VONTOBEL EUROPACIFIC FUND
OF
THE WORLD FUNDS, INC.
A "SERIES" INVESTMENT COMPANY
PROSPECTUS DATED May 2, 1996
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
Telephone: 1-800-527-9500
This Prospectus offers shares of the Vontobel EuroPacific
Fund (the "EuroPacific Fund"), a series of The World Funds, Inc.
(the "Fund"), an open-end diversified management investment company
commonly known as a "mutual fund." A "series" fund offers
investors a choice of investment objectives, with each series
having its own separate and distinct portfolio of investments and
operating much like a separate mutual fund. The objective of the
EuroPacific Fund is to seek to achieve capital appreciation by
investing in a carefully selected and continuously managed
diversified portfolio consisting primarily of equity securities
(which are securities convertible into equity securities, such as
warrants, convertible bonds, debentures or convertible preferred
stock). The Fund is currently composed of five series. Investors
will be able to exchange all or part of their investment from one
fund to another or to certain other mutual funds, under conditions
set by the Fund.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE
EUROPACIFIC FUND WHICH A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE
INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
MORE INFORMATION ABOUT THE EUROPACIFIC FUND HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS CONTAINED IN THE
"STATEMENT OF ADDITIONAL INFORMATION," DATED MAY 2, 1996, WHICH IS
AVAILABLE AT NO CHARGE UPON WRITTEN REQUEST TO THE FUND. THE
FUND'S STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN
BY REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS PAGE
PROSPECTUS SUMMARY 3
TABLE OF FUND EXPENSES 5
FINANCIAL HIGHLIGHTS 6
1995 PERFORMANCE 9
THE WORLD FUNDS, INC. 9
INVESTMENT OBJECTIVE 9
INVESTMENT POLICIES 10
INVESTMENT STRATEGY 11
INVESTMENT RESTRICTIONS 13
PERFORMANCE 15
SPECIAL RISK CONSIDERATIONS 15
THE FUND'S MANAGEMENT 15
HOW TO INVEST 19
HOW TO REDEEM SHARES 20
HOW TO TRANSFER SHARES 22
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS 22
SPECIAL SHAREHOLDER SERVICES 23
HOW NET ASSET VALUE IS DETERMINED 23
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS 24
TAXATION CONSIDERATIONS 25
GENERAL INFORMATION ABOUT THE FUND 25
MORE INFORMATION 26
<PAGE>
VONTOBEL EUROPACIFIC FUND
P R O S P E C T U S S U M M A R Y
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus.
Investment Objective : The objective of the EuroPacific
Fund is to seek to achieve capital
appreciation by investing in a
carefully selected and continuously
managed diversified portfolio
consisting primarily of equity
securities (which are securities
convertible into equity securities,
such as warrants, convertible bonds,
debentures or convertible preferred
stock). See "Investment Objective"
and "Investment Policies" on Pages
9 and 10.
Principal Investments : Invests primarily in equity
securities of issuers in Europe and
the Pacific Basin. See "Investment
Objective" and "Investment Policies"
on Pages 9 and 10.
The Advisor : Vontobel USA Inc. is the Advisor.
See "The Fund's Management" on Page
15.
Distributions/Dividends : Paid annually from available capital
gains and income. See "Dividends
and Capital Gains Distributions" on
Page 24.
Reinvestment : Distributions may be reinvested
automatically without a sales
charge. See "Dividends and Capital
Gains Distributions" on Page 24.
Initial Purchase : $1,000 minimum. See "How to Invest"
on Page 19.
Subsequent Purchase : $50 minimum. See "How to Invest" on
Page 19.
Net Asset Value : Quoted daily in the financial
section of most newspapers under
Vontobel. Information may also be
obtained by calling 1-800-527-9500;
and through most broker dealers.
See "How the Net Asset Value is
Determined" on Page 23.
Principal Risk Factors : There can be no assurance that the
EuroPacific Fund will achieve its
investment objective. Other factors
which should be considered by an
investor include: The EuroPacific
Fund invests in foreign securities,
and therefore may be affected by
foreign currency fluctuations or
exchange controls, differences in
accounting procedures, and other
risks. See "Special Risk
Considerations" on Page 23. The
EuroPacific Fund also may acquire
repurchase agreements.
Shares of the Fund are offered for sale without a sales charge
(see "How to Invest" on Page 19) from the distributor, First
Dominion Capital Corp.
THE ADVISOR: Vontobel USA Inc. (the "Advisor") manages the
investments of the EuroPacific Fund according to its investment
objectives.
<PAGE>
TABLE OF FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the EuroPacific Fund will incur. The expenses set
forth below are for the 1994 fiscal year:
Shareholder Transaction Expenses Vontobel EuroPacific Fund
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None*
Exchange Fees None
*A shareholder placing a telephone redemption
request will be charged $10.
Annual Fund Operating Expenses (as % of average net assets)
Management Fee 0.96%
12b-1 Fees None
Other Operating Expenses 0.67%**
Total Fund Operating Expenses 1.63%**
**Operating Expenses have been increased by 0.10% to reflect
additional custodian fees which were offset by custodian fee
credits. Taking into account such credits, total Fund Operating
Expenses on a net basis were 1.53% in 1995.
The purpose of this table is to assist investors in
understanding the various costs and expenses that they will bear
directly or indirectly.
The following examples illustrate the expenses that an
investor would pay on a $1,000 investment over various time periods
assuming (1) a 5% annual rate of return, and (2) redemption at the
end of each time period. As noted in the table above the
EuroPacific Fund charges no redemption fees.
1 Year 3 Years 5 Years 10 Years
$17 $51 $89 $193
These examples should not be considered a representation of
past or future expenses or performances. Actual expenses may be
greater or lesser than those shown.
<PAGE>
FINANCIAL HIGHLIGHTS - VONTOBEL EUROPACIFIC FUND
The Financial Highlights for the periods indicated below have been
examined by Tait, Weller and Baker, independent certified public
accountants, whose report thereon appears in the Annual Report to
Shareholders of the Vontobel EuroPacific Fund series for the year
ended December 31, 1995 and is incorporated by reference in this
Prospectus.
Financial Highlights
For a Share Outstanding Throughout Each Period
Years ended December 31,
1995 1994 1993 1992 1991
Per Share
Operating Performance
Net asset value,
beginning of period $16.23 $17.22 $12.23 $12.67 $10.67
Income from investment
operations-
Net investment income .16 .01 .08 .08 -0-
Net realized and
unrealized gain
(loss) on investments 1.61 (.92) 4.91 (.38) 2.00
Total from investment
operations 1.77 (.91) 4.99 (.30) 2.00
Less distributions-
Distributions from
net investment income (.17) (.08) -0- (.08) -0-
Distributions in excess of
realized gains (.70) -0- -0- (.06) -0-
Total distributions (.87) (.08) -0- (.14) -0-
Net asset value,
end of period $17.13 $16.23 $17.22 $12.23 $12.67
Total Return 10.91% (5.28%) 40.80% (2.37%) 18.74%
Ratios/Supplemental Data
Net assets, end of
period (000's) $130,505 $138,174 $136,932 $47,761 $25,611
Ratio to average
net assets-
Expenses(B) 1.63% 1.54% 1.77% 1.98% 2.71%(A)
Expenses-net(C) 1.53% 1.54% 1.77% 1.98% 2.71%(A)
Net investment
income(B) .41% .08% .85% .79% .02%(A)
Portfolio turnover
rate 68.43% 34.04% 10.66% 27.42% 3.40%
<PAGE>
Years ended December 31,
1990 1989(D) 1988(D) 1987(D) 1986(D)
Per Share Operating
Performance
Net asset value,
beginning of period $12.24 $11.17 $10.27 $10.00 $9.43
Income from investment
operations-
Net investment income .02 (.09) (.03) (.06) .10
Net realized and
unrealized gain
(loss) on investments (1.54) 1.21 .96 .33 .47
Total from investment
operations (1.52) 1.12 .93 .27 .57
Less distributions-
Distributions from
net investment income (.02) -0- -0- -0- -0-
Distributions in excess of
realized gains (.03) (.05) (.03) -0- -0-
Total distributions (.05) (.05) (.03) -0- -0-
Net asset value,
end of period $10.67 $12.24 $11.17 $10.27 $10.00
Total Return (12.42%) 10.03% 9.06% 2.70% 6.00%
Ratios/Supplemental Data
Net assets, end of
period (000's) $10,074 $2,564 $2,732 $1,109 $215
Ratio to average
net assets-
Expenses(B) 3.45% 6.10% 2.99% 5.35% 14.45%
Expenses-net(C) (A)2.76% (A)2.99% (A)2.99% (A)4.35%(A)2.14%
Net investment
income(B) (A).25% (A)(.83%) (A)(.57%)(A)(.50%)(A).99%
Portfolio turnover rate 60.87% 84.56% 18.60% 80.00% 10.00%
(A) Management fee waivers and expense reimbursements reduced the
expense ratio and increased the net investment income ratio by
.07%, .69%, 3.11%, 5.03%, 1.00% and 12.31% in 1991, 1990, 1989,
1988, 1987 and 1986, respectively.
(B) Expense ratio has been increased and net investment income
ratio has been reduced to include additional custodian fees in 1995
which were offset by custodian fee credits. Prior to 1995,
custodian fee credits reduced expense ratios.
(C) Expense ratio-net reflects the effect of the custodian fee
credits the fund received.
(D) Periods during which the Fund was advised by other Investment
Advisors. On July 6, 1990, the Fund's investment objective and
investment advisor were changed to its current status.
See Notes to Financial Statements
<PAGE>
1995 PERFORMANCE
The Fund produced a total return of 10.9% for the year,
vs. 11.2% for the MSCI Europe, Australia, Far East Index and 9.4%
for the average international equity fund tracked by Lipper
Analytical Services. International equities turned in a
surprisingly healthy performance in 1995 as investor fears of an
overheating global economy and rising inflation proved to be
groundless. The Fund's performance benefitted from our disciplined
approach to top-down country allocation, which is based on the
expected country returns produced by our multifactor model.
Generally, we concentrated on investments in the larger, more
liquid markets, avoiding countries with low return visibility,
unclear monetary and fiscal policies, weak valuations and unstable
macroeconomic variables. We added aggressively to Japan and the
U.K. in the 2nd and 3rd quarters at a time when both markets were
trading at below fair market value. We reduced our Latin American
holdings after a recovery in the 2nd quarter, maintaining only a
0.7% position in Brazil. We also had a sizable overweight in
Switzerland, the year's best performing international equity
market. Also contributing to the Fund's return was our 70%
dollar/yen hedge, which boosted performance in the 4th quarter when
the dollar appreciated 4% against the yen. On the negative side,
performance was adversely impacted by transaction costs resulting
from our rebalancing of the portfolio and the considerable number
of redemptions by fund shareholders in the first half due to the
selloff in emerging markets and the strength of the U.S. equity
markets.
THE WORLD FUNDS, INC.
The Vontobel EuroPacific Fund (the "EuroPacific Fund") is a
series of The World Funds, Inc. (the "Fund"), an open-end
diversified management investment company incorporated in Maryland
in 1983. The Fund currently consists of five series, and the Board
of Directors may elect to add more series in the future. A minimum
initial investment of $1,000 is required to open a shareholder
account in the EuroPacific Fund, and each subsequent investment
must be $50 or more.
INVESTMENT OBJECTIVE
The investment objective of the EuroPacific Fund is to seek to
achieve capital appreciation by investing in a carefully selected
and continuously managed diversified portfolio consisting primarily
of equity securities (which are securities convertible into equity
securities, such as warrants, convertible bonds, debentures or
convertible preferred stock). The investments of the EuroPacific
Fund will consist principally of equity securities of European and
Pacific Basin countries.
The investment objective of the EuroPacific Fund may not be
changed without the approval of shareholders. All investments
entail some risks (see "Special Risk Considerations"), and there is
no assurance that the investment objective of the EuroPacific Fund
can be achieved.
INVESTMENT POLICIES
The EuroPacific Fund is designed for individuals and
institutions who wish to diversify their investment programs to
take advantage of opportunities in the global security markets of
the world, with the principal emphasis on opportunities in Europe
and the Pacific Basin. The EuroPacific Fund will invest most of
its assets in equity securities of countries which are generally
considered to have developed markets, such as the United Kingdom,
Germany, France, the Netherlands, Switzerland, Norway, Spain,
Japan, Hong Kong, Australia, and Singapore. The Advisor will
decide when and how much to invest in each of those markets.
Investments may also be made in equities issued by companies in
"developing countries" or "emerging markets", such as Taiwan,
Malaysia, Indonesia, and Mexico. Investments in the equity markets
of these countries involves exposure to economic structures that
are generally less diverse and mature, and whose political systems
may have less stability than those of "developed countries."
The Advisor believes that economic and political developments
in Europe and the Pacific Basin have helped to create new
opportunities. In recent years a number of economies in developed
and developing countries have grown faster than the U.S. economy,
and return on equity investments in these markets has often been
superior to similar investments in the U.S. In addition, the U.S.
stock market presently represents approximately 40% of the
capitalization of the world's stock markets compared to
approximately two-thirds in 1970. Significant growth of European
and Pacific Basin capital markets, coupled with advances in
technology and lower cost of communications, have increased the
globalization of securities trading. Therefore, over the past few
years, the number of investment opportunities outside of the U.S.
has grown rapidly.
It is the policy of the EuroPacific Fund to invest primarily
in equity securities which may achieve capital appreciation by
selecting companies with superior potential based on a series of
macro and micro economic analyses. The EuroPacific Fund may select
its investments from companies which are listed on a securities
exchange or from companies whose securities have an established
over-the-counter market, and may make limited investments in
"thinly traded" securities (please refer to the Investment
Restrictions on Page 6 of the Statement of Additional Information).
Under normal circumstances the EuroPacific Fund will have at
least 65% of its assets invested in European and Pacific Basin
equity securities. The EuroPacific Fund intends to diversify
investments broadly among countries and normally to have
represented in the portfolio business activities of not less than
three different countries. The securities the EuroPacific Fund
purchases may not always be purchased on the principal market. For
example, American Depository Receipts ("ADR's") may be purchased if
trading conditions make them more attractive than the underlying
security. ADR's are receipts typically issued in the U.S. by a
bank or trust company evidencing ownership of an underlying foreign
security. The EuroPacific Fund may invest in ADR's which are
structured by a U.S. bank without the sponsorship of the underlying
foreign issuer. In addition to the risks of foreign investment
applicable to the underlying securities, such unsponsored ADR's may
also be subject to the risks that the foreign issuer may not be
obligated to cooperate with the U.S. bank, may not provide
additional financial and other information to the bank or the
investor, or that such information in the U.S. market may not be
current. For temporary defensive purposes, the EuroPacific Fund
may hold cash or debt obligations denominated in U.S. dollars or
foreign currencies. These debt obligations include U.S. and
foreign government securities and investment grade corporate debt
securities, or bank deposits of major international institutions.
Please refer to the Statement of Additional Information for more
information on ADR's.
The selection of the securities in which the EuroPacific Fund
will invest will not be limited to companies of any particular
size, or to securities traded in any particular marketplace, and
will be based only upon the expected contribution such security
will make to its investment objective.
Since the EuroPacific Fund seeks to achieve capital
appreciation, it will dispose of a security, regardless of the time
it has been held, to establish gains, to avoid anticipated
reductions of value, or to reduce or eliminate a position in a
security which is no longer believed to offer the potential for
suitable gains. Portfolio turnover is expected not to exceed an
annual rate of 100% under normal circumstances. Such a turnover
rate may reflect substantial short term trading and corresponding
brokerage costs which the EuroPacific Fund must pay.
INVESTMENT STRATEGY
The Advisor will seek to identify those countries in the
European and Pacific regions where economic and political factors
are likely to produce above average returns, as well as those
companies in such countries that are best positioned to take
advantage of such developments or are most attractively valued. In
this regard the Advisor will allocate the assets of the EuroPacific
Fund between the European and Pacific regions.
The equity selections of the EuroPacific Fund will be based on
a series of macro and micro economic analysis. The Advisor
combines forecasts for exchange rates, interest rates, and
industrial performance by country with fundamental analysis of
specific securities to shape its viewpoint about where investment
opportunity presents itself in the European and Pacific Basin
securities markets. Subject to the policies and limitations
governing the investments of the EuroPacific Fund, the Advisor may
also select investment opportunities in other markets.
From the macro-economic viewpoint, the Advisor will develop
and evaluate detailed research on the global economy and on
individual country's projected economic data. This guides the
allocation with regard to country weightings, since there is a high
correlation between market returns and economic growth over the
long term. Macro-economic issues are of particular importance in
evaluating emerging markets.
From the micro-economic viewpoint, equity selection is not
tied to any particular strict "style." The Advisor will tend to
focus on quality of management, and reasonable valuation levels
compared to its earnings growth or on undervalued assets. Strong
emphasis is put on cash flow rather than earnings, as a more
meaningful way to evaluate companies. This is of particular
importance when evaluating investment opportunities within a
particular industry across country borders.
In selecting investments for the EuroPacific Fund, the Advisor
will usually include large capitalization companies in attractive
markets, with positive industry fundamentals and capable
management. The Advisor will also include faster growing, medium-
sized companies that offer higher potential returns at a slightly
higher risk level, either because of their smaller size or because
they are not as widely researched.
Currency risk is assessed separately from equity analysis. To
balance undesirable currency risk, the EuroPacific Fund may enter
into forward contracts to purchase or sell foreign currencies in
anticipation of the currency requirements, and to protect against
possible adverse movements in foreign exchange rates. Although
such contracts may reduce the risk of loss due to a decline in the
value of the currency which is sold, they also limit any possible
gain which might result should the value of the currency rise.
Foreign investments which are not U.S. dollar denominated may
require the EuroPacific Fund to convert assets into foreign
currencies or convert assets and income from foreign currencies to
dollars. Normally, exchange transactions will be conducted on a
spot or cash basis at the prevailing rate in the foreign exchange
market. However, the investment policies permit the EuroPacific
Fund to enter into forward foreign currency exchange contracts in
order to provide protection against changes into foreign exchange
rates. Any transactions in foreign currencies will be designed to
protect the dollar value of the assets composing or selected to be
acquired for the investment portfolio of the EuroPacific Fund; the
EuroPacific Fund will not speculate in foreign currencies. For
more information, see "Forward Foreign Currency Contracts," in the
Statement of Additional Information.
