 1, 1997.
c. Re: CSI Fixed Income Fund.
FORM OF Agreement dated October 14, 1997 between
Commonwealth
Shareholder Services, Inc. and the Registrant is herein
incorporated by
reference to Post-Effective Amendment Nos. 2/2 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-29289 and
811-8255), as
filed with the SEC on December 1, 1997.
d. Re: Third Millenium Russia Fund.
Agreement dated September 21, 1998 between
Commonwealth
Shareholder Services, Inc. and the Registrant is herein
incorporated by
reference to Post-Effective Amendment No. 5 to the Registrant's
Registration
Statement on Form N-1A (File No. 811-8255), as filed with the SEC
on December
30, 1998.
e. Re: New Market Fund.
Agreement dated September 21, 1998 between
Commonwealth
Shareholder Services, Inc. and the Registrant is herein
incorporated by
reference to Post Effective Amendment No. 5 to the Registrant's
Registration
Statement on Form N-1A (File Nos. 333-29289 and 811-8255), as filed
with the
SEC on December 29, 1998.
(3) Fund Accounting Service.
a. Re: Sand Hill Portfolio Manager Fund.
FORM OF Agreement dated August 18, 1997 between
Star Bank,
N.A. and the Registrant is herein incorporated by reference to
Post-Effective
Amendment Nos. 2/2 to Registrant's Registration Statement on Form
N-1A (File
Nos. 333-29289 and 811-8255) as filed with the SEC on December 1,
1997.
b. Re: CSI Equity Fund and CSI Fixed Income Fund.
FORM OF Agreement dated October 14, 1997 between
Star Bank
N.A. and the Registrant is herein incorporated by reference to
Post-Effective
Amendment Nos. 2/2 to the Registrant's Registration Statement on
Form N-1A
(File Nos. 333-29289 and 811-8255), as filed with the SEC on
December 1, 1997.
c. Letter agreement dated August 21, 1998 adding the New Market Fund series to
the agreement dated October 14,1997 with CSI Equity Fund and CSI Fixed Income
Fund series (See(g)(4 above.
(4) Accounting Agency.
a. Re: Third Millenium Russia Fund.
FORM OF Agreement dated October 28, 1998 between
Brown Brothers
Harriman & Co. and the Registrant is herein incorporated by
reference to
Post-Effective Amendment Nos. 5/6 to the Registrant's Registration
Statement on
Form N-1A (File Nos. 333-29289 and 811-8255), as filed with the
SEC on January
29, 1999.
(5) FORM OF IRA Service Agreement between Brown Brothers Harriman & Co.
and the Registrant is herein incorporated by reference to Post-Effective
Amendment Nos. 4/4 to the Registrant's Registration Statement on Form N-1A (File
Nos. 333-29289 and 811-8255), as filed with the SEC on July 8, 1998.
(i) LEGAL OPINION.
Opinion of Stradley, Ronon, Stevens & Young, LLP dated April 22, 1998 is
herein incorporated by reference to Post-Effective Amendment Nos. 4/4 to the
Registrant's Registration Statement on Form N-1A (File Nos. 333-29289 and
811-8255), as filed with the SEC on July 8, 1998.
(j) OTHER OPINIONS.
Consent of Tait, Weller & Baker, Independent Accountants is
filed herewith
as Exhibit EX-99.B11.
(k) OMITTED FINANCIAL STATEMENTS.
Not Applicable.
(l) INITIAL CAPITAL AGREEMENTS.
Not applicable.
(m) RULE 12B-1 PLAN.
(1) Re: Third Millenium Russia Fund.
FORM OF Plan of Distribution dated September 21, 1998 is
herein
incorporated by reference to Post-Effective Amendment No. 5 to the
Registrant's Registration Statement on Form N-1A (File No.
811-8255), as
filed with the SEC on December 30, 1998.
(2) Re: New Market Fund.
FORM OF Plan of Distribution dated September 21, 1998 is herein
incorporated by reference to Post Effective Amendment No. 5 to the Registrant's
Registration Statement on Form N-1A (File No.811-8255), as filed with the SEC on
December 30, 1998.
(n) RULE 18F-3 PLAN Not Applicable.
(o) POWERS-OF-ATTORNEY.
(1) Re: Samuel Boyd, Jr., William E. Poist and Paul M. Dickinson are
herein incorporated by reference to the Registrant's Initial Registration
Statement on Form N-1A (File Nos. 333-29289 and 811-8255), as filed with the SEC
on June 16, 1997.
(p) CODES OF ETHICS.
The Code of Ethics of the Registrant will be filed by future
Post-Effective Amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
FUND.
None.
ITEM 25. INDEMNIFICATION.
