THE WORLD FUNDS, INC.
(THE "COMPANY")
1500 FOREST AVENUE, SUITE 223, RICHMOND, VA 23229
1-800-527-9525
STATEMENT OF ADDITIONAL INFORMATION
SAND HILL PORTFOLIO MANAGER FUND
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current Prospectus of the Sand Hill Portfolio
Manager 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 (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, 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.
The date of this SAI is December 29, 1999.
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TABLE OF CONTENTS
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . .. .4
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS. . . . . . . .. .4
INVESTMENT OBJECTIVES . . . . . . . . . . . . . . . . . . . . 4
STRATEGIES AND RISKS . . . . . . . . . . . . . . . . . . . . .4
INVESTMENT PROGRAMS. . . . . . . . . . . . . . . . . . . . .. .4
DEPOSITARY RECEIPTS . . . . . . . . . . . . . . . . . .. .4
REPURCHASE AGREEMENTS. . . . . . . . . . . . . . . . . .. 5
DEBT SECURITIES . . . . . . . . . . . . . . . . . . . .. .5
U.S. GOVERNMENT SECURITIES. .. . . . . . . . . . . . . .. 5
ZERO COUPON SECURITIES . . . . . . . . . . . . . . . . .. 6
INTERNATIONAL BONDS. . . . . . . . . . . . . . . . . . . 6
. MORTGAGE AND ASSET-BACKED SECURITIES. . . . . . . . . .. .6
CONVERTIBLE SECURITIES. . . . . . . . . . . . . . . . .. .7
WARRANTS. . . . . . .. . . . . . . . . . . . . . . . . ...7
INVESTMENT COMPANIES. . . . . . . . . . . . . . . . . .. .7
ILLIQUID SECURITIES. . . . . . . . . . . . . . . . . . .. 8
WHEN-ISSUED SECURITIES. . . . . . . . . . . . . . . . .. .8
STRATEGIC TRANSACTIONS. . . . . . . . . . . . . . . . .. .8
PUT AND CALL OPTIONS. . . . . . . . . . . . . . . . . .. .9
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES11
CURRENCY TRANSACTIONS. . . . . . . . . . . . . . . . . ..11
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. . . . . .. 12
RESTRICTED SECURITIES. . . . . . . . . . . . . . . . . ..13
INDEXED SECURITIES. . . . . . . . . . . . . . . . . . .. 14
OTHER SECURITIES. . . . . . . . . . . . . . . . . . . .. 14
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . .. 14
FUNDAMENTAL POLICIES AND RESTRICTIONS . . . . . . . . .. 14
NON-FUNDAMENTAL POLICIES AND RESTRICTIONS . . . . . . .. 15
MANAGEMENT OF THE COMPANY. . . . . . . . . . . . . . . . . . . . .. 16
DIRECORS AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . .. 16
COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . ..18
CONTROL PERSONS. . . . . . . . . . . . . . . . . . . . . . . . . .. 19
PRINCIPAL HOLDERS OF SECURITIES. . . . . . . . . . . . . . . . . .. 19
INVESTMENT ADVISER AND ADVISORY AGREEMENT . . . . . . . . . . . . ..19
MANAGEMENT-RELATED SERVICES. . . . . . . . . . . . . . . . . . . .. 20
ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . ..20
CUSTODIAN AND ACCOUNTING SERVICES . . . . . . . . . . . . . ..20
TRANSFER AGENT. . . . . . . . . . . . . . . . . . . . . . . ..21
DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . .. 21
INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . .. 22
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . ..22
PORTFOLIO TURNOVER. . . . . . . . . . . . . . . . . . . . . . . . ..23
CAPITAL STOCK AND DIVIDENDS. . . . . . . . . . . . . . . . . . . .. 23
ADDITIONAL INFORMATION ABOUT PURCHASES AND SALES. . . . . . . . . ..24
ELIBIBLE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . . . ..24
SELLING SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . ..24
SMALL ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . ..25
SPECIAL SHAREHOLDER SERVICES. . . . . . . . . . . . . . . . . . . ..25
TAX STATUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..26
DISTRIBUTIONS AND TAXES. . . . . . . . . . . . . . . . . . . . . .. 29
INVESTMENT PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . ..29
YIELD INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . .. 29
TOTAL RETURN PERFORMANCE. . . . . . . . . . . . . . . . . . . . . ..29
FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . .. 30
<PAGE>
GENERAL INFORMATION
The World Funds, Inc. (the "Company") was organized under the laws of the State
of Maryland in May, 1997. The Company is an open-end management investment
company registered under the Investment Company Act of 1940, as amended, (the
"1940 Act") commonly known as a "mutual fund". This SAI relates to the Sand Hill
Portfolio Manager Fund (the "Fund"). The Fund is a separate investment portfolio
or series of the Company. See "Capital Stock and Dividends" in this SAI. The
Fund is a "diversified" series as that term is defined in the 1940 Act.