The EuroPacific Fund may purchase and write covered call
options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign securities. The purchase
of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of
rate movements adverse to the EuroPacific Fund's position, the
EuroPacific Fund may forfeit the entire amount of the premium plus
related transaction costs. In connection with such transactions,
the EuroPacific Fund will segregate assets sufficient to meet its
obligations: when the EuroPacific Fund's obligations is denominated
in a foreign currency, the EuroPacific Fund will own that currency
or assets denominated in that currency, or a currency or securities
which the Advisor determines will move along with the hedged
currency.
The EuroPacific Fund may enter into contracts for the purchase
or sale for future delivery of foreign currencies ("foreign
currency futures"). This investment technique will be used only to
hedge against anticipated future changes in exchange rates which
otherwise might adversely affect the value of the portfolio
securities or adversely affect the prices of securities that the
EuroPacific Fund intends to purchase at a later date. The
successful use of currency futures will usually depend on the
Advisor's ability to forecast currency exchange rate movements
correctly. Should exchange rates move in an unexpected manner, the
EuroPacific Fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
The EuroPacific Fund is authorized to use financial futures
for certain hedging purposes subject to conditions of regulatory
authorities (including margin requirements) and limits established
by the Fund's Board of Directors to avoid speculative use of such
techniques (see the Statement of Additional Information for
additional information).
INVESTMENT RESTRICTIONS
The investments of the EuroPacific Fund are subject to
investment limitations which may not be changed without the
approval of at least a majority of the outstanding voting
securities (as defined in the Investment Company Act of 1940. See
the Statement of Additional Information for the specific
definition.)
Certain of these policies are detailed below, while other
policies which prohibit or limit particular practices are set forth
in the Statement of Additional Information. The investment
restrictions of the EuroPacific Fund specifically provide that it
may not:
* As to 75% of its assets, purchase the securities of any
issuer (other than obligations issued or guaranteed as to
principal and interest by the Government of the United States
or any agency or instrumentality thereof) if, as a result of
such purchase, more than 5% of its total assets would be
invested in the securities of such issuer.
* Purchase stock or securities of an issuer (other than the
obligations of the United States or any agency or
instrumentality thereof) if such purchase would cause the
EuroPacific Fund to own more than 10% of any class of the
outstanding stock or securities or more than 10% of any class
of voting securities of such issuer.
* Act as an underwriter of securities of other issuers,
except that it may invest up to 10% of the value of its total
assets (at time of investment) in portfolio securities which
the EuroPacific Fund might not be free to sell to the public
without registration of such securities under the Securities
Act of 1933 or any foreign law restricting distribution of
securities in a country of a foreign issuer ("restricted
securities").
* Buy or sell commodities or commodity contracts provided,
however, that it may utilize not more than 1% of its assets
for deposits or commissions required to enter into a forward
foreign security contract for hedging purposes as described
under "Investment Policies." (Such deposits or commissions
are not presently required in the markets the EuroPacific Fund
will use.)
* Borrow money except for temporary or emergency purposes
and then only in an amount not in excess of 5% of the lower of
value or cost of its total assets, in which case it may
pledge, mortgage or hypothecate any of its assets as security
for such borrowing but not to an extent greater than 5% of its
total assets.
* Make loans, except that it may: (1) lend portfolio
securities; and (2) enter into repurchase agreements secured
by the U.S. Government or Agency securities.
Percentage limitations in the "Investment Policies" and
"Investment Restrictions" sections are determined at the time the
EuroPacific Fund makes a purchase or loan subject to such
percentage.
PERFORMANCE
From time to time the Fund may advertise information regarding
the performance of the EuroPacific Fund. Such statements of
performance will consist of the EuroPacific Fund's current "yield,"
"distribution rate" (to be included in sales literature only), and
"total return." These performance figures are based upon
historical results and are not intended to indicate future
performance.
"Yield" is the ratio of income per share derived from the
portfolio investments to the current maximum offering price
expressed in terms of a percentage. "Distribution rate" is the
amount of distribution per share made over a twelve-month period
divided by a current maximum offering price. "Total return" is the
total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a
percentage of the purchase price.
Please refer to the Statement of Additional Information for
more information on Performance.
SPECIAL RISK CONSIDERATIONS
Investing in foreign securities involves special risk
considerations including those described herein which are not
normally associated with investing in United States securities.
These considerations include: changes in currency rates; exchange
control regulations; costs incurred in connection with conversions
between various currencies; availability of less financial
information than comparable United States companies; lack of
uniform accounting, auditing and financial reporting requirements;
less liquidity and more volatility than securities listed on the
New York Stock Exchange due to substantially lower trading volume;
possibly lower sales prices in the event of forced liquidation of
securities in order to meet unanticipated cash requirements; fixed
commissions on foreign stock exchanges which are generally higher
than negotiated commissions on United States exchanges, in addition
to less supervision and regulation of such exchanges; difficulty in
enforcing judgments abroad; and the possibility of expropriation of
assets, confiscatory taxation, imposition of withholding of taxes
prior to payment of dividends or other distributions, political or
social instability, or diplomatic developments which could affect
United States investments in those countries.
THE FUND'S MANAGEMENT
The Fund's Board of Directors is responsible for the
supervision of the general business of the Fund. The Directors act
as fiduciaries for shareholders under the laws of the State of
Maryland. The Board has appointed John Pasco, III to serve as
President of the Fund. The Fund employs the following persons to
provide it with investment advice and to conduct its on-going
business:
Advisor - Vontobel USA Inc. (the "Advisor") manages the
investments of the EuroPacific Fund pursuant to an Investment
Advisory Agreement (the "Advisory Agreement" ), dated July 14,
1992. The Advisory Agreement was effective for an initial term of
two years and thereafter may be continued annually by the Board of
Directors of the Fund.
The Advisor is a wholly owned and controlled subsidiary of
Vontobel Holding Ltd., a Swiss bank holding company, having its
registered offices in Zurich, Switzerland. The Advisor currently
manages in excess of $1 billion (which includes the assets of the
EuroPacific Fund, the Vontobel U.S. Value Fund, the Vontobel
International Bond Fund series of the Fund, and the Vontobel
Eastern European Equity Fund, and an International Equity series of
an unaffiliated fund). The Advisor also acts as the investment
advisor to three series of a Luxembourg fund organized by an
affiliate of the Advisor. That fund does not accept investments
from the U.S.
Mr. Fabrizio Pierallini, who is a Vice President of the
Advisor, is the President and portfolio manager of the EuroPacific
Fund since May 1994. From May 1991 to April 1994 Mr. Pierallini
was an Associate-Director/Portfolio Manager with Swiss Bank
Corporation in New York where he was responsible for, among other
things, international asset allocation (Europe/Pacific). From
September 1988 to May 1991 Mr. Pierallini was a Vice-
President/Portfolio Manager with SBC Portfolio Management Ltd. in
Zurich, Switzerland, where, among other responsibilities, he
actively managed institutional portfolios.
Pursuant to the Advisory Agreement the Advisor provides the
EuroPacific Fund with investment management services, subject to
the supervision of the Fund's Board of Directors, and with office
space, and pays the ordinary and necessary office and clerical
expenses relating to investment research, statistical analysis,
supervision of its portfolio and certain other costs. The Advisor
also bears the cost of fees, salaries and other remuneration of the
Fund's directors, officers or employees who are officers,
directors, or employees of the Advisor. The EuroPacific Fund is
responsible for all other costs and expenses, such as, but not
limited to, brokerage fees and commissions in connection with the
purchase and sale of securities, legal, auditing, bookkeeping and
record keeping services, custodian and transfer agency fees and
fees and other costs of registration of its shares for sale under
various state and Federal securities laws.
Under the Advisory Agreement the monthly compensation paid to
the Advisor is accrued daily at a rate equal to a fee at the annual
rate of 1% of the net assets of the EuroPacific Fund. This fee is
higher than that charged to many other investment companies. If
the assets of the EuroPacific Fund exceed $100,000,000, the fee for
such assets will be computed at the annual rate of .75 of 1% on
such excess. The fee is paid monthly, within five (5) business days
after the end of the month. The Advisory Agreement provides that
the fee paid by the EuroPacific Fund will be reduced to the extent
necessary to comply with any applicable state expense limitation
provision to which the EuroPacific Fund may be subject. All
expenses not specifically assumed by the Advisor are assumed by the
EuroPacific Fund. The address of the Advisor is 450 Park Avenue,
New York, N.Y. 10022.
The Advisory Agreement contemplates the authority of the
Advisor to place orders for the EuroPacific Fund pursuant to its
investment determinations either directly with the issuer or with
any broker or dealer. The Advisor may allocate brokerage to an
affiliated dealer in accordance with written policies and
procedures adopted by the Board of Directors. In placing orders
with brokers or dealers, the Advisor will attempt to obtain the
best net price and the most favorable execution of its orders. The
Advisor may purchase and sell securities to and from brokers and
dealers who provide the Advisor with research advice and other
services, or who sell shares of the EuroPacific Fund. From time to
time, and subject to the Advisor obtaining the best price and
execution for the EuroPacific Fund, the Board may authorize the
Advisor to allocate brokerage transactions to a broker in
consideration: (1) of investment research or statistical services,
or (2) in consideration of a payment of an obligation otherwise
payable by the EuroPacific Fund.
Administrator - Commonwealth Shareholder Services, Inc.
("CSS"), serves as Administrator to the EuroPacific Fund pursuant
to an Administrative Services Agreement. CSS provides certain
recordkeeping and shareholder servicing functions required of
registered investment companies, and will assist the Fund in
preparing and filing certain financial and other reports and
performs certain daily functions required for ongoing operations.
CSS may furnish personnel to act as the Fund's officers to conduct
the Fund's business subject to the supervision and instructions of
the Board of Directors of the Fund.
The Administrative Services Agreement provides that CSS will
be paid a monthly fee: (1) of $30 per hour for shareholder
servicing; (2) $30 per hour for blue sky matters; (3) the greater
of 20 basis points of the average daily net assets of the
EuroPacific Fund or $42,500 per year for administration (which
includes regulatory matters, backup of the pricing of the
EuroPacific Fund, administrative duties in connection with the
execution of portfolio trades, and certain services in connection
with Fund accounting); and (4) certain out-of-pocket expenses. The
address of CSS is 1500 Forest Avenue, Suite 223, Richmond, VA
23229.
Custodian and Accounting Services Agent - Brown Brothers
Harriman & Co. ("BBH") is the Fund's Custodian and Accounting
Services Agent. BBH collects income when due and holds all of the
Fund's portfolio securities and cash. (BBH, with the Fund's
consent, has designated The Depository Trust Company of New York,
as its agent to secure some of the assets of the Fund.) BBH is
authorized to appoint other entities to act as sub-custodians to
provide for the custody of foreign securities which may be acquired
and held by the Fund outside the U.S. Such appointments are
subject to appropriate review by the Fund's Board of Directors.
BBH as the Accounting Services Agent maintains and keeps current
the books, accounts, records, journals or other records of original
entry relating to the Fund's business. The address of BBH is 40
Water Street, Boston, Massachusetts 02109.
Transfer and Dividend Disbursing Agent - Fund Services, Inc.
("FSI") is the Fund's Transfer and Dividend Disbursing Agent. John
Pasco, III, Chairman of the Board of the Fund owns one third of the
stock of FSI, and, therefore, FSI may be deemed to be an affiliate
of the Fund. FSI provides all the necessary facilities, equipment
and personnel to perform the usual and ordinary services of
Transfer and Dividend Disbursing Agent, including: administrative
receipt and processing of orders and payments for purchases of
shares, opening shareholder accounts, preparing shareholder meeting
lists, mailing proxy material, receiving and tabulating proxies,
mailing shareholder reports and prospectuses, withholding certain
taxes on non-resident alien accounts, disbursing income dividends
and capital distributions, preparing and filing U.S. Treasury
Department Form 1099 (or equivalent) for all shareholders,
preparing and mailing confirmation forms to shareholders for all
purchases and redemptions of the Fund's shares and all other
confirmable transactions in shareholders' accounts, recording
reinvestment of dividends and distribution of the Fund's shares.
Under the Agreement between the Fund and FSI, as in effect on May
1, 1991, FSI is compensated pursuant to a schedule of services and
out-of-pocket expenses. The schedule calls for a minimum payment
of $16,500 per year. During the fiscal year ended December 31,
1995 the EuroPacific Fund paid FSI $32,088. The address of the
Transfer and Dividend Disbursing Agent is P.O. Box 26305, Richmond,
VA 23260.
Principal Underwriter/Distributor - First Dominion Capital
Corp. (the "Distributor") acts as the Principal Underwriter for the
Fund pursuant to an agreement dated January 1, 1994. Mr. John
Pasco, III, who is the President, Treasurer, and a Director of the
Distributor owns 100% of the stock of the Distributor. Mr. Pasco
is also the Chairman and a director of the Fund. The address of
the Distributor is 1500 Forest Avenue, Suite 223, Richmond, VA
23229.
HOW TO INVEST
Shares of the Fund may be purchased directly from the
Distributor or through members of the National Association of
Securities Dealers, Inc. who are registered, if required, in the
state where the purchase is made and who have a sales agreement
with the Distributor. After a shareholder account is established,
subsequent orders for shares may be mailed directly to the Transfer
Agent. Such purchases of shares are made at the net asset value.
A minimum initial investment of $1,000 is required to open a
shareholder account in the EuroPacific Fund, and each subsequent
investment must be $50 or more. Under certain circumstances the
Fund may waive the minimum initial investment for purchases by
officers, directors and employees of TWF and its affiliated
entities and for certain related advisory accounts and retirement
accounts. The offering price per share is equal to the net asset
value per share next determined after receipt of a purchase order.
When an investor acquires shares of the EuroPacific Fund from
their Securities Dealer, the investor may be charged a transaction
fee for shares purchased and/or redeemed at net asset value through
that broker.
To facilitate the handling of transactions with shareholders,
the Fund uses an open account plan. The Transfer Agent will
automatically establish and maintain an open account for the Fund's
shareholders. Under the open account plan your shares are
reflected in your open account. This service facilitates the
purchase, redemption or transfer of shares, and eliminates the need
to safeguard certificates and reduces time delays in executing
transactions.
Purchase by Mail. For initial purchases the Account
Application form which accompanies this Prospectus should be
completed, signed, and mailed to the Transfer Agent, together with
your check or other negotiable bank draft drawn on and payable by
a U.S. Bank payable to the Vontobel EuroPacific Fund. For
subsequent purchases include with your check the tear-off stub from
a prior purchase confirmation, or otherwise identify the name(s) of
the registered owner(s) and the social security number.
Investing by Wire. You may purchase shares by requesting your
bank to transmit "Federal Funds" by wire directly to the Transfer
Agent. To invest by wire please call the Transfer Agent for
instructions, then notify the Distributor by calling 800-527-9500.
Your bank may charge you a small fee for this service. The Account
Application which accompanies this Prospectus should be completed
and promptly forwarded to the Transfer Agent. This application is
required to complete the Fund's records in order to allow you
access to your shares. Once your account is opened by mail or by
wire, additional investments may be made at any time through the
wire procedure described above. Be sure to include your name and
account number in the wire instructions you provide your bank.
Stock Certificates - Certificates for full shares will be
issued by the Transfer Agent upon written request but only after
payment for the shares is collected by the Transfer Agent.
HOW TO REDEEM SHARES
Shares may be redeemed at any time and in any amount by mail
or telephone. For your protection, the Transfer Agent will not
redeem your shares until it has received all information and
documents necessary for your request to be in "proper order." (See
"Signature Guarantees.") You will be notified promptly by the
Transfer Agent if your redemption request is not in proper order.
The Fund's procedure is to redeem shares at the net asset
value next determined after receipt by the Transfer Agent of the
redemption request in proper order as described herein. Payment
will be made promptly, but no later than the seventh day following
receipt of the request in proper order. Please note that (1) the
Transfer Agent cannot accept redemption requests which specify a
particular date for redemption, or which specify any special
conditions; and (2) if the shares you are redeeming were purchased
by you less than fifteen (15) days prior to the receipt of your
redemption request, the Transfer Agent must ascertain that your
check in payment of the shares you are redeeming has cleared prior
to disbursing the redemption proceeds. If you anticipate the need
to redeem before fifteen (15) days, you should make your purchase
by Federal Funds wire, or by a certified, treasurer's or cashier's
check.
The Fund may suspend the right to redeem shares for any period
during which the New York Stock Exchange is closed or the
Securities and Exchange Commission determines that there is an
emergency. In such circumstances you may withdraw your redemption
request or permit your request to be held for processing at the net
asset value per share next computed after the suspension is
terminated.
Redemption by Mail - To redeem shares by mail, send the
following information to the Transfer Agent: (1) a written request
for redemption signed by the registered owner(s) of the shares,
exactly as the account is registered; (2) the stock certificates
for the shares you are redeeming, if any were issued; (3) any
required signature guarantees (See "Signature Guarantees"); and (4)
any additional documents which might be required for redemption by
corporations, executors, administrators, trustees, guardians, etc.
The Transfer Agent will mail the proceeds to your currently
registered address, payable to the registered owner(s) unless you
specify otherwise in your redemption request. There is no charge to
shareholders for redemptions by mail.
Redemption by Telephone - You may redeem your shares by
telephone if you request this service at the time you complete your
initial Account Application. If you do not request this service at
that time, you must request approval of telephone redemption
privileges in writing (sent to the Fund's Transfer Agent) with a
signature guarantee before you can redeem shares by telephone.
There is no charge for establishing this service, but the Transfer
Agent will charge your account a $10.00 service fee each time you
make a telephone redemption. Once your telephone authorization is
in effect, you may redeem shares by calling the Transfer Agent at
(800) 628-4077. By establishing this service, you authorize the
Transfer Agent to act upon any telephone instructions it believes
to be genuine, to (1) redeem shares from your account and (2) mail
or wire redemption proceeds. There is a $10.00 service fee for
making a telephone redemption. The amount of these service charges
may be changed at any time, without notice, by the Transfer Agent.
You cannot redeem shares by telephone if you hold a stock
certificate representing the shares you are redeeming or if you
paid for the shares with a personal, corporate, or government check
and your payment has been on the books of the Fund for less than 15
days.
If it should become difficult to reach the Transfer Agent by
telephone during periods when market or economic conditions lead to
an unusually large volume of telephone requests, a shareholder may
send a redemption request to the Transfer Agent by overnight mail.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if
it does not, it may be liable for any losses due to unauthorized or
fraudulent transactions. As a result of this policy, a shareholder
authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which the Fund
believes to be genuine. When you request a telephone redemption or
transfer, you will be asked to respond to certain questions
designed to confirm your identity as a shareholder of record. Your
cooperation with these procedures will protect your account and the
Fund from unauthorized transactions.