The Registrant is incorporated under the General Corporation Law (the
GCL") of the State of Maryland. The Registrant's Articles of Incorporation
provide the 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 Investment Company Act of 1940, as amended,
for certain conduct set forth in that section ("Disabling Conduct"). Contracts
between the Registrant and various service providers include provisions for
indemnification, but also forbid the Registrant to indemnify affiliates for
Disabling Conduct.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
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 21, 1999, had approximately $500 million in assets under management.
CSI Capital Management, Inc., ("CSI") 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 December 21, 1999 had approximately $244
million in assets under management. A principal of CSI acts as trustee
supervising an additional $30 million in assets.
Third Millennium Investment Advisors, LLC, the investment advisor to
the Third Millennium Russia Fund, Virginia Management Investment Corporation,
the investment manager to provides investment advisory services consisting of
portfolio management for a variety of individuals and institutions and as of
December 21, 1999, had approximately $1 million in assets under management.
Virginia Management Investment Corporation, the investment manager to the
New Market Fund is a newly formed advisor formed for the purpose of advising
Registered Investment Companies. The London Company of Virginia (The London
Company") is the investment advisor to the New Market Fund pursuant to an
Investment Advisory Agreement between Virginia Management Investment Corporation
and The London Company and currently has 3.7 million in assets under management.
For information as to any other business, profession, vocation or
employment of a substantial nature in which each of the foregoing investment
advisors, and each director, officer or partner of such investment advisors, is
or has been engaged within the last two fiscal years for his or her own account
or in the capacity of director, officer, employee, partner or trustee, reference
is made to the investment advisor's Form ADV listed opposite the investment
advisor's name below, which is currently on file with the SEC as required by the
Investment Advisors Act of 1940, as amended.
Name of Investment Adviser Form ADV File
Number
Sand Hill Advisors, Inc. 801-17601
CSI Capital Management, Inc. 801-14549
Third Millennium Investment Advisors, LLC 801-55720
Virginia Management Investment Corporation 801-55697
The London Company of Virginia 801-46604
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) The Registrant's underwriter, First Dominion Capital
Corp.,also acts
as underwriter to Vontobel Funds, Inc.
(b) Name and Principal Position and Offices
Positions and
Business Address with Underwriter
Offices with
Fund
John Pasco, III President, Chief
Chairman,
1500 Forest Avenue Financial Officer
President
Suite 223 and Treasurer and
Director
Richmond VA 23229
Mary T. Pasco Director
Assistant
1500 Forest Avenue
Secretary
Suite 223
Richmond, VA 23229
Darryl S. Peay Vice President
Assistant
1500 Forest Avenue Assistant Compliance
Secretary
Suite 223 Officer
Richmond, VA 23229
Lori J. Martin Vice President and None
1500 Forest Avenue Assistant Secretary
Suite 223
Richmond, VA 23229
F. Byron Parker, Jr. Secretary
Secretary
Mustian & Parker
8002 Discovery Drive
Suite 101
Richmond, VA 23229
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books or other documents of the
Registrant required to
be maintained by Section 31 (a) of the Investment Company Act of 1940, as
amended, and the rules promulgated thereunder are kept in several locations:
(a) 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 of the Fund are maintained
at each Fund's investment advisor, as follows:
Fund: Sand Hill Portfolio Manager Fund
Advisor: Sand Hill Advisors, Inc., located at:
Location: 3000 Sand Hill Road
Building 3, Suite 150
Menlo Park, CA 94025
Fund: CSI Equity Fund and CSI Fixed Income Fund
Advisor: CSI Capital Management
Location: 445 Bush Street, 5th Floor
San Francisco, CA 94108.
Fund: Third Millennium Russia Fund
Advisor: Third Millenium Investment Advisors, LLC:
Location: 515 Madison Avenue, 24th Floor
NY, NY 10022.
Fund: New Market Fund
Advisor: The London Company
Location: Riverfront Plaza, West Tower
901 E. Byrd Street, Suite 350A
Richmond, VA 23219.
(b) Accounts and records for portfolio securities and other investment
assets, including cash of each of the Funds, as well as applicable accounting
records, general ledgers, supporting ledgers, pricing computations, etc. are
maintained in the custody of each Fund's custodian bank and accounting services
agent, as follows:
Funds: Sand Hill Portfolio Manager
Fund
CSI Equity Fund
CSI Fixed Income Fund
New Market Fund
Custodian Bank/Accounting
Services Agent: Star Bank, N.A.
Location: 425 Walnut Street
P.O. Box 1118
Cincinnati, OH 45201-1118.
Fund: Third Millennium Russia Fund
Custodian Bank/Accounting Brown Brothers Harriman &
Co.