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS
The following information supplements the discussion of the Fund's investment
objectives and policies. The Fund's investment objective and fundamental
investment policies may not be changed without approval by vote of a majority of
the outstanding voting shares of the Fund. As used in this SAI, "majority of
outstanding voting shares" means the lesser of: (1) 67% of the voting shares of
the Fund represented at a meeting of shareholders at which the holders of 50% or
more of the shares of the Fund are represented, or (2) more than 50% of the
outstanding voting shares of the Fund. The investment programs, restrictions and
the operating policies of the Fund that are not fundamental policies can be
changed by the Board of Directors of the Company (the "Directors") without
shareholder approval.
INVESTMENT OBJECTIVES
The Fund's investment objective is to maximize total return (consisting of
realized and unrealized appreciation plus income). All investments entail some
market and other risks and there is no assurance that the Fund will achieve its
investment objective. You should not rely on an investment in the Fund as a
complete investment program.
STRATEGIES AND RISKS
The Fund invests in three major categories of investment: equity securities,
debt securities and short-term investments. Each of these categories may include
securities of domestic or foreign issuers.
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
Depositary Receipts: The Fund invests on a global basis to take advantage of
investment opportunities both within the U.S. and other countries. The Fund may
buy foreign securities directly in their principal markets or indirectly through
the use of depositary receipts. The Fund may invest in sponsored and unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDR's),
and other similar depositary receipts. ADRs are issued by an American bank or
trust company and evidence ownership of underlying securities of a foreign
company. EDRs are issued in Europe, usually by foreign banks, and evidence
ownership of either foreign or domestic underlying securities. The foreign
country may withhold taxes on dividends or distributions paid on the securities
underlying the ADRs and EDRs, thereby reducing the dividend or distribution
amount received by the Fund.
Unsponsored ADRs and EDRs are issued without the participation of the issuer of
the underlying securities. As a result, information concerning the issuer may
not be as current as for sponsored ADRs and EDRs. Holders of unsponsored ADRs
generally bear all the costs of the ADR facilities. The depositary of an
unsponsored facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities. Therefore, there may not be a correlation between
information concerning the issuer of the security and the market value of an
unsponsored ADR.
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, a fund acquires a
security, subject to the seller's agreement to repurchase that security at a
specified time and price. The Fund considers a purchase of securities under
repurchase agreements to be a loan by the Fund. The Investment Adviser 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 ability 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.
Debt Securities: The Fund may invest in investment grade debt securities; which
are securities rated Baa or higher by Moody's Investors Service, Inc.
("Moody's"), or BBB or higher by Standard & Poor's Ratings Group ("S&P") at the
time of purchase or, unrated securities which Sand Hill Advisors, Inc. (the
"Investment Adviser") believes to be of comparable quality. The Fund does not
currently intend to invest more than 5% of its total assets in securities that
are below investment grade or that are unrated. Securities rated as Baa or BBB
are generally regarded as having adequate capacity to pay interest and repay
principal.
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 suprarnational
organizations, corporate debt securities, bank or holding company debt
securities.
U.S. Government Securities: The Fund may invest in U.S. Government Securities
that 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-payment
securities.
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 follows the movements in the market value of the
underlying common stock. Zero coupon convertible securities generally are
expected to be less volatile than the underlying common 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. 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 purchaseless 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, excet 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 changein 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 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.
The Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. Such brokers are authorized to designate intermediaries to
accept orders on the Fund's behalf. The Fund will be deemed to have received the
order when an authorized broker or broker authorized designee accepts the order.
Customer orders will be priced at the Fund's NAV next computed after they are
accepted by an authorized broker or the broker authorized designee.
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 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. 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.
THE WORLD FUNDS, INC.
1500 Forest Avenue, Suite 223 * P.O. Box 8687 * Richmond, VA 23229
804-285-8211 * 800-527-9525 * FAX 804-285-8251
VIA EDGAR
February 11, 2000
Filing Desk
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: The World Funds, Inc.
File Number 333-29289
Filing Pursuant to Rule 497(c)
Gentlemen:
Transmitted herewith for electronic filing, please find enclosed, pursuant to
Rule 497 (c), a copy of the Supplement to the Statement of Additional
Information for The Sand Hill Portfolio Manager Fund (the "Fund') series of The
World Funds, Inc.
This Supplement dated February 11, 2000 to the Statement of Additional
Information dated December 29, 1999 informs shareholders that the Fund has
authorized brokers to accept purchase and redemption orders on its behalf.
Should you have any questions or require additional information, please contact
the undersigned.
Sincerely,
/s/ John Pasco, III
John Pasco, III