Signature Guarantees - To protect you and the Fund from fraud,
signature guarantees are required for: (1) all redemptions ordered
by mail if you require that the check be payable to another person
or that the check be mailed to an address other than the one
indicated on the account registration; (2) all requests to transfer
the registration of shares to another owner; and (3) all
authorizations to establish or change telephone redemption service,
other than through your initial account application.
In the case of redemption by mail, signature guarantees must
appear either: (a) on the written request for redemption; (b) on a
separate instrument of assignment (usually referred to as a "stock
power") specifying the total number of shares being redeemed. If
shares held by the Transfer Agent are being redeemed, the signature
guarantee must be on the written request or stock power. The Fund
may waive these requirements in certain instances.
The following institutions are acceptable guarantors: (a)
participants in good standing of the Securities Transfer Agents
Medallion Program ("STAMP"); (b) commercial banks which are members
of the Federal Deposit Insurance Corporation ("F.D.I.C."); (c)
trust companies; (d) firms which are members of a domestic stock
exchange; (e) eligible guarantor institutions qualifying under Rule
17Ad-15 of the Securities Exchange Act of 1934 that are authorized
by charter to provide signature guarantees; and (f) foreign
branches on any of the above. In addition, the Fund will guarantee
your signature if you personally visit its offices at 1500 Forest
Avenue, Suite 223, Richmond, VA 23229. The Transfer Agent cannot
honor guarantees from notaries public, savings and loan
associations, or savings banks.
Small Accounts - Due to the relatively higher cost of
maintaining small accounts, the Fund may deduct $10 (payable to
the Transfer Agent) from accounts valued at less than $1,000 unless
the account value has dropped below $1,000 solely as a result of
share value depreciation. Shareholders will receive 60 days'
written notice to increase the account value before the fee is
deducted.
HOW TO TRANSFER SHARES
If you wish to transfer shares to another owner, send a
written request to the Transfer Agent. Your request should include
(1) the name of the Fund and existing account registration; (2)
signature(s) of the registered owner(s); (3) the new account
registration, address, Social Security Number or taxpayer
identification number and how dividends and capital gains are to be
distributed; (4) any stock certificates which have been issued for
the shares being transferred; (5) signature guarantees (See
"Signature Guarantees"); and (6) any additional documents which are
required for transfer by corporations, administrators, executors,
trustees, guardians, etc. If you have any questions about
transferring shares, call the Transfer Agent at (800) 628-4077.
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
Each time you purchase, redeem or transfer shares of the Fund,
you will receive a written confirmation. You will also receive a
year-end statement of your account if any dividends or capital
gains have been distributed, and an annual and a semi-annual
report.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following four services for its
shareholders:
Regular Account - allows shareholders to make voluntary
additions and withdrawals to and from their account as often as
they wish;
Invest-A-Matic - permits automatic monthly investments into
the EuroPacific Fund from your checking account on a fixed or
flexible schedule;
Individual Retirement Accounts (IRA's); and
Exchange Privileges - allows the shareholder to exchange his
or her shares for shares of certain other funds having a different
investment objective from the EuroPacific Fund, provided the shares
of the fund the shareholder is exchanging into are registered for
sale in the shareholders state of residence. More information on
any of these services is available upon written request to the
Fund.
HOW NET ASSET VALUE IS DETERMINED
The EuroPacific Fund's Net Asset Value ("NAV") is determined
as of the close of trading of the New York Stock Exchange
(currently 4:00 P.M., Eastern Time) on each business day from
Monday to Friday or on each day (other than a day during which no
security was tendered for redemption and no order to purchase or
sell such security was received by the EuroPacific Fund) in which
there is a sufficient degree of trading in the portfolio securities
of the EuroPacific Fund that the current NAV of the shares might be
materially affected by changes in the value of such portfolio
security. The EuroPacific Fund's NAV is calculated at the 4:00
p.m. time set by the Board of Directors based upon a determination
of the most appropriate time to price the securities.
NAV per share is determined by dividing the total value of the
assets, less its liabilities, by the total number of shares then
outstanding. Generally, securities owned by the EuroPacific Fund
are valued at market value.
Investments in securities traded on a national securities
exchange or included in the NASDAQ National Market System are
valued at the last reported sales price; other securities traded in
the over-the-counter market and listed securities for which no sale
is reported on that date are valued at the last reported bid price.
Short-term debt securities (less than 60 days to maturity) are
valued at their fair market value using amortized cost pricing
procedures set, and determined to be fair, by the Board of
Directors. Other assets for which market prices are not readily
available are valued at their fair value as determined in good
faith under procedures set by the Board of Directors.
ADR's will be valued at the closing price of the ADR last
determined prior to the valuation time unless the Fund is aware of
a material change in value. ADR's for which such a value cannot be
readily determined on any day will be valued at the closing price
of the underlying security adjusted for the exchange rate.
The Fund's management may compute the NAV per share more
frequently in order to protect shareholders' interests.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends from net investment income are declared annually.
The EuroPacific Fund intends to distribute annually realized net
capital gains, after utilization of capital loss carryforwards, if
any, to prevent application of a federal excise tax. However, it
may make an additional tax distribution any time prior to the due
date, including extensions, of filing its tax return, if necessary
to accomplish this result. Any dividends or capital gains
distributed pursuant to a dividend declaration declared in October,
November or December with a record date in such a month and paid
during the following January will be treated by shareholders for
federal income tax purposes as if received on December 31 of the
calendar year declared. According to preference, shareholders may
receive distributions in cash or have them reinvested in additional
shares. Shareholders will be subject to tax on all dividends
declared or reinvested. If an investment is in the form of a
retirement plan, all dividends and capital gains distributions must
be reinvested into an account.
Generally, dividends from net investment income are taxable to
investors as ordinary income. Certain gains or losses on the sale
or retirement of international securities held by the EuroPacific
Fund, to the extent attributable to fluctuations in currency
exchange rates, as well as certain other gains or losses
attributable to exchange rate fluctuations, must be treated as
ordinary income or loss. Such income or loss may increase or
decrease (or possibly eliminate) the income available for
distribution to shareholders. If, under the rules governing the
tax treatment of foreign currency gains and losses, the income
available for distribution is decreased or eliminated, all or a
portion of the dividends declared by the EuroPacific Fund may be
treated for federal income tax purposes as a return of capital, or
in some circumstances, as capital gain. Generally, a shareholder's
tax basis in his/her EuroPacific Fund shares will be reduced to the
extent that an amount distributed to the shareholder is treated as
a return of capital.
Long-term capital gains distributions, if any, are taxable as net
long-term capital gains when distributed regardless of the length
of time shareholders have owned their shares. Net short-term
capital gains and any other taxable income distributions are
taxable as ordinary income.
The EuroPacific Fund sends detailed tax information about the
amount and type of its distributions to its shareholders by January
31 of the following year.
TAXATION CONSIDERATIONS
The EuroPacific Fund will seek to qualify under Subchapter M
of the Internal Revenue Code of 1986 (the "Code"). As a regulated
investment company under the Code, the EuroPacific Fund is not
liable for federal income taxes on income or gains which are
distributed to its shareholders or imputed to shareholders under
the Code. The distribution to shareholders each year of investment
income and capital gains will represent taxable income to the
shareholders. The Fund is a series corporation. Each series is
taxed as a separate taxable entity under the Code. Shareholders
will receive a written advice from the Fund within sixty (60) days
after the end of the year furnishing them with the information
required under the Code.
GENERAL INFORMATION ABOUT THE FUND
The Fund is authorized to issue up to 500,000,000 shares of
$0.01 par value common stock, of which it has presently allocated
50,000,000 shares to the EuroPacific Fund, 50,000,000 to the
Vontobel U.S. Value Fund series, 50,000,000 to the Vontobel
International Bond Fund series, 50,000,000 to the Sand Hill
Portfolio Manager Fund series and 50,000,000 to the Vontobel
Eastern European Equity Fund series. The Board of Directors can
allocate the remaining authorized but unissued shares to any series
of the Fund or may create additional series and allocate shares to
such series. A share of the EuroPacific Fund has priority in the
assets of the EuroPacific Fund in the event of a liquidation. The
shares of the EuroPacific Fund will be fully paid and non-
assessable, will have no preference over other shares of the
EuroPacific Fund as to conversion, dividends, or retirement, and
will have no preemptive rights. Shares of the EuroPacific Fund
will be redeemable from the assets of the EuroPacific Fund at any
time.
Each outstanding share of the Fund is entitled to one vote for
each full share of stock and a fractional vote for fractional
shares of stock. All shareholders vote on matters which concern
the corporation as a whole. The Fund is not required to hold a
meeting of shareholders each year, and may elect not to hold a
meeting in years when no meeting is necessary. The EuroPacific
Fund shall vote separately on matters which affect only the
interest of the EuroPacific Fund. The Fund's shares do not have
cumulative voting rights, which means that the holders of more than
50% of the shares voting for the election of directors can elect
all of the directors if they choose to do so. Shareholders may
utilize procedures described in the Statement of Additional
Information to call a meeting.
Limitation on Use of Name - The Advisory Agreement for the
EuroPacific Fund authorizes the Fund to utilize the name
"Vontobel." The Fund agrees that if the Advisory Agreement is
terminated it will promptly redesignate the name of the EuroPacific
Fund to eliminate any reference to the name "Vontobel" or any
derivation thereof unless the Advisor waives this requirement in
writing.
MORE INFORMATION
For further information on the Fund please contact
Commonwealth Shareholder Services, Inc., P.O. Box 8687, Richmond,
VA 23226, telephone: (800) 527-9500.
Additional information may also be obtained by requesting a
copy of the Fund's Statement of Additional Information.
<PAGE>
Advisor: Vontobel USA Inc.
450 Park Avenue
New York, N.Y. 10022
Distributor: First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Fund and
Marketing Services, call the Distributor
at (800) 527-9500 Toll Free
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23286-8172
(800) 628-4077 Toll Free
More Information: For 24 hour, 7 days a week price
information call 1-800-527-9500.
For information on any series of the
Fund, investment plans, or other
shareholder services, call 1-800-527-9500
during normal business hours, or write
the Fund at 1500 Forest Avenue, Suite
223, Richmond, VA 23229.
<PAGE>
VONTOBEL U.S. VALUE FUND
OF
THE WORLD FUNDS, INC.
A "SERIES" INVESTMENT COMPANY
PROSPECTUS DATED May 2, 1996
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
1-800-527-9500 (Toll Free)
This Prospectus offers shares of the Vontobel U.S. Value Fund
(the "Value Fund"), a series of The World Funds, Inc. (the "Fund"),
an open-end diversified management investment company commonly
known as a "mutual fund." A "series" fund offers investors a
choice of investment objectives, with each series having its own
separate and distinct portfolio of investments and operating much
like a separate mutual fund. The objective of the Value Fund is to
seek to achieve long-term capital returns in excess of the broad
market by investing in a carefully selected, continuously managed
diversified portfolio of principally equity securities (including
securities convertible into equity securities, such as warrants,
convertible bonds, debentures, or convertible preferred stock)
traded on U.S. exchanges. The Fund is currently composed of five
series. Investors will be able to exchange all or part of their
investment from one fund to another or to certain other mutual
funds, under conditions set by the Fund.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE
VALUE FUND WHICH A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE
INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
MORE INFORMATION ABOUT THE VALUE FUND HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS CONTAINED IN THE
"STATEMENT OF ADDITIONAL INFORMATION," DATED MAY 2, 1996, WHICH IS
AVAILABLE AT NO CHARGE UPON WRITTEN REQUEST TO THE FUND. THE VALUE
FUND'S STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN
BY REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS PAGE
PROSPECTUS SUMMARY 3
TABLE OF FUND EXPENSES 5
FINANCIAL HIGHLIGHTS 6
1995 PERFORMANCE 8
THE WORLD FUNDS, INC. 8
INVESTMENT OBJECTIVE 8
INVESTMENT POLICIES 9
PERFORMANCE 10
THE FUND'S MANAGEMENT 10
HOW TO INVEST 14
HOW TO REDEEM SHARES 15
HOW TO TRANSFER SHARES 17
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS 18
SPECIAL SHAREHOLDER SERVICES 18
HOW NET ASSET VALUE IS DETERMINED 18
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS 19
TAXATION CONSIDERATIONS 20
GENERAL INFORMATION ABOUT THE FUND 20
MORE INFORMATION 21
VONTOBEL U.S. VALUE FUND
P R O S P E C T U S S U M M A R Y
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus.
Investment Objective : The objective of the Value Fund is
to seek to achieve long-term capital
returns in excess of the broad
market by investing in a carefully
selected, continuously managed
diversified portfolio of principally
equity securities (including
securities convertible into equity
securities, such as warrants,
convertible bonds, debentures, or
convertible preferred stock) traded
on U.S. exchanges. See "Investment
Objective" and "Investment Policies"
on Pages 8 and 9.
Principal Investments : Invests principally in equity
securities traded on U.S. exchanges.
See "Investment Objective" and
"Investment Policies" on Pages 8 and
9.
Advisor : Vontobel USA Inc. is the Advisor.
See "The Fund's Management" on Page
10.
Distributions/Dividends : Paid annually from available capital
gains and income. See "Dividends
and Capital Gains Distributions" on
Page 19).
Reinvestment : Distributions may be reinvested
automatically without a sales
charge. See "Dividends and Capital
Gains Distributions" on Page 19.
Initial Purchase : $1,000 minimum. See "How to Invest"
on Page 14.
Subsequent Purchase : $50 minimum. See "How to Invest" on
Page 14.
Net Asset Value : Quoted daily in the financial
section of most newspapers under
Vontobel. Information may also be
obtained by calling 1-800-527-9500;
and through most broker dealers.
See "How the Net Asset Value is
Determined" on Page 18.
Principal Risk Factors : There can be no assurance that the
Value Fund will achieve its
investment objective. A factor
which should be considered by an
investor is the power of the Value
Fund to acquire repurchase
agreements.
Shares of the Value Fund are offered for sale without a sales
charge (see "How to Invest" on Page 14) from the Distributor,
First Dominion Capital Corp.
THE ADVISOR: Vontobel USA Inc. (the "Advisor") manages the
investments of the Value Fund according to its investment
objectives.
<PAGE>
TABLE OF FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the Value Fund will incur. The expenses set forth
below are for the 1995 fiscal year:
Shareholder Transaction Expenses Vontobel U.S. Value
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None*
Exchange Fees None
*A shareholder placing a telephone
redemption request will be charged $10.
Annual Fund Operating Expenses (as % of average net assets)
Management Fee 0.94%**
12b-1 Fees None
Other Operating Expenses .71%**
Total Fund Operating Expenses 1.65%**
**For the year ended December 31, 1995, fee waivers reduced
Management Fees by 0.06%. Other Operating Expenses have been
increased by 0.15% to reflect additional custodian fees which were
offset by custodian fee credits. Taking into account such credits,
total Fund Operating Expenses on a net basis were 1.56% in 1995.
The purpose of these tables is to assist investors in
understanding the various costs and expenses that they will bear
directly or indirectly.
The following example illustrates the expenses that an
investor would pay on a $1,000 investment over various time periods
assuming (1) a 5% annual rate of return, and (2) redemption at the
end of each time period. As noted in the table above the Value
Fund charges no redemption fees of any kind.
1 Year 3 Years 5 Years 10 Years
$17 $52 $90 $195
These examples should not be considered a representation of
past or future expenses or performances. Actual expenses may be
greater or lesser than those shown.
Financial Highlights
Vontobel U.S. Value Fund
FOR A SHARE OUTSTANDING DURING THE PERIOD INDICATED: The
Financial Highlights for the periods indicated below have been
examined by Tait, Weller and Baker, independent certified public
accountants, whose report thereon appears in the Annual Report to
Shareholders of the Vontobel U.S. Value Fund series for the year
ended December 31, 1995, and is incorporated by reference in this
Prospectus.
Financial Highlights
For a Share Outstanding Throughout Each Period
Mar.30* to
Years ended December 31, Dec. 31
1995 1994 1993 1992 1991 1990
Per Share Operating
Performance
Net asset value,
beginning of
period $10.26 $12.64 $12.00 $11.36 $ 8.86 $10.00
Income from
investment operations-
Net investment income.05 .09 .16 .10 .07 .14
Net realized and unrealized
gain (loss)
on investments 4.09 (.08) .56 1.70 3.23 (1.13)
Total from investment
operations 4.14 .01 .72 1.80 3.30 (.99)
Less distributions-
Distributions from net
investment
income (.04) (.23) (.02) (.10) (.06) (.15)
Distributions from realized
gains on
investments (1.11) (2.16) (.06) (1.06) (.74) -0-
Total distribu-
tions (1.15) (2.39) (.08) (1.16) (.80) (.15)
Net asset value,
end of period $13.25 $10.26 $12.64 $12.00 $11.36 $ 8.86
Total Return 40.36% .02% 6.00% 16.30% 37.29% (9.90%)
Ratios/Supplemental Data
Net assets,
end of
period (000) $55,103 $29,852$34,720 $31,335$22,315 $9,488
Ratio to average
net assets-(A)
Expenses (B) 1.65% 1.62% 1.82% 1.96% 2.54% 1.94%*
Expenses-net (C) 1.50% 1.62% 1.82% 1.96% 2.54% 1.94%*
Net investment
income (B) 0.23% .76% 1.23% .76% .92% 1.48%*
Portfolio
turnover rate 95.93% 98.80%137.32% 99.66%166.46% 87.29%
* Commencement of Operations was March 31, 1990; ratios are
annualized.
(A) Management fee waivers reduced the expense ratios and
increased net investment income ratios by .06% in 1995 and .09%
in 1990.
(B) Expense ratio has been increased and net investment income
has been reduced to include additional custodian fees in 1995
which were offset by custodian fee credits, prior to 1995
custodian fee credits reduced expense ratios.
(C) Expense ratio-net reflects the effect of the custodian fee
credits the fund received
See Notes to Financial Statements
<PAGE>
1995 PERFORMANCE
The Fund produced a total return of 40.4% for the year, vs.
37.6% for the S&P 500 with income and 30.1% for the average
growth and income fund tracked by Lipper Analytical Services.