Services Agent: 40 Water Street
Location: Boston, MA 02109
(c) Shareholder Account Records (including share ledgers, duplicate
confirmations, duplicate account statements and applications forms) pertaining
to each of the Funds are maintained by their transfer agent, Fund Services,
Inc.:
1500 Forest Avenue, Suite 111
Richmond, VA. 23229.
(d) Administrative records, including copies of the charter, by-laws,
minute books, agreements, compliance records and reports, certain shareholder
communications, etc. pertaining to each of the Funds are kept at their
administrator, Commonwealth Shareholder Services, Inc., located at:
1500 Forest Avenue, Suite 223
Richmond, VA 23229
(e) Records relating to distribution of shares of each of the Funds are
kept at their distributor, First Dominion Capital Corp., located at:
1500 Forest Avenue, Suite 223 Richmond, VA 23229.
ITEM 29. MANAGEMENT SERVICES.
There are no management-related service contracts not discussed in Parts A
or B of this Form.
ITEM 30. UNDERTAKINGS.
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Fund certifies that it meets all the requirements for
effectiveness of this registration statement under Rule 485(b) under the
Securities Act and has duly caused this registration statement to be signed on
its behalf by the undersigned, duly authorized, in the City of Richmond, and
Commonwealth of Virginia on the 29th day of December, 1999.
THE WORLD FUNDS, INC.
Fund
By ________________________
(Signature and Title)
John Pasco, III, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act, this registration statement
has been signed below by the following persons in the capacities and on the
date(s) indicated.
(Signature) (Title) (Date)
___________________ Director, Chairman December 29,
1999
John Pasco, III Chief Executive
Officer and Chief
Financial Officer
/S/ SAMUEL BOYD, JR.* Director December 29,
1999
Samuel Boyd, Jr.
/S/ PAUL M. DICKENSON* Director December 29,
1999
Paul M. Dickinson
/S/ WILLIAM E. POIST* Director December 29,
1999
William E. Poist
------------------------
John Pasco, III
* By John Pasco, III, Attorney-in-Fact Pursuant to
Powers-of-Attorney.
EXHIBIT INDEX EDGAR EXHIBIT #
Consent of Independent EX-99.B11.
Public Accountants
Letter Agreement for The New
Market Fund Custody Ex-99.(g)(4)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Post-Effective to the
Registration Statement on Form N-1A of The World Funds, Inc. and to the use of
our reports each dated October 1, 1999 on the financial statements and financial
highlights of CSI Equity Fund and CSI Fixed Income Fund, each a series of The
World Funds, Inc. Such financial statements, financial highlights and reports of
independent certified public accountants appear in the 1999 Annual Report to
Shareholders and are incorporated by reference in the Registration Statement and
Prospectus.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
December 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Post-Effective Amendment to
the Registration Statement on Form N-1A of The World Funds, Inc. and to the use
of our reports each dated October 1, 1999 on the financial statements and
financial highlights of Sand Hill Portfolio Manager Fund, The New Market Fund,
and the Third Millennium Russia Fund, each a series of The World Funds, Inc.
Such financial statements, financial highlights and report of independent
certified public accountants appear in the 1999 Annual Reports to Shareholders
and are incorporated by reference in the Registration Statement and Prospectus.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
December 28, 1999
<PAGE>
Exhibit (g)(4)
THE WORLD FUNDS, INC.
1500 Forest Avenue, Suite 223, Richmond, VA 23229
804-285-8211 * 800-527-9525 * 804-285-8251(fax)
Marsha Croxton
Star Bank, N.A.
425 Walnut Street
Cincinnati, OH 45201-1118
Dear Ms. Croxton:
The Custody Agreement (the "Agreement") dated October 14, 1997 by and
between The World Funds, Inc. (the "Fund") and Star Bank states that the
Agreement is "on behalf of the CSI Equity Fund series and the CSI Fixed Income
Fund series (the "Series") and any other 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".
The purpose of this letter is to formally notify you that the Fund filed a
registration statement with the Securities and Exchange Commission (the "SEC")
on September 8, 1998 creating The New Market Fund series of the Fund. The New
Market Fund will be effective with the SEC on September 21, 1998.
I would appreciate your executing a copy of the attached letter indicating
that Star Bank will act as custodian for The New Market Fund according to the
terms and conditions of the above mentioned October 14, 1997 Agreement.
Sincerely,
/s/ John Pasco, III
John Pasco, III
Star Bank agrees to act as the custodian for The new Market Fund pursuant to the
October 14, 1997 Custody Agreement.
/s/ Marsha Croxton August 21, 1998
Marsha Croxton