Strong earnings gains and a sharp drop in interest rates fueled
a powerful rally in U.S. equities in 1995. Despite its lack of
any investments in the white-hot technology sector, the Fund
benefitted from its overweighting in financial sectors, which
vied with technology for the leadership position throughout most
of the year. Indeed, the Fund's top four performers in 1995
were two federal agencies that securitize and hold residential
mortgages (Fannie Mae and Freddie Mac), an insurer (Old
Republic), and a bank (State Street). Also benefitting the
Fund's performance last year was a burst of merger and
acquisition activity. Among the Fund's holdings at the start of
the year, Geico, Shawmut National and Southern Pacific were
acquired during 1996.
THE WORLD FUNDS, INC.
The Vontobel U.S. Value Fund (the "Value Fund") is a series of
The World Funds, Inc. (the "Fund"), an open-end diversified
management investment company incorporated in Maryland in 1983.
The Fund currently consists of five series, and the Board of
Directors may elect to add more series in the future. A minimum
initial investment of $1,000 is required to open a shareholder
account in the Value Fund, and each subsequent investment must
be $50 or more.
INVESTMENT OBJECTIVE
The investment objective of the Value Fund is to seek to achieve
long-term capital returns in excess of the broad market by
investing in a carefully selected, continuously managed
diversified portfolio of principally equity securities
(including securities convertible into equity securities, such
as warrants, convertible bonds, debentures, or convertible
preferred stock) traded on U.S. exchanges. The Advisor uses the
S&P 500 as the benchmark for the broad market, against which the
performance of the Value Fund is measured. The Advisor
employs a disciplined value approach that seeks to achieve a
satisfactory return relative to the benchmark while maintaining
safety of principal. The Advisor's bottom-up research is geared
toward identifying companies with a high level of earnings
predictability and whose equities are being offered at a
discount to their intrinsic value, as measured by calculating
the present value of future free cash flows. Portfolio
positions are trimmed or sold as they approach or reach the
Adviser's determination of fair market value. Adherence to this
disciplined approach may result in fluctuating investment levels
and concentrated positions in individual stocks and industry
overweightings vis-a-vis the benchmark. Generally, the price-
to-earnings and price-to-cash flow ratios of the securities will
be lower than the market ratios.
The investment objective of the Value Fund may not be changed
without the approval of shareholders. There is no assurance
that the investment objective of the Value Fund can be achieved.
INVESTMENT POLICIES
It is the policy of the Value Fund to invest primarily in equity
securities (common stocks or securities convertible into common
stocks). The Value Fund will select companies which are listed
on a securities exchange or from companies whose securities have
an established over-the-counter market.
It is not the intention of the Advisor to attempt to time the
direction of the market or to forecast future changes regarding
interest rates or the economy. As an equity fund the Value Fund
will have at least 65% of its assets invested in common stocks
or securities convertible into common stocks, although the
Advisor expects the Value Fund to be fully invested at all
times, except in those times of extreme market conditions.
When the Advisor believes that investments should be deployed in
a temporary defensive posture because of economic or market
conditions, the Value Fund may invest up to 100% of its assets
in U.S. Government securities (such as bills, notes, or bonds of
the U.S. Government and its agencies) or other forms of
indebtedness such as bonds, certificates of deposits or
repurchase agreements (for the risks involved in repurchase
agreement see the Statement of Additional Information). When
the Value Fund is in a temporary defensive position, it is not
pursuing its stated investment policies. The Advisor decides
when it is appropriate to be in a defensive position.
It is the policy of the Value Fund not to concentrate its
investments in particular industries and accordingly, no
investment shall be made if, at the time of acquisition,
investments in any one industry would exceed 25% of the market
value of its assets.
The Value Fund has agreed to implement the following two non-
fundamental investment restrictions in order to satisfy the
requirements of certain states: (1) The Value Fund will not
purchase or sell real estate, provided that liquid securities of
companies which deal in real estate or interests therein will
not be deemed to be investment in real estate; and (2) The
Value Fund will not borrow amounts in excess of 5% of its net
asset value, and only from banks as a temporary measure for
extraordinary or emergency purposes and not for investment in
securities. To avoid the untimely disposition of assets to meet
redemptions the Value Fund may borrow up to 20% of the value of
its assets. The Value Fund will not make other investments
while such borrowings are outstanding, and it will not mortgage,
pledge or in any other manner transfer, as security for
indebtedness, any of its assets.
Since the Value Fund seeks to achieve capital appreciation, it
will dispose of a security, regardless of the time it has been
held, to establish gains, to avoid anticipated reductions of
value, or to reduce or eliminate a position in a security which
is no longer believed to offer the potential for suitable gains.
Portfolio turnover is expected not to exceed an annual rate of
100% under normal circumstances. Such a turnover rate may
reflect substantial short term trading and corresponding
brokerage costs which the Value Fund must pay. A higher
portfolio turnover rate may result in additional brokerage
commissions or expenses to the Value Fund.
The selection of the securities in which the Value Fund will
invest will not be limited to companies of any particular size,
or to securities traded in any particular marketplace, and will
be based only upon the expected contribution such securities
would make to the investment objective.
PERFORMANCE
From time to time the Fund may advertise information regarding
the performance of the Value Fund. Such statements of
performance will consist of the current "yield," "distribution
rate" (to be included in sales literature only), and "total
return." These performance figures are based upon historical
results and are not intended to indicate future performance.
"Yield" is the ratio of income per share derived from the
portfolio investments to the current maximum offering price
expressed in terms of a percentage. "Distribution rate" is the
amount of distribution per share made over a twelve-month period
divided by a current maximum offering price. "Total return" is
the total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a
percentage of the purchase price.
Please refer to the Statement of Additional Information for more
information on Performance.
THE FUND'S MANAGEMENT
The Fund's Board of Directors is responsible for the supervision
of the general business of the Fund. The Directors act as
fiduciaries for shareholders under the laws of the State of
Maryland. The Board has appointed John Pasco, III to serve as
President of the Fund. The Fund employs the following persons
to provide it with investment advice and to conduct its on-going
business:
Advisor - Vontobel USA Inc. (the "Advisor") manages the
investments of the Value Fund pursuant to an Investment Advisory
Agreement (the "Advisory Agreement" ), dated July 14, 1992. The
Advisory Agreement is effective for an initial term of two years
and thereafter may be continued annually by the Board of
Directors of the Fund.
The Advisor is a wholly owned and controlled subsidiary of
Vontobel Holding Ltd., a Swiss bank holding company, having its
registered offices in Zurich, Switzerland. The Advisor
currently manages in excess of $1 billion (which includes the
assets of the Value Fund, the Vontobel EuroPacific Fund, the
Vontobel International Bond Fund series of the Fund, and the
Vontobel Eastern European Equity Fund and an International
Equity series of an unaffiliated fund). The Advisor also acts
as the investment advisor to three series of a Luxembourg fund
organized by an affiliate of the Advisor. That fund does not
accept investments from the U.S.
Mr. Edwin Walczak, who is the First Vice President of the
Advisor, is the President and portfolio manager of the Value
Fund since its inception in March 1990. Since 1988 Mr. Walczak
has been the Chief Investment Officer of the Advisor.
Pursuant to the Advisory Agreement the Advisor provides the
Value Fund with investment management services, subject to the
supervision of the Fund's Board of Directors, and with office
space, and pays the ordinary and necessary office and clerical
expenses relating to investment research, statistical analysis,
supervision of its portfolio and certain other costs. The
Advisor also bears the cost of fees, salaries and other
remuneration of the Fund's directors, officers or employees who
are officers, directors, or employees of the Advisor. The Value
Fund is responsible for all other costs and expenses, such as,
but not limited to, brokerage fees and commissions in connection
with the purchase and sale of securities, legal, auditing,
bookkeeping and record keeping services, custodian and transfer
agency fees and other costs and fees of registration of its
shares for sale under various state and Federal securities laws.
Under the Advisory Agreement the monthly compensation paid to
the Advisor is accrued daily at a rate equal to a fee at the
annual rate of 1% of the net assets of the Value Fund. This fee
is higher than that charged to many other investment companies.
If the assets of the Value Fund exceed $100,000,000, the fee for
such assets will be computed at the annual rate of .75 of 1% on
such excess. The fee is paid monthly, within five (5) business
days after the end of the month. The Advisory Agreement
provides that the fee paid by the Value Fund will be reduced to
the extent necessary to comply with any applicable state expense
limitation provision to which the Value Fund may be subject.
All expenses not specifically assumed by the Advisor are assumed
by the Value Fund. The address of the Advisor is 450 Park
Avenue, New York, N.Y. 10022.
The Advisory Agreement contemplates the authority of the Advisor
to place orders pursuant to its investment determinations for
the Value Fund either directly with the issuer or with any
broker or dealer. The Advisor may allocate brokerage to an
affiliated dealer in accordance with written policies and
procedures adopted by the Board of Directors. In placing orders
with brokers or dealers, the Advisor will attempt to obtain the
best net price and the most favorable execution of its orders.
The Advisor may purchase and sell securities to and from brokers
and dealers who provide the Advisor with research advice and
other services, or who sell shares of the Fund. From time to
time, and subject to the Advisor obtaining the best price and
execution for the Value Fund, the Board may authorize the
Advisor to allocate brokerage transactions to a broker in
consideration: (1) of investment research or statistical
services, or (2) in consideration of a payment of an obligation
otherwise payable by the Value Fund.
Administrator - Commonwealth Shareholder Services, Inc. ("CSS"),
serves as Administrator to the Value Fund pursuant to an
Administrative Services Agreement. CSS provides certain
recordkeeping and shareholder servicing functions required of
registered investment companies, and will assist the Fund in
preparing and filing certain financial and other reports and
performs certain daily functions required for ongoing
operations. CSS may furnish personnel to act as the Fund's
officers to conduct the Fund's business subject to the
supervision and instructions of the Board of Directors of the
Fund.
The Administrative Services Agreement provides that CSS will be
paid a monthly fee: (1) of $30 per hour for shareholder
servicing; (2) $30 per hour for blue sky matters; (3) the
greater of 20 basis points of the average daily net assets of
the Value Fund or $30,000 per year for administration (which
includes regulatory matters, backup of the pricing of the Value
Fund, administrative duties in connection with the execution of
portfolio trades, and certain services in connection with Fund
accounting); and (4) certain out-of-pocket expenses. The
address of CSS is 1500 Forest Avenue, Suite 223, Richmond, VA
23229.
Custodian and Accounting Services Agent - Brown Brothers
Harriman & Co. ("BBH") is currently the Fund's Custodian and
Accounting Services Agent. BBH collects income when due and holds
all of the Fund's portfolio securities and cash. (BBH, with the
Fund's consent, has designated The Depository Trust Company of New
York, as its agent to secure some of the assets of the Fund.)
BBH is authorized to appoint other entities to act as sub-
custodian to provide for the custody of foreign securities which
may be acquired and held by the Fund outside the U.S. Such
appointments are subject to appropriate review by the Fund's
Board of Directors.
BBH as the Accounting Services Agent maintains and keeps current
the books, accounts, records, journals or other records of
original entry relating to the Fund's business. The address of
BBH is 40 Water Street, Boston, Massachusetts 02109.
Transfer and Dividend Disbursing Agent - Fund Services, Inc.
("FSI") is the Fund's Transfer and Dividend Disbursing Agent.
John Pasco, III, Chairman of the Board of the Fund owns one
third of the stock of FSI, and, therefore, FSI may be deemed to
be an affiliate of the Fund. FSI provides all the necessary
facilities, equipment and personnel to perform the usual and
ordinary services of Transfer and Dividend Disbursing Agent,
including: receiving and processing orders and payments for
purchases of the Fund shares, opening shareholder accounts,
preparing shareholder meeting lists, mailing proxy material,
receiving and tabulating proxies, mailing shareholder reports
and prospectuses, withholding certain taxes on non-resident
alien accounts, disbursing income dividends and capital
distributions, preparing and filing U.S. Treasury Department
Form 1099 (or equivalent) for all shareholders, preparing and
mailing confirmation forms to shareholders for all purchases and
redemptions of the Fund's shares and all other confirmable
transactions in shareholders' accounts, recording reinvestment
of dividends and distribution of the Fund's shares. Under an
Agreement between the Fund and FSI, as in effect on May 1, 1991,
FSI is compensated pursuant to a schedule of services and out-
of-pocket expenses. The schedule calls for a minimum payment of
$16,500 per year. During the fiscal year ended December 31,
1995 the Value Fund paid FSI $35,652. The address of the
Transfer and Dividend Disbursing Agent is P.O. Box 26305,
Richmond, VA 23260.
Principal Underwriter/Distributor - First Dominion Capital
Corp. (the "Distributor") acts as the Principal Underwriter for
the Fund pursuant to an agreement dated January 1, 1994. Mr.
John Pasco, III, who is President, Director and Treasurer of the
Distributor, owns 100% of the stock of the Distributor. Mr.
Pasco is also the Chairman and a director of the Fund. The
address of the Distributor is 1500 Forest Avenue, Suite 223,
Richmond, VA 23229.
HOW TO INVEST
Shares of the Fund may be purchased directly from the
Distributor or through members of the National Association of
Securities Dealers, Inc. who are registered, if required, in the
state where the purchase is made and who have a sales agreement
with the Distributor. After a shareholder account is
established subsequent orders for shares may be mailed directly
to the Transfer Agent. Such purchases of shares are made at the
net asset value. A minimum initial investment of $1,000 is
required to open a shareholder account in the Value Fund, and
each subsequent investment must be $50 or more. Under certain
circumstances the Fund may waive the minimum initial investment
for purchases by officers, directors and employees of the Fund
and its affiliated entities and for certain related advisory
accounts and retirement accounts. The offering price per share
is equal to the net asset value per share next determined after
the receipt of a purchase order.
When an investor acquires shares of the Value Fund from their
Securities Dealer, the investor may be charged a transaction fee
for shares purchased and/or redeemed at net asset value through
that broker.
To facilitate the handling of transactions with shareholders,
the Fund uses an open account plan. The Transfer Agent will
automatically establish and maintain an open account for the
Fund's shareholders. Under the open account plan your shares
are reflected in your open account. This service facilitates
the purchase, redemption or transfer of shares, and eliminates
the need to safeguard certificates and reduces time delays in
executing transactions.
Purchases by Mail. For initial purchases the Account
Application form which accompanies this Prospectus should be
completed, signed, and mailed to the Transfer Agent, together
with your check or other negotiable bank draft drawn on any
payable by a U.S. Bank payable to the Vontobel U.S. Value Fund.
For subsequent purchases include with your check the tear-off
stub from a prior purchase confirmation, or otherwise identify
the name(s) of the registered owner(s) and the social security
number.
Investing by Wire. You may purchase shares by requesting your
bank to transmit "Federal Funds" by wire directly to the
Transfer Agent. To invest by wire please call the Transfer
Agent for instructions, then notify the Distributor by calling
800-527-9500. Your bank may charge you a small fee for this
service. The Account Application which accompanies this
Prospectus should be completed and promptly forwarded to the
Transfer Agent. This application is required to complete the
Fund's records in order to allow you access to your shares.
Once your account is opened by mail or by wire, additional
investments may be made at any time through the wire procedure
described above. Be sure to include your name and account
number in the wire instructions you provide your bank.
Stock Certificates - Certificates for full shares will be issued
by the Transfer Agent upon written request but only after
payment for the shares is collected by the Transfer Agent.
HOW TO REDEEM SHARES
Shares may be redeemed at any time and in any amount by mail or
telephone. For your protection, the Transfer Agent will not
redeem your shares until it has received all information and
documents necessary for your request to be in "proper order."
(See "Signature Guarantees.") You will be notified promptly by
the Transfer Agent if your redemption request is not in proper
order.
The Fund's procedure is to redeem shares at the net asset value
next determined after receipt by the Transfer Agent of the
redemption request in proper order as described herein. Payment
will be made promptly, but no later than the seventh day
following receipt of the request in proper order. Please note
that (1) the Transfer Agent cannot accept redemption requests
which specify a particular date for redemption, or which specify
any special conditions; and (2) if the shares you are redeeming
were purchased by you less than fifteen (15) days prior to the
receipt of your redemption request, the Transfer Agent must
ascertain that your check in payment of the shares you are
redeeming has cleared prior to disbursing the redemption
proceeds. If you anticipate the need to redeem before fifteen
(15) days, you should make your purchase by Federal Funds wire,
or by a certified, treasurer's or cashier's check.
The Fund may suspend the right to redeem shares for any period
during which the New York Stock Exchange is closed or the
Securities and Exchange Commission determines that there is an
emergency. In such circumstances you may withdraw your
redemption request or permit your request to be held for
processing at the net asset value per share next computed after
the suspension is terminated.
Redemption by Mail - To redeem shares by mail, send the
following information to the Transfer Agent: (1) a written
request for redemption signed by the registered owner(s) of the
shares, exactly as the account is registered; (2) the stock
certificates for the shares you are redeeming, if any were
issued; (3) any required signature guarantees (See "Signature
Guarantees"); and (4) any additional documents which might be
required for redemption by corporations, executors,
administrators, trustees, guardians, etc. The Transfer Agent
will mail the proceeds to your currently registered address,
payable to the registered owner(s) unless you specify otherwise
in your redemption request. There is no charge to shareholders
for redemptions by mail.
Redemption by Telephone - You may redeem your shares by
telephone if you request this service at the time you complete
your initial Account Application. If you do not request this
service at that time, you must request approval of telephone
redemption privileges in writing (sent to the Fund's Transfer
Agent) with a signature guarantee before you can redeem shares
by telephone. There is no charge for establishing this service.
The Transfer Agent will charge your account a $10.00 service fee
each time you make a telephone redemption. While your telephone
authorization is in effect, you may redeem shares by calling the
Transfer Agent at (800) 628-4077. By establishing this service,
you authorize the Transfer Agent to act upon any telephone
instructions it believes to be genuine, to (1) redeem shares
from your account and (2) mail or wire redemption proceeds. There
is a $10.00 service fee for making a telephone redemption. The
amount of these service charges may be changed at any time, without
notice, by the Transfer Agent.
You cannot redeem shares by telephone if you hold a stock
certificate representing the shares you are redeeming or if you
paid for the shares with a personal, corporate, or government
check and your payment has been on the books of the Fund for
less than 15 days.
If it should become difficult to reach the Transfer Agent by
telephone during periods when market or economic conditions lead
to an unusually large volume of telephone requests, a
shareholder may send a redemption request to the Transfer Agent
by overnight mail.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and,
if it does not, it may be liable for any losses due to
unauthorized or fraudulent transactions. As a result of this
policy, a shareholder authorizing telephone redemption bears the
risk of loss which may result from unauthorized or fraudulent
transactions which the Fund believes to be genuine. When you
request a telephone redemption or transfer, you will be asked to
respond to certain questions designed to confirm your identity
as a shareholder of record. Your cooperation with these
procedures will protect your account and the Fund from
unauthorized transactions. The telephone redemption privilege
may be terminated or modified by the Fund at any time.
Signature Guarantees - To protect you and the Fund (and its
agents) from fraud, signature guarantees are required for: (1)
all redemptions ordered by mail if you require that the check be
payable to another person or that the check be mailed to an
address other than the one indicated on the account
registration; (2) all requests to transfer the registration of
shares to another owner; and (3) all authorizations to establish
or change telephone redemption service, other than through your
initial account application.
In the case of redemption by mail, signature guarantees must
appear either: (a) on the written request for redemption; (b) on
a separate instrument of assignment (usually referred to as a
"stock power") specifying the total number of shares being
redeemed. If shares held by the Transfer Agent are being
redeemed, the signature guarantee must be on the written request
or stock power. The Fund may waive these requirements in
certain instances.
The following institutions are acceptable guarantors: (a)
participants in good standing of the Securities Transfer Agents
Medallion Program ("STAMP"); (b) commercial banks which are
members of the Federal Deposit Insurance Corporation
("F.D.I.C."); (c) trust companies; (d) firms which are members
of a domestic stock exchange; (e) eligible guarantor
institutions qualifying under Rule 17Ad-15 of the Securities
Exchange Act of 1934 that are authorized by charter to provide
signature guarantees; and (f) foreign branches on any of the
above. In addition, the Fund will guarantee your signature if
you personally visit its offices at 1500 Forest Avenue, Suite
223, Richmond, VA 23229. The Transfer Agent cannot honor
guarantees from notaries public, savings and loan associations,
or savings banks.
Small Accounts - Due to the relatively higher cost of
maintaining small accounts, the Fund may deduct $10
(payable to the Transfer Agent) from accounts valued at less
than $1,000 unless the account value has dropped below $1,000
solely as a result of share value depreciation. Shareholders
will receive 60 days written notice to increase the account
value before the fee is deducted.
HOW TO TRANSFER SHARES
If you wish to transfer shares to another owner, send a written
request to the Transfer Agent. Your request should include (1)
the name of the fund and existing account registration; (2)
signature(s) of the registered owner(s); (3) the new account
registration, address, Social Security Number or taxpayer
identification number and how dividends and capital gains are to
be distributed; (4) any stock certificates which have been
issued for the shares being transferred; (5) signature
guarantees (See "Signature Guarantees"); and (6) any additional
documents which are required for transfer by corporations,
administrators, executors, trustees, guardians, etc. If you
have any questions about transferring shares, call the Transfer
Agent at (800) 628-4077.
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
Each time you purchase, redeem or transfer shares of the Fund,
you will receive a written confirmation. You will also receive
a year-end statement of your account if any dividends or capital
gains have been distributed, and an annual and a semi-annual
report.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following four services for its
shareholders:
Regular Account - allows shareholders to make voluntary
additions and withdrawals to and from their account as often as
they wish;
Invest-A-Matic - permits automatic monthly investments into the
Fund from your checking account on a fixed or flexible schedule;
Individual Retirement Accounts (IRA's); and
Exchange Privileges - allows the shareholder to exchange his or
her shares for shares of certain other funds having a different
investment objective from the Value Fund, provided the shares of
the fund the shareholder is exchanging into are registered for
sale in the shareholders state of residence. More information on
any of these services is available upon written request to the
Fund.
HOW NET ASSET VALUE IS DETERMINED
The Value Fund's Net Asset Value ("NAV") is determined as of the
close of trading of the New York Stock Exchange (currently 4:00
P.M., Eastern Time) on each business day from Monday to Friday
or on each day (other than a day during which no security was
tendered for redemption and no order to purchase or sell such
security was received by the Value Fund) in which there is a
sufficient degree of trading in the portfolio securities of the
Value Fund that the current NAV of the shares might be
materially affected by changes in the value of such portfolio
security. The Value Fund's NAV is calculated at the 4:00 p.m.
time set by the Board of Directors based upon a determination of
the most appropriate time to price the securities.
NAV per share is determined by dividing the total value of the
assets, less its liabilities, by the total number of shares then
outstanding. Generally, securities owned by the Value Fund are
valued at market value.
Investments in securities traded on a national securities
exchange or included in the NASDAQ National Market System are
valued at the last reported sales price; other securities traded
in the over-the-counter market and listed securities for which
no sale is reported on that date are valued at the last reported
bid price.
Short-term debt securities (less than 60 days to maturity) are
valued at the fair market value using amortized cost pricing
procedures set, and determined to be fair, by the Board of
Directors. Other assets for which market prices are not readily
available are valued at their fair value as determined in good
faith under procedures set by the Board of Directors.
The Fund's management may compute the NAV per share more
frequently in order to protect shareholders' interests.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTION
Dividends from net investment income are declared annually.
The Value Fund intends to distribute annually realized net
capital gains, after utilization of capital loss carryforwards,
if any, to prevent application of a federal excise tax.
However, it may make an additional tax distribution any time
prior to the due date, including extensions, of filing its tax
return, if necessary to accomplish this result. Any dividends
or capital gains distributed pursuant to a dividend declaration
declared in October, November or December with a record date in
such a month and paid during the following January will be
treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared.
According to preference, shareholders may receive distributions
in cash or have them reinvested in additional shares.
Shareholders will be subject to tax on all dividends declared or
reinvested. If an investment is in the form of a retirement
plan, all dividends and capital gains distributions must be
reinvested into an account.
Generally, dividends from net investment income are taxable to
investors as ordinary income. Certain gains or losses on the
sale or retirement of international securities held by the Value
Fund, to the extent attributable to fluctuations in currency
exchange rates, as well as certain other gains or losses
attributable to exchange rate fluctuations, must be treated as
ordinary income or loss. Such income or loss may increase or
decrease (or possibly eliminate) the income available for
distribution to shareholders. If, under the rules governing the
tax treatment of foreign currency gains and losses, the income
available for distribution is decreased or eliminated, all or a
portion of the dividends declared by the Value Fund may be
treated for federal income tax purposes as a return of capital,
or in some circumstances, as capital gain. Generally, a
shareholder's tax basis in his/her Value Fund shares will be
reduced to the extent that an amount distributed to the
shareholder is treated as a return of capital.
Long-term capital gains distributions, if any, are taxable as
net long-term capital gains when distributed regardless of the
length of time shareholders have owned their shares. Net short-
term capital gains and any other taxable income distributions
are taxable as ordinary income.
The Value Fund sends detailed tax information about the amount
and type of its distributions to its shareholders by January 31
of the following year.
TAXATION CONSIDERATIONS
The Value Fund will seek to qualify under Sub Chapter M of the
Internal Revenue Code of 1986 (the "Code"). As a regulated
investment company under the Code, the Fund is not liable to
federal income taxes for income or gains which are distributed
to the Value Fund's shareholders or imputed to shareholders
under the Code. The distribution to shareholders each year of
investment income and capital gains will represent taxable
income to the shareholders. The Fund is a series corporation.
Each series is taxed as a separate taxable entity under the
Code. Shareholders will receive a written advice from the Fund
within sixty (60) days after the end of the year furnishing them
with the information required under the Code.
GENERAL INFORMATION ABOUT THE FUND
The Fund is authorized to issue up to 500,000,000 shares of
$0.01 par value common stock, of which it has presently
allocated 50,000,000 shares to the Value Fund, 50,000,000 to
the Vontobel International Bond Fund series, 50,000,000 to the
Vontobel EuroPacific Fund series, 50,000,000 to the Sand Hill
Portfolio Manager Fund series and 50,000,000 to the Vontobel
Eastern European Equity Fund series. The Board of Directors can
allocate the remaining authorized but unissued shares to any
series of the Fund or may create additional series and allocate
shares to such series. A share of the Value Fund has priority
in the assets of the Value Fund in the event of a liquidation.
The shares of the Value Fund will be fully paid and non-
assessable, will have no preference over other shares of the
Value Fund as to conversion, dividends, or retirement, and will
have no preemptive rights. Shares of the Value Fund will be
redeemable from the assets of the Value Fund at any time.
Each outstanding share of the Fund is entitled to one vote for
each full share of stock and a fractional vote for fractional
shares of stock. All shareholders vote on matters which concern
the corporation as a whole. The Fund is not required to hold a
meeting of shareholders each year, and may elect not to hold a
meeting in years when no meeting is necessary. The Value Fund
shall vote separately on matters which affect only the interest
of the Value Fund. The Fund's shares do not have cumulative
voting rights, which means that the holders of more than 50% of
the shares voting for the election of directors can elect all of
the directors if they choose to do so. Shareholders may utilize
procedures described in the Statement of Additional Information
to call a meeting.
Limitation on Use of Name - The Advisory Agreement for the Value
Fund authorizes the Fund to utilize the name "Vontobel." The
Fund agrees that if the Advisory Agreement is terminated it will
promptly redesignate the name of the Value Fund to eliminate any
reference to the name "Vontobel" or any derivation thereof
unless the Advisor waives this requirement in writing.
MORE INFORMATION
For further information on the Fund please contact Commonwealth
Shareholder Services, Inc., P.O. Box 8687, Richmond, VA 23226,
telephone: (800) 527-9500. Additional information may also be
obtained by requesting a copy of the Fund's Statement of
Additional Information.
<PAGE>
Advisor:
Vontobel USA Inc.
450 Park Avenue
New York, N.Y. 10022
Distributor:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, VA 23229
Independent Auditors:
Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Fund and
Marketing Services, call the Distributor at (800) 527-9500 Toll
Free.
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Fund's Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23286-8172
(800) 628-4077 Toll Free
More Information: For 24 hour, 7 days a week price information
call 1-800-527-9500.
For information on any series of the Fund, investment plans, or
other shareholder services, call 1-800-527-9500 during normal
business hours, or write the Fund at 1500 Forest Avenue, Suite
223, Richmond, VA 23229.
NASDAQ SYMBOL: VONTOBEL U.S. VALUE FUND: VUSVX
<PAGE>
VONTOBEL INTERNATIONAL BOND FUND
OF
THE WORLD FUNDS, INC.
A "SERIES" INVESTMENT COMPANY
PROSPECTUS DATED MAY 2, 1996
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
Telephone: 1-800-527-9500
This Prospectus offers shares of the Vontobel International
Bond Fund (the "Bond Fund"), a series of The World Funds, Inc.
(the "Fund"). The Fund is an open-end management investment
company commonly known as a "mutual fund." The Bond Fund
operates as a non-diversified series of the Fund for purposes of
the Investment Company Act of 1940. A "series" fund offers
investors a choice of investment objectives, with each series
having its own separate and distinct portfolio of investments
and operating much like a separate mutual fund. The objective
of the Bond Fund is to maximize total return from capital growth
and income. The Fund is currently composed of five series.
Investors will be able to exchange all or part of their
investment from one fund to another or to certain other mutual
funds, under conditions set by the Fund.
SHARES IN THE BOND FUND ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT
THE BOND FUND WHICH A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE
INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
MORE INFORMATION ABOUT THE BOND FUND HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS CONTAINED IN THE
"STATEMENT OF ADDITIONAL INFORMATION," DATED MAY 2, 1996, WHICH
IS AVAILABLE AT NO CHARGE UPON WRITTEN REQUEST TO THE FUND. THE
BOND FUND'S STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED
HEREIN BY REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS PAGE
PROSPECTUS SUMMARY 3
ESTIMATED BOND FUND EXPENSES 5
FINANCIAL HIGHLIGHTS 6
1995 PERFORMANCE 7
INVESTMENT OBJECTIVE 7
WHY INVEST IN THE BOND FUND? 8
THE BOND FUND'S INVESTMENTS 8
ADDITIONAL INFORMATION ON POLICIES AND INVESTMENTS 12
SPECIAL RISK CONSIDERATIONS 15
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS 18
PERFORMANCE 18
THE FUND'S MANAGEMENT 19
HOW TO INVEST 22
HOW TO REDEEM SHARES 23
HOW TO TRANSFER SHARES 26
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS 26
SPECIAL SHAREHOLDER SERVICES 26
HOW NET ASSET VALUE IS DETERMINED 26
TAXES 27
GENERAL INFORMATION ABOUT THE FUND 28
MORE INFORMATION 29
<PAGE>
P R O S P E C T U S S U M M A R Y
The following summary is qualified in its entirety by the
more detailed information appearing in the body of this
Prospectus.
Investment Objective The Bond Fund's investment objective
is to maximize total return from
capital growth and income. See
"Investment Objective" on Page 7.
Principal Investments Invests primarily in the international
bond markets of the world. See "The
Bond Fund's Investments" on Page 8.
Investment Advisor Vontobel USA Inc. is the Advisor, and
it manages the investments of the Bond
Fund according to its investment
objective. See "The Fund's
Management" on Page 19.
Distributions/Dividends Paid annually from available capital
gains and income. See "Dividends and
Capital Gains Distributions" on Page
18.
Reinvestment Distributions may be reinvested
automatically. See "Dividends and
Capital Gains Distributions" on Page
18.
Purchases Initial purchase is $1,000 minimum.
Subsequent purchases must be a minimum
of $50. See "How to Invest" on Page
22.
Net Asset Value Information may be obtained by calling
1-800-527-9500. See "How the Net
Asset Value is Determined" on Page 26.
Principal Risk Factors There can be no assurance the Bond
Fund will achieve its investment
objective. Other factors which should
be considered by an investor include:
The Bond Fund invests in foreign
securities, and thus may be affected
by currency fluctuations or exchange
controls, differences in accounting
procedures, and other risks. The Bond
Fund may invest in repurchase and
reverse repurchase agreements. See
"Special Risk Considerations" on Page
15.
Shares of the Bond Fund are offered for sale without a sales
charge from the distributor, First Dominion Capital Corp. (see
"How to Invest" on Page 22).
<PAGE>
TABLE OF BOND FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder in the Bond Fund will incur. The expenses set forth
below are for the 1995 fiscal year:
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None*
Exchange Fees None
*A shareholder placing a telephone redemption
request will be charged $10.
Annual Bond Fund Operating Expenses (as % of average net assets)
Management Fee 1.00%**
12b-1 Fees None
Other Operating Expenses 0.76%**
Total 1.76%**
**For the year ended December 31, 1995, the Advisor waived
its 1.0% fee. Effective January 1, 1996, such waiver has
ceased. Other Operating Expenses have been increased by 0.41%
to reflect additional custodian fees which were offset by
custodian fee credits. Taking into account such credits, total
Fund Operating expenses on a net basis were 1.35% in 1995.
The purpose of this table is to assist investors in
understanding the various costs and expenses that they will bear
directly or indirectly.
The following examples illustrate the expenses that an
investor would pay on a $1,000 investment over various time periods
assuming (1) a 5% annual rate of return, and (2) redemption at the
end of each time period. As noted in the table above the Bond Fund
charges no redemption fees.
1 Year 3 Years 5 Years 10 Years
$18 $55 $95 $207
These examples should not be considered a representation of
past or future expenses or performances. Actual expenses may be
greater or lesser than those shown.
<PAGE>
The Financial Highlights for the periods indicated below have
been examined by Tait, Weller and Baker, independent certified
public accountants, whose report thereon appears in the Annual
Report to Shareholders of the Vontobel International Bond Fund
series for the year ended December 31, 1995, and is incorporated by
reference in this Prospectus.
Financial Highlights
For a Share Outstanding Throughout the Period
Jan. 1 March 1*
to to
Dec. 31, Dec. 31,
1995 1994
Per Share Operating Performance
Net asset value, beginning of period $ 9.48 $10.00
Income from investment operations-
Net investment income .61 .70
Net realized and unrealized
gain (loss) on investments 1.06 (.50)
Total from investment operations 1.67 .20
Less distributions-
Distributions from net
investment income (.55) (.70)
Distributions in excess of
net investment income -0- (.02)
Total distributions (.55) (.72)
Net asset value, end of period $10.60 $ 9.48
Total Return 17.60% 1.98%
Ratios/Supplemental Data
Net assets, end of period (000) $16,253 $10,235
Ratio to average net assets-(A)
Expenses (B) 1.76% 1.35% *
Expense ratio-net (C) 1.35% 1.35% *
Net investment income (B) 4.97% 3.99% *
Portfolio turnover rate 18.63% 19.00%
* Commencement of Operations was March 1, 1994, ratios are
annualized
(A) Management fee waivers reduced the expense ratios and
increased the ratios of net investment income by 1.00% in 1995 and
0.19% in 1994.
(B) Expense ratio has been increased and net investment income has
been reduced to include additional custodian fees in 1995 that were
offset by custodian fee credits, prior to 1995 custodian fee
credits reduced the expense ratio.
(C) Expense ratio-net reflects the effect of the custodian fee
credits the fund received
See Notes to Financial Statements
<PAGE>
1995 PERFORMANCE
The Fund produced a total return of 17.6% in line with the
average world income fund tracked by Lipper Analytical Services at
18.1% although underperforming the J.P. Morgan Global Government
Bond index (ex US), which rose 21.1%. During the first half of
1995, U.S. dollar weakness contributed to over half of
international bond market returns. In the second half,
particularly the last quarter, international bond markets were
propelled by falling yields as inflation remained subdued not only
in Europe and Japan but the U.S. The benign inflation outlook
allowed the Bundesbank, followed by other European central banks,
to cut interest rates in the face of a slowdown in European
economic growth. The Fund's underperformance relative to the
benchmark is attributable to its defensive cash position as the
Advisor anticipated a bottoming out of global interest rates and a
strengthening U.S. dollar.
VONTOBEL INTERNATIONAL BOND FUND
The Vontobel International Bond Fund (the "Bond Fund") is a
series of The World Funds, Inc. (the "Fund"). The Fund is an open-
end management investment company incorporated in Maryland in 1983.
The Bond Fund operates as a non-diversified fund for purposes of
the Investment Company Act of 1940 (the "1940 Act") but will seek
to qualify as a diversified investment company for purposes of
Subchapter M of the Internal Revenue Code of 1986. The Fund
currently consists of five series, and the Board of Directors may
elect to add more series in the future. A minimum initial
investment of $1,000 is required to open a shareholder account in
the Bond Fund, and each subsequent investment must be $50 or more.
The Bond Fund commenced operations on February 24, 1994.
INVESTMENT OBJECTIVE
The investment objective of the Bond Fund is to maximize total
return from capital growth and income. The Bond Fund is a no-load
non-diversified mutual fund which offers investors a convenient way
to invest in a managed portfolio of debt securities denominated in
foreign currencies ("International" securities). The Bond Fund
seeks to achieve its objective of total return by investing in a
continuously managed portfolio consisting primarily of high-grade
international bonds. International Bonds are defined as bonds
issued (i) in countries other than the United States; (ii) by
issuers which are organized in a country other than the United
States or have at least 50% of their assets or derive at least 50%
of their revenues in such country (notwithstanding the currency in
which such bonds are denominated); or (iii) by national or
international authorities other than the U.S. Vontobel USA Inc.
(the "Advisor") will seek protection and possible enhancement of
principal value by actively managing currency, bond market and
maturity exposure and by security selection.
The investment objective may not be changed without the
approval of shareholders. However, the investment policies are not
fundamental and may be changed with the approval of Fund's Board of
Directors.
All investments entail some risks (See "Special Risk
Considerations"), and there can be no assurance that the investment
objective of the Bond Fund can be achieved.
WHY INVEST IN THE BOND FUND?
The Bond Fund provides an easy, efficient, and low cost way of
investing in international bonds. Direct investment in
international securities is usually impractical for most individual
and smaller institutional investors. Investors often find it
difficult to purchase and sell international bonds, to obtain
current information about foreign entities, to hold securities in
foreign safekeeping and to convert the value of their investment
from foreign currencies into U.S. dollars. The Bond Fund manages
these concerns for the investor. With a single investment in the
Bond Fund, a shareholder can benefit from the income and potential
capital protection and appreciation associated with a
professionally managed portfolio of high-grade international bonds.
The Advisor to the Bond Fund has had extensive experience
investing in international markets and dealing with trading,
custody and currency transactions around the world. The Advisor
also manages the investment of the Vontobel EuroPacific Fund
series, the Vontobel U.S. Value Fund series and the Vontobel
Eastern European Equity Fund series of the Fund.
THE BOND FUND'S INVESTMENTS
The Bond Fund is designed for individuals and institutions who
wish to diversify their investment programs to take advantage of
opportunities in the international bond markets of the world. To
achieve its objective, the Bond Fund will invest in a managed
portfolio of high-grade international bonds that are denominated in
foreign currencies, including bonds denominated in the European
Currency Unit (ECU).
In recent years, opportunities for investment in international
bond markets have become more significant. Foreign currency
denominated bond markets have grown faster than the U.S. dollar
denominated bond market in terms of U.S. dollar market value and
now represent more than half of the value of the world's developed
bond markets. Participants in the markets have grown in number
thereby providing better marketability. A number of international
bond markets have reduced entry barriers to foreign investors by
deregulation and by reducing their withholding taxes.
Simultaneously with the opening of foreign markets, barriers to
international capital flows have been reduced or eliminated,
freeing investment funds to seek the highest real returns. Thus,
market conditions in one economy influence market conditions
elsewhere through the channel of global capital flows. The Bond
Fund provides a convenient vehicle to participate in international
bond markets, some of which may outperform U.S. dollar denominated
bond markets in U.S. dollar terms during certain periods of time.
Although the Bond Fund is non-diversified, investing in the
Bond Fund can provide international diversity to an investor's
existing portfolio of U.S. dollar denominated bonds ("U.S. bonds"),
thereby reducing volatility or risk over time. Historically, total
returns of international bond markets have often diverged from
returns generated by U.S. bond markets. These divergences stem not
only from fluctuating exchange rates, but also from foreign
interest rates not always moving in the same direction or magnitude
as interest rates in the U.S. Investment in the Bond Fund may
provide the international bond portion of an investor's
diversification program.
International bonds may provide, at times, higher investment
returns than U.S. bonds. For example, international bonds may
provide higher current income than U.S. bonds and the local price
of international bonds can appreciate more than U.S. bonds.
Fluctuations in foreign currencies relative to the U.S. dollar can
potentially benefit investment returns. Of course, in each case,
at any time the opposite may also be true. Investments in the Bond
Fund provide international diversity not only to an investor's
existing portfolio of U.S. dollar denominated bonds but also to an
investors holdings of U.S. or international equities and other
assets.
The portfolio investments of the Bond Fund will be selected on
the basis of, among other things, yields, credit quality, and the
fundamental outlooks for currency and interest rate trends in
different parts of the globe, taking into account the ability to
hedge a degree of currency or local bond price risk. The Bond Fund
will normally invest at least 65% of its total assets in bonds
denominated in foreign currencies, however, generally foreign
currency denominated bonds will constitute 90% of its portfolio.
The Bond Fund will invest in very high investment grade
instruments that will bear the rating of A or higher by Standard &
Poor's Corporation ("S&P") or A or higher by Moody's Investors
Service, Inc. ("Moody's"), or unrated securities which the Advisor
believes to be of comparable quality. However, the Bond Fund
reserves the right to invest its assets in lower rated securities.
It will do so to avail itself of the higher yields available with
these securities. The Bond Fund will invest no more than 5% in
securities rated below investment grade or which are unrated but
are of comparable quality as determined by the Advisor. Securities
rated below investment grade (i.e., below BBB by S&P or Baa by
Moody's) entail greater risks than investment grade debt securities
(see "Special Risk Considerations").
The investments of the Bond Fund 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 (e.g., European Investment Bank, Inter-American
Development Bank, the World Bank and other such organizations);
* Corporate foreign debt securities;
* Bank or bank holding company debt securities;
* Other debt securities, including those convertible into common
stock.
The Bond Fund may purchase securities which are not publicly
offered. If such securities are purchased, they may be subject to
restrictions applicable to restricted securities. Please see
"Additional information on Policies and Investments - Investment
Restrictions."
The Bond Fund intends to select its investments from a number
of country and market sectors. It may invest substantial amounts
in issuers from one or more countries and would normally have
investments in securities of issuers from a minimum of three
different countries; however, it may invest substantially all of
its assets in securities of issuers located in the U.S. for
temporary or emergency purposes. A non-governmental issuer will be
considered to be "from" a country in which it is organized, in
which it has at least 50% of its assets, or from which it derives
at least 50% of its revenues.
Under normal circumstances, the Bond Fund will invest no more
than 35% of the value of its total assets in U.S. dollar debt
securities, however, generally it will invest less than 10% of its
assets in U.S. dollar debt securities. The Bond Fund may engage in
strategic transactions, as described below, for hedging purposes
and to seek to increase gain. For temporary defensive or emergency
purposes, however, it may invest without limit in investment grade
U.S. debt securities, including short-term money market securities.
It is impossible to predict for how long such alternative
strategies will be utilized.
The Bond Fund does not engage in short-term trading due to the
fact that such practices would result in increased commissions and
transactions costs.
ADDITIONAL INFORMATION ON POLICIES AND INVESTMENTS
Investment restrictions: The Bond Fund seeks to minimize
credit risk and maintain high liquidity. It is a "non-diversified"
investment company under Federal securities laws, and therefore may
invest a larger portion of its assets in certain issuers, including
foreign governments and domestic issuers other than the U.S.
government. It may invest more than 5% of its assets in government
debt securities of the U.S. However, because it intends to qualify
as a "regulated investment company" for purposes of Subchapter M of
the Internal Revenue Code, at least 50% of its total assets must be
invested in cash, U.S. government securities, and securities of
issuers (including foreign governments), in which it has invested
not more than 5% of its assets. In any event, it does not intend
to invest more than 5% of its assets in the securities of any one
issuer unless such securities are issued or guaranteed by a
national government. (A regulated investment company is also
limited in its purchases of voting securities of any issuer; the
Bond Fund does not intend to purchase any voting securities, except
to the extent it receives such securities due to conversion of
convertible securities.)
The Bond Fund has adopted certain fundamental policies which
may not be changed without a shareholder vote and which are
designed to reduce its investment risk. It may not invest more
than 25% of its assets in securities of companies in the same
industry; may not make loans except through the lending or purchase
of portfolio securities or through repurchase agreements; and may
not borrow money except as a temporary measure for extraordinary or
emergency purposes.
In addition, the Board of Directors has adopted the following
policy (among others) which may be changed without a shareholder
vote: the Bond Fund may not invest more than 5% of its net assets
in securities which are not readily marketable, including
repurchase agreements maturing in more than seven days and
restricted securities.
Short-term investments: To protect against adverse movements
of interest rates and for liquidity, the Bond Fund may also invest
all or a portion of its net assets in short-term obligations
denominated in U.S. and foreign currencies such as, but not limited
to, bank deposits, bankers' acceptances, certificates of deposit,
commercial paper, short-term government, government agency,
supranational agency and corporate obligations, and repurchase
agreements.
Repurchase agreements: As a means of earning income for
periods as short as overnight, the Bond Fund may without limit
enter into repurchase agreements, which are collateralized by U.S.
government securities in which it may otherwise invest, with
selected banks and broker/dealers. Under a repurchase agreement,
a fund acquires securities, subject to the seller's agreement to
repurchase at a specified time and price. The Bond Fund requires
the party obligated to repurchase the securities to provide it with
collateral for that obligation. Repurchase agreements are
considered to be loans under the Investment Company Act of 1940
(the "1940 Act"). The Bond Fund may enter into repurchase
commitments for investment purposes for periods of 30 days or more.
Such commitments involve investment risk similar to that of debt
securities in which it invests. For purposes of the tax
diversification test under Subchapter M of the Code, repurchase
agreements are likely to be treated as securities subject to the
"5% per issuer" requirement noted above.
Reverse repurchase agreements: As a means of enhancing income,
the Bond Fund may enter into reverse repurchase agreements with
selected banks and broker/dealers. Under a reverse repurchase
agreement, a fund sells securities subject to an obligation to
repurchase those securities at a specified time and price. In
order to comply with U.S. regulatory conditions applicable to
investment companies, the Bond Fund will recognize gains or losses
on such obligations each day, and will segregate cash, U.S.
government securities, or other high-grade debt instruments in an
amount sufficient to satisfy its repurchase obligation, will mark
the value of the assets to market daily, and post additional
collateral if necessary. The Bond Fund may invest the payment
received for such securities prior to fulfilling its obligation to
repurchase the securities. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. Therefore, the
Bond Fund's investment in reverse repurchase agreements is subject
to the borrowing limitations of the 1940 Act (See "Investment
Restrictions" in the Statement of Additional Information).
When-issued securities: The Bond 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 Bond Fund. At
the time of settlement, the market value of the security may be
more or less than the purchase price. The Bond Fund reflects gains
or losses on such commitments each day, and segregates assets
sufficient to meet its obligation pending payment for the
securities.
Strategic Transactions: The Bond Fund may, but is not required
to, utilize various other investment strategies as described below
to hedge various market risks (such as interest rates, currency
exchange rates, and broad or specific fixed-income market
movements), to manage the maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are
generally accepted as modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments
and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the
Bond Fund may purchase and sell exchange-listed and
over-the-counter put and call options on securities, fixed-income
indices and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars,
and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or
options on currencies (collectively, all the above are called
"Strategic Transactions"). Interest rate swaps involve the
exchange by a fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a
notional amount of principal. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index
exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent
that a specified index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range of interest
rates or values.
Strategic Transactions may be used to attempt to protect
against possible changes in the market value of securities held in
or to be purchased for the Bond Fund's portfolio resulting from
securities markets or currency exchange rate fluctuations, to
protect its unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration
of its portfolio, to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling
particular securities, or as a means to efficiently change country
and/or currency allocation. Some Strategic Transactions may also
be used to enhance potential gain although no more than 5% of the
Bond Fund's assets will be committed to futures and options on
futures entered into for non-hedging purposes. Any or all of these
investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of
numerous variables including market conditions. The ability of the
Bond Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Bond Fund will comply with
applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions
involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or
portfolio management purposes and not for speculative purposes.
Please see "Special Risk Considerations - Strategic Transactions"
for additional information. Strategic Transactions also are likely
to involve "Section 988 transactions," at least in part. As such,
the foreign currency component must be segregated for tax purposes
and treated as ordinary interest income or loss and distributed.
See "Taxation," also.
SPECIAL RISK CONSIDERATIONS
Because the Bond Fund is intended for long-term investors who
can accept the risks associated with investing in international
bonds, investors should not rely on an investment in the Bond Fund
for their short-term financial needs and should not view it as a
vehicle for playing short-term swings in the international bond and
foreign exchange markets. Shares of the Bond Fund alone should not
be regarded as a complete investment program.
Total return from investment in the Bond Fund will consist of
income after expenses, bond price gains (or losses) in terms of the
local currency, and currency gains (or losses). For tax purposes,
realized gains and losses on currency are regarded as ordinary
income and loss and could, under certain circumstances, have an
impact on distributions. The value of the Bond Fund's portfolio
will fluctuate in response to various economic factors, the most
important of which are fluctuations in foreign currency exchange
rates and interest rates.
Since investments in the Bond Fund are primarily denominated in
foreign currencies, exchange rates are likely to have a significant
impact on its total performance. For example, a fall in the U.S.
dollar's value relative to the Japanese yen will increase the U.S.
dollar value of a Japanese bond held in the portfolio, even though
the price of that bond in yen terms remains unchanged. Conversely,
if the U.S. dollar rises in value relative to the yen, the U.S.
dollar value of a Japanese bond will fall. Investors should be
aware that exchange rate movements can be significant and endure
for long periods of time.
The Advisor attempts to control exchange rate and interest rate
risks through active portfolio management. The Advisor's techniques
consist of management of currency, bond market and maturity
exposure and security selection which will vary based on available
yields and the Advisor's outlook for the interest rate cycle in
various countries and changes in foreign currency exchanges rates.
In any of the markets in which the Bond Fund invests, longer
maturity bonds tend to fluctuate more in price as interest rates
change than shorter-term instruments - again providing both
opportunity and risk.
In addition to the risks outlined above, an investor should be
aware that investing in foreign securities involves risks which are
not normally associated with investing in U.S. securities, such as,
exchange control regulations; costs incurred in connection with
conversions between various currencies; availability of less
financial information than comparable U.S. companies; lack of
uniform accounting, auditing and financial reporting requirements;
less liquidity and more volatility than securities listed on U.S.
security markets due to substantially lower trading volume;
possibly lower sales prices in the event of forced liquidation of
securities in order to meet unanticipated cash requirements; fixed
commissions on foreign security markets which are generally higher
than negotiated commissions on U.S. security markets, in addition
to less supervision and regulation of such security markets;
difficulty in enforcing judgments abroad; and the possibility of
expropriation of assets, confiscatory taxation, imposition of
withholding of taxes prior to payment of dividends or other
distributions, political or social instability, or diplomatic
developments which could affect U.S. investments in those
countries. Communications between the U.S. and foreign countries
may be less reliable than within the U.S., thus increasing the risk
of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. It may be more difficult
for the Bond Fund's agents to keep currently informed about
corporate actions which may affect the prices of portfolio
securities.
While the Bond Fund will seek to qualify as a "diversified"
investment company under provisions of Subchapter M of the Internal
Revenue Code of 1986, it will not be diversified under the 1940
Act. Thus, while at least 50% of its total assets will be
represented by cash, cash items, and other securities limited in
respect of any one issuer to an amount not greater than 5% of its
total assets, it will not satisfy the 1940 Act requirement in this
respect, which applies that test to 75% of its assets. A non-
diversified portfolio is subject to greater risk because adverse
effects on the portfolio's security holdings may affect a larger
portion of the overall assets.
The Bond Fund's risks are determined by the nature of the
securities it holds and the portfolio management strategy used by
the Advisor. The following are descriptions of certain risks
related to the investment techniques that the Bond Fund may use
from time to time:
Bonds. The Bond Fund reserves the right to invest in debt
securities rated BBB or Baa or below, but no lower than B by S&P or
Moody's or which are unrated but are of comparable quality as
determined by the Advisor. Securities rated BB and below are
commonly referred to as "junk bonds" and involve a high degree of
speculation with respect to the payment of principal and interest.
Repurchase agreements. If the seller under a repurchase
agreement becomes insolvent, the Bond Fund's right to dispose of
the securities may be restricted. In the event of the commencement
of bankruptcy or insolvency proceedings with respect to the seller
of the securities before repurchase of the securities under a
repurchase agreement, the Bond Fund may encounter delay and incur
costs before being able to sell the securities. Also, the value of
such securities may decline before it is able to dispose of them.
Reverse repurchase agreements. If the buyer under a repurchase
agreement becomes insolvent, the Bond Fund's right to reacquire its
securities may be impaired. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the buyer of
the securities before repurchase of the securities under a reverse
repurchase agreement, it may encounter delay and incur costs before
being able to apply the cash held to purchase replacement
securities. Also, the value of such securities may increase before
it is able to purchase them.
Strategic Transactions. Strategic Transactions have risks
associated with them including possible default by the other party
to the transaction, illiquidity and, to the extent the Advisor's
view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may
result in losses to the Bond Fund, force the sale or purchase of
portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call
options) current market values, limit the amount of appreciation it
can realize on its investments or cause it to hold a security it
might otherwise sell. The use of currency transactions can result
in the Bond 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. The use of options and futures transactions entails
certain other risks. In particular, the variable degrees of
correlation between price movements of futures contracts and price
movements in the related portfolio position of the Bond Fund
creates the possibility that losses on the hedging instrument may
be greater than gains in the value of the Bond Fund's position. In
addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Bond Fund might not
be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and 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 they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation
margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options,
where the exposure is limited to the cost of the initial premium.
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.
The Strategic Transactions that the Bond Fund may use and some of
their risks are described more fully in the Statement of Additional
Information.
Investments in debt securities issued by foreign governments and
foreign corporations domiciled in such countries could result in
the imposition of withholding taxes on interest and capital gains
by the country of domicile or residence of the issuer. The amount
of tax withheld, if any, will depend on the domestic tax law of the
country of domicile or residence of the issuer and/or the
availability of a bilateral income tax treaty between such country
and the United States. If a withholding tax is imposed, the rate
of return on the foreign investments could be adversely affected.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends from net investment income are declared annually.
The Bond Fund intends to distribute annually realized net capital
gains, after utilization of capital loss carryforwards, if any, to
prevent application of a federal excise tax. However, it may make
an additional tax distribution any time prior to the due date,
including extensions, of filing its tax return, if necessary to
accomplish this result. Any dividends or capital gains distributed
pursuant to a dividend declaration declared in October, November or
December with a record date in such a month and paid during the
following January will be treated by shareholders for federal
income tax purposes as if received on December 31 of the calendar
year declared. According to preference, shareholders may receive
distributions in cash or have them reinvested in additional shares.
Shareholders will be subject to tax on all dividends declared or
reinvested. If an investment is in the form of a retirement plan,
all dividends and capital gains distributions must be reinvested
into an account.
Generally, dividends from net investment income are taxable to
investors as ordinary income. Certain gains or losses on the sale
or retirement of international bonds held by the Bond Fund, to the
extent attributable to fluctuations in currency exchange rates, as
well as certain other gains or losses attributable to exchange rate
fluctuations, must be treated as ordinary income or loss. Such
income or loss may increase or decrease (or possibly eliminate) the
income available for distribution to shareholders. If, under the
rules governing the tax treatment of foreign currency gains and
losses, the income available for distribution is decreased or
eliminated, all or a portion of the dividends declared by the Bond
Fund may be treated for federal income tax purposes as a return of
capital or, in some circumstances, as capital gain. Generally, a
shareholder's tax basis in his/her Bond Fund shares will be reduced
to the extent that an amount distributed to the shareholder is
treated as a return of capital.
Long-term capital gains distributions, if any, are taxable as
net long-term capital gains when distributed regardless of the
length of time shareholders have owned their shares. Net short-
term capital gains and any other taxable income distributions are
taxable as ordinary income.
The Bond Fund sends detailed tax information about the amount
and type of its distributions to its shareholders by January 31 of
the following year.
PERFORMANCE
From time to time the Bond Fund may advertise information
regarding its performance. All performance figures are historical,
show the performance of a hypothetical investment and are not
intended to indicate future performance. Advertising may include
the following performance measurements.
"Yield" is the ratio of income per share derived from the
portfolio investments to the current maximum offering price
expressed in terms of a percentage.
"Distribution rate" is the amount of distribution per share
made over a twelve-month period divided by a current maximum
offering price.
"Total return" is the total of all income and capital gains
paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment,
expressed as a percentage of the purchase price.
"Average annual total return" refers to the average annual
compound rate of return of an investment in the Bond Fund assuming
that the investment has been held for one year and the life of the
Bond Fund.
"Cumulative total return" represents the cumulative change in
value of an investment in the Bond Fund for various periods. These
calculations assume that dividends and capital gains distributions
were reinvested.
"Capital change" measures return from capital, including
reinvestment of any capital gains distributions but not
reinvestment of dividends.
Performance will vary based upon, among other things, changes
in market conditions and the level of the Bond Fund's expenses.
Please refer to the Statement of Additional Information for more
information on Performance.
THE FUND'S MANAGEMENT
The Board of Directors of the Fund is responsible for the
supervision of the general business of the Fund. The Directors act
as fiduciaries for shareholders under the laws of the State of
Maryland. The Board has appointed John Pasco, III to serve as
President of the Fund. The Fund employs the following persons to
provide it with investment advice and to conduct its on-going
business:
Investment Advisor - Vontobel USA Inc. (the "Advisor") manages
the investments of the Bond Fund pursuant to an Investment Advisory
Agreement (the "Advisory Agreement" ), dated February 10, 1994.
The Advisory Agreement is effective for an initial term of two
years and thereafter may be renewed annually by the Fund's Board of
Directors or shareholders for additional yearly periods. The
address of the Advisor is 450 Park Avenue, New York, N.Y. 10022.
The Advisor is a wholly owned and controlled subsidiary of
Vontobel Holding Ltd., a Swiss bank holding company, having its
registered offices in Zurich, Switzerland. The Advisor currently
manages in excess of $1 billion (which includes the assets of the
Bond Fund, the Vontobel EuroPacific Fund series, the Vontobel U.S.
Value Fund series of Fund, and the Vontobel Eastern European Equity
Fund and an International Equity series of an unaffiliated fund).
The Advisor also acts as the advisor to three series of a
Luxembourg fund organized by an affiliate of the Advisor. That
fund does not accept investments from the U.S.
Mr. Sven Rump, who is a Vice President of the Advisor, is
President of the Bond Fund and its portfolio manager. Mr. Rump is
also a Vice President of Vontobel Asset Management Ltd., Zurich,
Switzerland, where he is responsible for managing fixed income
investments.
Pursuant to the Advisory Agreement the Advisor provides the
Bond Fund with investment management services, subject to the
supervision of the Board of Directors of the Fund, and with office
space, and pays the ordinary and necessary office and clerical
expenses relating to investment research, statistical analysis,
supervision of its portfolio and certain other costs. The Advisor
also bears the cost of fees, salaries and other remuneration of the
Fund's directors, officers or employees who are officers,
directors, or employees of the Advisor. The Bond Fund is
responsible for all other costs and expenses, such as, but not
limited to, brokerage fees and commissions in connection with the
purchase and sale of securities, legal, auditing, bookkeeping and
record keeping services, custodian and transfer agency fees and
fees and other costs of registration of its shares for sale under
various state and Federal securities laws.
Under the Advisory Agreement the monthly compensation paid to
the Advisor is accrued daily at a rate equal to a fee at the annual
rate of 1% of the net assets of the Bond Fund. This fee is higher
than that charged to most other investment companies. The fee is
paid monthly, within five (5) business days after the end of the
month. The Advisory Agreement provides that the fee paid will be
reduced to the extent necessary to comply with any applicable state
expense limitation provision to which the Bond Fund may be subject.
All expenses not specifically assumed by the Advisor are assumed by
the Bond Fund. The Advisor had undertaken for the first 2 years of
operation to the Fund that if fees and other operating expenses of
the Bond Fund, including the advisory fee, exceed 1.35% per annum,
then the Advisor would waive collection of its fee, or otherwise
reimburse the Bond Fund, to the extent that the expenses exceed
that amount. In 1995, the Advisor reimbursed the Bond Fund
$128,371 according to its undertaking.
The Advisory Agreement contemplates the authority of the
Advisor to place orders for the Bond Fund pursuant to its
investment determinations either directly with the issuer or with
any broker or dealer. The Advisor may allocate brokerage to an
affiliated dealer in accordance with written policies and
procedures adopted by the Fund's Board of Directors. In placing
orders with brokers or dealers, the Advisor will attempt to obtain
the best net price and the most favorable execution of its orders.
The Advisor may purchase and sell securities to and from brokers
and dealers who provide the Advisor with research advice and other
services, or who sell shares of the Bond Fund. From time to time,
and subject to the Advisor obtaining the best price and execution
for the Bond Fund, the Board of Directors may authorize the Advisor
to allocate brokerage transactions to a broker in consideration:
(1) of investment research or statistical services, or (2) in
consideration of a payment of an obligation otherwise payable by
the Bond Fund.
Administrator - Commonwealth Shareholder Services, Inc.
("CSS"), serves as Administrator to the Bond Fund pursuant to an
Administrative Services Agreement. CSS provides certain
recordkeeping and shareholder servicing functions required of
registered investment companies, and will assist the Bond Fund in
preparing and filing certain financial and other reports and
performs certain daily functions required for ongoing operations.
CSS may furnish personnel to act as the Fund's officers to conduct
the Fund's business subject to the supervision and instructions of
the Fund's Board of Directors.
The Administrative Services Agreement provides that CSS will be
paid a monthly fee: (1) of $30 per hour for shareholder servicing;
(2) $30 per hour for blue sky matters; (3) the greater of 20 basis
points of the average daily net assets of the Bond Fund or $42,500
per year for administration (which includes regulatory matters,
backup of the pricing of the Bond Fund, administrative duties in
connection with the execution of portfolio trades, and certain
services in connection with the Bond Fund's accounting); and (4)
certain out-of-pocket expenses. The address of CSS is 1500 Forest
Avenue, Suite 223, Richmond, VA 23229.
Custodian and Accounting Services Agent - Brown Brothers
Harriman & Co. ("BBH") is the Fund's Custodian and Accounting
Services Agent. BBH collects income when due and holds all the
Fund's portfolio securities and cash. (BBH, with the consent of the
Fund, has designated The Depository Trust Company of New York, as
its agent to secure some of the assets of the Fund.) BBH is
authorized to appoint other entities to act as sub-custodians to
provide for the custody of foreign securities which may be acquired
and held by the Fund outside the U.S. Such appointments are
subject to appropriate review by the Fund's Board of Directors.
BBH as the Accounting Services Agent maintains and keeps current
the books, accounts, records, journals or other records of original
entry relating to the Fund's business. The address of BBH is 40
Water Street, Boston, Massachusetts 02109.
Transfer and Dividend Disbursing Agent - Fund Services, Inc.
("FSI") is the Transfer and Dividend Disbursing Agent for the Fund.
John Pasco, III, Chairman of the Board of the Fund owns one third
of the stock of FSI, and, therefore, FSI may be deemed to be an
affiliate of the Fund. FSI provides all the necessary facilities,
equipment and personnel to perform the usual and ordinary services
of Transfer and Dividend Disbursing Agent, including:
administrative receipt and processing of orders and payments for
purchases of shares, opening shareholder accounts, preparing
shareholder meeting lists, mailing proxy material, receiving and
tabulating proxies, mailing shareholder reports and prospectuses,
withholding certain taxes on non-resident alien accounts,
disbursing income dividends and capital distributions, preparing
and filing U.S. Treasury Department Form 1099 (or equivalent) for
all shareholders, preparing and mailing confirmation forms to
shareholders for all purchases and redemptions of the Fund's shares
and all other confirmable transactions in shareholders' accounts,
recording reinvestment of dividends and distribution of the Fund's
shares. Under the Agreement between the Fund and FSI, as in effect
on May 1, 1991, FSI is compensated pursuant to a schedule of
services and out-of-pocket expenses. The schedule calls for a
minimum payment of $16,500 per year. During the fiscal year ended
December 31, 1995, the International Bond Fund paid FSI $17,313.
The address of the Transfer and Dividend Disbursing Agent is P.O.
Box 26305, Richmond, VA 23260.
Principal Underwriter/Distributor - First Dominion Capital
Corp. (the "Distributor") acts as the Principal Underwriter for the
Fund pursuant to an agreement effective January 1, 1994. Mr. John
Pasco, III, who owns 100% of the outstanding stock of the
Distributor, is the President, Treasurer and a Director. Mr. Pasco
is also the Chairman and a director of the Fund. The address of
the Distributor is 1500 Forest Avenue, Suite 223, Richmond, VA
23229.
HOW TO INVEST
Shares of the Bond Fund may be purchased directly from the
Distributor or through members of the National Association of
Securities Dealers, Inc. who are registered, if required, in the
state where the purchase is made and who have a sales agreement
with the Distributor. After a shareholder account is established,
subsequent orders for shares may be mailed directly to the Transfer
Agent. Such purchases of shares are made at the net asset value.
A minimum initial investment of $1,000 is required to open a
shareholder account in the Bond Fund, and each subsequent
investment must be $50 or more. Under certain circumstances the
Fund may waive the minimum initial investment for purchases by
officers, directors and employees of the Fund and its affiliated
entities and for certain related advisory accounts and retirement
accounts. The offering price per share is equal to the net asset
value per share next determined after receipt of a purchase order.
When an investor acquires shares of the Bond Fund from their
Securities Dealer, the investor may be charged a transaction fee
for shares purchased and/or redeemed at net asset value through
that broker.
To facilitate the handling of transactions with shareholders,
the Fund uses an open account plan. The Transfer Agent will
automatically establish and maintain an open account for the Bond
Fund's shareholders. Under the open account plan your shares are
reflected in your open account. This service facilitates the
purchase, redemption or transfer of shares, and eliminates the need
to safeguard certificates and reduces time delays in executing
transactions.
Purchase by Mail. For initial purchases the Account
Application form which accompanies this Prospectus should be
completed, signed, and mailed to the Transfer Agent, together with
your check or other negotiable bank draft drawn on and payable by
a U.S. Bank payable to the Vontobel International Bond Fund. For
subsequent purchases include with your check the tear-off stub from
a prior purchase confirmation, or otherwise identify the name(s) of
the registered owner(s) and the social security number.
Investing by Wire. You may purchase shares by requesting your
bank to transmit "Federal Funds" by wire directly to the Transfer
Agent. To invest by wire please call the Transfer Agent for
instructions, then notify the Distributor by calling 800-527-9500.
Your bank may charge you a small fee for this service. The Account
Application which accompanies this Prospectus should be completed
and promptly forwarded to the Transfer Agent. This application is
required to complete the Bond Fund's records in order to allow you
access to your shares. Once your account is opened by mail or by
wire, additional investments may be made at any time through the
wire procedure described above. Be sure to include your name and
account number in the wire instructions you provide your bank.
Stock Certificates - Certificates for full shares will be
issued by the Transfer Agent upon written request but only after
payment for the shares is collected by the Transfer Agent.
HOW TO REDEEM SHARES
Shares may be redeemed at any time and in any amount by mail or
telephone. For your protection, the Transfer Agent will not redeem
your shares until it has received all information and documents
necessary for your request to be in "proper order." (See
"Signature Guarantees.") You will be notified promptly by the
Transfer Agent if your redemption request is not in proper order.
The Fund's procedure is to redeem shares at the net asset value
next determined after receipt by the Transfer Agent of the
redemption request in proper order as described herein. Payment
will be made promptly, but no later than the seventh day following
receipt of the request in proper order. Please note that (1) the
Transfer Agent cannot accept redemption requests which specify a
particular date for redemption, or which specify any special
conditions; and (2) if the shares you are redeeming were purchased
by you less than fifteen (15) days prior to the receipt of your
redemption request, the Transfer Agent must ascertain that your
check in payment of the shares you are redeeming has cleared prior
to disbursing the redemption proceeds. If you anticipate the need
to redeem before fifteen (15) days, you should make your purchase
by Federal Funds wire, or by a certified, treasurer's or cashier's
check.
The Fund may suspend the right to redeem shares for any period
during which the New York Stock Exchange is closed or the
Securities and Exchange Commission determines that there is an
emergency. In such circumstances you may withdraw your redemption
request or permit your request to be held for processing at the net
asset value per share next computed after the suspension is
terminated.
Redemption by Mail - To redeem shares by mail, send the
following information to the Transfer Agent: (1) a written request
for redemption signed by the registered owner(s) of the shares,
exactly as the account is registered; (2) the stock certificates
for the shares you are redeeming, if any were issued; (3) any
required signature guarantees (See "Signature Guarantees"); and (4)
any additional documents which might be required for redemption by
corporations, executors, administrators, trustees, guardians, etc.
The Transfer Agent will mail the proceeds to your currently
registered address, payable to the registered owner(s) unless you
specify otherwise in your redemption request. There is no charge to
shareholders for redemptions by mail.
Redemption by Telephone - You may redeem your shares by
telephone if you request this service at the time you complete your
initial Account Application. If you do not request this service at
that time, you must request approval of telephone redemption
privileges in writing (sent to the Fund's Transfer Agent) with a
signature guarantee before you can redeem shares by telephone.
There is no charge for establishing this service, but the Transfer
Agent will charge your account a $10.00 service fee each time you
make a telephone redemption. Once your telephone authorization is
in effect, you may redeem shares by calling the Transfer Agent at
(800) 628-4077. By establishing this service, you authorize the
Transfer Agent to act upon any telephone instructions it believes
to be genuine, to (1) redeem shares from your account and (2) mail
or wire redemption proceeds. There is a $10.00 service fee
for making a telephone redemption. The amount of these service
charges may be changed at any time, without notice, by the Transfer
Agent.
You cannot redeem shares by telephone if you hold a stock
certificate representing the shares you are redeeming or if you
paid for the shares with a personal, corporate, or government check
and your payment has been on the books of the Fund for less than 15
days.
If it should become difficult to reach the Transfer Agent by
telephone during periods when market or economic conditions lead to
an unusually large volume of telephone requests, a shareholder may
send a redemption request to the Transfer Agent by overnight mail.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if
it does not, it may be liable for any losses due to unauthorized or
fraudulent transactions. As a result of this policy, a shareholder
authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which the Fund
believes to be genuine. When you request a telephone redemption or
transfer, you will be asked to respond to certain questions
designed to confirm your identity as a shareholder of record. Your
cooperation with these procedures will protect your account and the
Fund from unauthorized transactions.
Signature Guarantees - To protect you and the Fund from fraud,
signature guarantees are required for: (1) all redemptions ordered
by mail if you require that the check be payable to another person
or that the check be mailed to an address other than the one
indicated on the account registration; (2) all requests to transfer
the registration of shares to another owner; and (3) all
authorizations to establish or change telephone redemption service,
other than through your initial account application.
In the case of redemption by mail, signature guarantees must
appear either: (a) on the written request for redemption; (b) on a
separate instrument of assignment (usually referred to as a "stock
power") specifying the total number of shares being redeemed. If
shares held by the Transfer Agent are being redeemed, the signature
guarantee must be on the written request or stock power. The Fund
may waive these requirements in certain instances.
The following institutions are acceptable guarantors: (a)
participants in good standing of the Securities Transfer Agents
Medallion Program ("STAMP"); (b) commercial banks which are members
of the Federal Deposit Insurance Corporation ("F.D.I.C."); (c)
trust companies; (d) firms which are members of a domestic stock
exchange; (e) eligible guarantor institutions qualifying under Rule
17Ad-15 of the Securities Exchange Act of 1934 that are authorized
by charter to provide signature guarantees (e.g., credit unions,
securities dealers and brokers, clearing agencies and national
securities exchanges); and (f) foreign branches of any of the
above. In addition, the Fund will guarantee your signature if you
personally visit its offices at 1500 Forest Avenue, Suite 223,
Richmond, VA 23229. The Transfer Agent cannot honor guarantees
from notaries public, savings and loan associations, or savings
banks.
Small Accounts - Due to the relatively higher cost of
maintaining small accounts, the Fund may deduct $10 (payable
to the Transfer Agent) from accounts valued at less than $1,000
unless the account value has dropped below $1,000 solely as a
result of share value depreciation. Shareholders will receive 60
days' written notice to increase the account value before the fee
is deducted.
HOW TO TRANSFER SHARES
If you wish to transfer shares to another owner, send a written
request to the Transfer Agent. Your request should include (1) the
name of the fund and existing account registration; (2)
signature(s) of the registered owner(s); (3) the new account
registration, address, Social Security Number or taxpayer
identification number and how dividends and capital gains are to be
distributed; (4) any stock certificates which have been issued for
the shares being transferred; (5) signature guarantees (See
"Signature Guarantees"); and (6) any additional documents which are
required for transfer by corporations, administrators, executors,
trustees, guardians, etc. If you have any questions about
transferring shares, call the Transfer Agent at (800) 628-4077.
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
Each time you purchase, redeem or transfer shares of the Bond
Fund, you will receive a written confirmation. You will also
receive a year-end statement of your account if any dividends or
capital gains have been distributed, and an annual and a semi-
annual report.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following four services for its
shareholders:
Regular Account - allows shareholders to make voluntary
additions and withdrawals to and from their account as often as
they wish;
Invest-A-Matic - permits automatic monthly investments into the
Bond Fund from your checking account on a fixed or flexible
schedule;
Individual Retirement Accounts (IRA's); and
Exchange Privileges - allows the shareholder to exchange his or
her shares for shares of certain other funds having a different
investment objective from the Bond Fund provided the shares of the
fund the shareholder is exchanging into are registered for sale in
shareholders state of residence. More information on any of these
services is available upon written request to the Fund.
HOW NET ASSET VALUE IS DETERMINED
The Net Asset Value ("NAV") of the Bond Fund is determined by
the Fund's custodian, Brown Brothers Harriman & Co., as of the
close of trading of the New York Stock Exchange (currently 4:00
P.M., Eastern Time) on each business day from Monday to Friday or
on each day (other than a day during which no security was tendered
for redemption and no order to purchase or sell such security was
received by the Bond Fund) in which there is a sufficient degree of
trading in the portfolio securities that the current NAV of the
shares might be materially affected by changes in the value of such
portfolio security. The Bond Fund's NAV is calculated at the 4:00
p.m. time set by the Fund's Board of Directors based upon a
determination of the most appropriate time to price the securities.
NAV per share is determined by dividing the total value of the
assets, less its liabilities, by the total number of shares then
outstanding. Generally, securities owned by the Bond Fund are
valued at market value.
The Fund's management may compute the NAV per share more
frequently in order to protect shareholders' interests.
TAXES
The Bond Fund will seek to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986
(the "Code"). As a regulated investment company under the Code, it
is not liable for federal income taxes on income or net capital
gains which are distributed to its shareholders or imputed to
shareholders under the Code, or for any excise tax, to the extent
its earnings are distributed as provided in the Code, and assuming
it meets the tax diversification test, 90% gross income test and
30% gross income test as required by the Code.
In order to meet the tax diversification test, at the close of
each quarter of its fiscal year, at least 50% of the value of its
total assets must be represented by cash and cash items including
receivables (for these purposes, currency and demand deposits
denominated in a currency other than the U.S. dollar will not be
considered cash, a cash item or a receivable), U.S. Government
securities, and securities of other regulated investment companies,
and other securities limited in respect of any one issuer to an
amount not greater than 5% of the value of its total assets, and to
not more than 10% of the outstanding voting securities of such
issuer; and, not more than 25% of the value of its total assets may
be invested in the securities of any one issuer (other than U.S.
Government securities and the securities of other regulated
investment companies).
The Bond Fund will meet the 90% of gross income test if 90% of
its gross income is derived from dividends, interest, payments with
respect to certain securities loans, and gain from the sale or
disposition of stock or securities or foreign currencies, or other
income (including but not limited to gains from options, futures,
or forward contracts) derived with respect to its business of
investing in such stock, securities, or currencies.
The Bond Fund will meet the 30% of gross income test provided
less than 30% of its gross income for the fiscal year is derived
from the sale or disposition of any of the following held for less
than 3 months: stock or securities, options, futures, or forward
contracts (other than such contracts on foreign currencies), and
foreign currencies (or options, futures, or forward contracts on
foreign currencies) but only if such currencies (and hedging
instruments) are not directly related to the Bond Fund's principal
business of investing in stock or securities (or options and
futures with respect to stock or securities.)
The Bond Fund will act and invest so as to comply with the
requirements of Subchapter M outlined above. This may mean, for
example, that it will be required to hold an investment longer than
it otherwise would, or not engage in a hedging transaction which it
otherwise would, in order to avoid violating one of the tests
outlined above.
The distribution to shareholders each year of investment income
and capital gains will represent taxable income to the
shareholders. The Fund is a series corporation. Each series is
taxed as a separate taxable entity under the Code.
The Bond Fund may be subject to foreign withholding taxes on
income from certain of its foreign securities. If more than 50% of
the value of its assets at the close of its taxable year consists
of stock or securities in foreign corporations, it may elect to
pass through to its shareholders the amount of foreign withholding
taxes it paid. If this election is made, shareholders will be (i)
required to include in their gross income their pro rata share of
foreign source income (including any foreign taxes paid by the
fund), and (ii) entitled to either deduct (as an itemized deduction
in the case of individuals) their share of such foreign taxes in
computing their taxable income or to claim a credit for such taxes
against their U.S. income tax, subject to certain limitations under
the Code. The Bond Fund will notify its shareholders of such
election within 60 days of the close of its tax year. Shareholders
may decide whether to utilize such flow through amount as either a
deduction or a tax credit; individual shareholders will usually
find that the credit is more favorable. Tax exempt investors, such
as pension plans and individual retirement accounts, will not
benefit from this pass through.
GENERAL INFORMATION ABOUT THE FUND
The Fund is authorized to issue up to 500,000,000 shares of
$0.01 par value common stock, of which it has presently allocated
50,000,000 shares to the Bond Fund, 50,000,000 shares to the
Vontobel EuroPacific Fund series, 50,000,000 to the Vontobel U.S.
Value Fund series, 50,000,000 to the Sand Hill Portfolio Manager
Fund series and 50,000,000 to the Vontobel Eastern European Equity
Fund series. The Board of Directors can allocate the remaining
authorized but unissued shares to any series of the Fund or may
create additional series and allocate shares to such series.
A share of the Bond Fund has priority in the assets of that
fund in the event of a liquidation. The shares of the Bond Fund
will be fully paid and non-assessable, will have no preference over
other shares of the Bond Fund as to conversion, dividends, or
retirement, and will have no preemptive rights. Shares of the Bond
Fund will be redeemable from the assets of the Bond Fund at any
time.
Each outstanding share of the Fund is entitled to one vote for
each full share of stock and a fractional vote for fractional
shares of stock. All shareholders vote on matters which concern
the corporation as a whole. The Fund is not required to hold a
meeting of shareholders each year, and may elect not to hold a
meeting in years when no meeting is necessary. The Bond Fund shall
vote separately on matters which affect only its interest. The
Fund's shares do not have cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the
election of directors can elect all of the directors if they choose
to do so. Shareholders may utilize procedures described in the
Statement of Additional Information to call a meeting.
Limitation on Use of Name - The Advisory Agreement for the Bond
Fund authorizes the Fund to utilize the name "Vontobel." The Fund
agrees that if the Advisory Agreement is terminated it will submit
to shareholders a proposal that the Bond Fund redesignate its name
to eliminate any reference to the name "Vontobel" or any derivation
thereof unless the Advisor waives this requirement in writing.
MORE INFORMATION
For further information on the Bond Fund please contact
Commonwealth Shareholder Services, Inc., P.O. Box 8687, Richmond,
VA 23226, telephone: (800) 527-9500.
Additional information may also be obtained by requesting a
copy of the Statement of Additional Information.
<PAGE>
Investment Advisor: Vontobel USA Inc.
450 Park Avenue
New York, N.Y. 10022
Distributor: First Dominion Capital Corp.
1500 Forest Avenue, Suite 223
Richmond, Va. 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, Pa. 19102
Marketing Services: For general information on the Bond Fund
and Marketing Services, call the Advisor
at (800) 445-8872 Toll Free
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260
(800) 628-4077 Toll Free
More Information: For 24 hour, 7 days a week price
information call 1-800-527-9500.
For information on any series of the
Fund, Investment plans, or other
shareholder services, call 1-800-527-9500
during normal business hours, or write
the Fund at 1500 Forest Avenue, Suite
223, Richmond, Va. 23229
For information on any series of the Fund, investment plans, or
other shareholder services, call 1-800-527-9500 during normal
business hours, or write the Fund at 1500 Forest Avenue, Suite
223, Richmond, VA 23229.
<PAGE>
SAND HILL PORTFOLIO MANAGER FUND
A "SERIES" OF THE WORLD FUNDS, INC.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
1-800-527-9500 (Toll Free)
Prospectus Dated May 2, 1996
This Prospectus offers shares of the Sand Hill Portfolio Manager
Fund (the "Fund"), a no-load diversified series of The World Funds,
Inc. ("TWF"), an open-end management investment company commonly
known as a "mutual fund." TWF is currently composed of five
series, each of which is offered to investors through its own
prospectus. TWF offers investors a choice of investment
objectives, with each series having its own separate and distinct
portfolio of investments and operating much like a separate mutual
fund.
The Fund seeks to maximize total return (consisting of realized and
unrealized appreciation plus income) consistent with allocating its
investments among equity securities (i.e., stocks), debt securities
(i.e., bonds) and short term investments.
This Prospectus sets forth concisely the information about the Fund
which a prospective investor should know before investing. It
should be read and retained for future reference. More information
about the Fund has been filed with the Securities and Exchange
Commission and is contained in the "Statement of Additional
Information," dated May 2, 1996, which is available at no charge
upon written request to the Fund. The Fund's Statement of
Additional Information is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY
ESTIMATED FUND EXPENSES
THE WORLD FUNDS, INC.
INVESTMENT OBJECTIVE
WHY INVEST IN THE FUND?
ASSET ALLOCATION POLICIES
ADDITIONAL INFORMATION ON INVESTMENTS, POLICIES AND RISKS
PERFORMANCE
THE FUND'S MANAGEMENT
HOW TO INVEST
HOW TO REDEEM SHARES
HOW TO TRANSFER SHARES
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
SPECIAL SHAREHOLDER SERVICES
HOW NET ASSET VALUE IS DETERMINED
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
TAXES
GENERAL INFORMATION ABOUT THE FUND
MORE INFORMATION
<PAGE>
SAND HILL PORTFOLIO MANAGER FUND
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus.
Investment Objective: The investment objective of the Sand Hill
Portfolio Manager Fund (the "Fund") is to seek to maximize total
return (consisting of realized and unrealized appreciation plus
income) consistent with allocating its investments among equity
securities (i.e., stocks), debt securities (i.e., bonds) and short
term investments. As with any mutual fund, there is no assurance
that the Fund will achieve its objective. See "Investment
Objective" on Page ___ .
Investment Advisor: Sand Hill Advisors, Inc. is the Investment
Advisor of the Fund. See "The Fund's Management" on Page___ .
Distributions/Dividends: Paid annually from available capital
gains and income. See "Dividends and Capital Gains Distributions"
on Page___.
Reinvestment: Distributions may be reinvested automatically
without a sales charge. See "Dividends and Capital Gains
Distributions" on Page ___.
Initial Purchase: $25,000 minimum. See "How to Invest" on Page
___.
Subsequent Purchases: $50 minimum. See "How to Invest" on
Page___.
Net Asset Value: The net asset value per share of the Fund is
calculated on each day that the New York Stock Exchange is open for
trading. You may obtain the net asset value per share of the Fund
by calling 1-800-527-9500. See "How the Net Asset Value is
Determined" on Page___ .
No Sales Charge or Redemption Fees: The Fund's shares are sold at
their net asset value per share, with no sales charges, Rule 12b-1
fees, redemption fees or exchange fees.
Principal Risk Factors: The Fund invests in different types of
securities issued in the United States or abroad. Its performance
will be influenced by various factors, including market and
economic conditions, company-specific developments and the skill of
the Investment Advisor in allocating investments among stocks,
bonds and other investments. See "Asset Allocation Policies" on
page _______. The Fund may invest in foreign securities, and
therefore may be affected by changes in exchange rates between
foreign currencies and the U.S. dollar, adverse social or political
developments and other factors. See "Foreign Securities and
Depositary Receipts" on page _______________.
<PAGE>
ESTIMATED FUND EXPENSES
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None*
Exchange Fees None
*A shareholder placing a telephone redemption request will be
charged $10.
Annual Fund Operating Expenses (as % of average net assets)
Management Fee 0.00%
12b-1 Fees None
Other Operating Expenses 3.03%**
Total Fund Operating Expenses 3.03%**
**The Investment Advisor has undertaken to reduce its advisory fee
of 1.0% or reimburse the Fund so that total operating expenses
during the first three years of the Investment Advisory Agreement
do not exceed 1.90% of average net assets. Other Operating
Expenses have been increased by 1.13% to reflect additional
custodian fees which were offset by custodian fee credits. Taking
into account such credits, total Fund Operating expenses on a net
basis were 1.905 in 1995.
The purpose of this table is to assist investors in
understanding the various costs and expenses that they will bear
directly or indirectly. "Other Operating Expenses" are based on
estimated amounts for the Fund's current fiscal year. Management
expects that as the Fund increases in size its other operating
expenses will reflect economies of scale.
The following example illustrates the expenses that an investor
would pay on a $1,000 investment over various time periods assuming
(1) a 5% annual rate of return, and (2) redemption at the end of
each time period. As noted in the table above, the Fund charges no
redemption fees of any kind.
1 Year 3 Years 5 years 10 years
$31 $94 $159 $335
These examples should not be considered a representation of
past or future expenses or performance. Actual expenses may be
greater or lesser than those shown.
<PAGE>
FOR A SHARE OUTSTANDING DURING THE PERIOD INDICATED: The Financial
Highlights for the periods indicated below have been examined by
Tait, Weller and Baker, independent certified public accountants,
whose report thereon appears in the Annual report to Shareholders
of the Sand Hill Portfolio Manager Fund for the year ended December
31, 1995 and is incorporated by reference in this Prospectus.
Financial Highlights
For a Share Outstanding Throughout Each Period
January 2, 1995*
to
December 31, 1995
Per Share Operating Performance
Net asset value, beginning of period $10.00
Income from investment operations-
Net investment income .06
Net realized and unrealized gain on investments 1.10
Total from investment operations 1.16
Less distributions-
Distributions from net investment income (.05)
Total distributions (.05)
Net asset value, end of period $11.11
Total Return 11.60%
Ratios/Supplemental Data
Net assets, end of period (000's) $4,025
Ratio to average net assets-(A)
Expenses (B) 3.03%
Expense ratio-net (C) 1.90%
Net investment income (B) (.61%)
Portfolio turnover rate 40.96%
* Commencement of operations
(A) Management fee waivers reduced the expense ratios and
increased the net investment income ratio by 1.00%.
(B) Expense ratio has been increased and net investment
income has been reduced to include custodian fees which
were offset by custodian credits.
(C) Expense ratio-net reflects the effect of the custodian
fee credits the fund received.
See Notes to Financial Statements
<PAGE>
1995 PERFORMANCE
The Sand Hill Portfolio Manager Fund gained 11.60% for the year
versus the returns of the following relevant indices:
S&P 37.53%
MSCI EAFE (foreign share index) 9.49%
Salomon Bond Index 18.30%
U.S. Treasury Bills 6.20%
During 1995, investors emphasized domestic technology and
financial issues, and these sectors tended to drive performance
in the U.S. stock market. Since the Portfolio Manager Fund aims
for a more diversified mix of securities, as reflected by the
foreign (ADR's), bond and Treasury Bill components of the
portfolio, performance appropriately displays the results of the
mixture of these ingredients. While the index results shown
above cover all of 1995, it should be noted that the Portfolio
Manager Fund's first investor assets were not available for
investment until January 16. By that point, the S&P 500 had
already achieved three percentage points of its total 1995 gain.
By year-end, the Fund has positioned itself broadly throughout
a variety of asset classes or sectors, the most prominent of
which were domestic consumer products companies, technology
firms, diversified foreign equities, and intermediate term U.S.
bonds.
THE WORLD FUNDS, INC.
The Sand Hill Portfolio Manager Fund (the "Fund") is a no-load
series of The World Funds, Inc. ("TWF"), an open-end diversified
management investment company incorporated in Maryland in 1983.
The Fund currently consists of five series, and the Board of
Directors of the Fund may elect to add more series in the
future. A minimum initial investment of $25,000 is required to
open a shareholder account in the Fund, and each subsequent
investment must be $50 or more.
INVESTMENT OBJECTIVE
The Fund seeks to maximize total return (consisting of realized
and unrealized appreciation plus income) consistent with
allocating its investments among equity securities (i.e.,
stocks), debt securities (i.e., bonds) and short term
investments. By allocating investments across broad asset
classes, the Investment Advisor seeks to achieve over time a
high total return, yet experience lower price volatility than
might be inherent in a more limited asset mix.
The investment objective of the Fund may not be changed without
the approval of shareholders. Unless specifically stated
otherwise, each of the Fund's other investment policies may be
changed by the Board of Directors, without shareholder approval.
There is no assurance that the investment objective can be
achieved.
Because the value of the securities in which the Fund may invest
may fluctuate from day-to-day, the value of an investment in the
Fund will vary based upon the Fund's investment performance.
When you sell your shares of the Fund, they may be worth more or
less than their cost to you.
WHY INVEST IN THE FUND?
The Fund is designed for investors seeking maximum total return
through a professionally managed portfolio which provides a mix
of domestic and foreign stocks, bonds and short term
investments. The purpose of an investment in the Fund should be
to seek representation in a wide selection of asset classes and
markets with specific allocations and securities selections set
by an experienced portfolio management organization.
The Fund provides an easy, efficient and low cost way of
investing in a carefully selected, continuously managed and
diversified portfolio of equity securities, debt securities and
short term investments. (See "Equity Securities, Debt
Securities and Short Term Investments" on Page __.)
ASSET ALLOCATION POLICIES
The Fund seeks to take advantage of investment opportunities
using a mix of asset classes and markets throughout the world.
Investments will be selected not only based upon the Investment
Advisor's evaluation of the merits of the particular investment,
but also based upon the Investment Advisor's evaluation of the
investment's relationship to other investments in the portfolio.
National economies and their investment markets change at
varying rates and not necessarily in tandem with one another.
Many foreign markets do not have the maturity, depth, or
liquidity of the U.S. market; therefore, the opportunity to
take advantage of their growth normally means acceptance of
higher price volatility than is usual in the U.S. The
Investment Advisor believes that by allocating investments among
equity, debt and short term asset classes in different markets,
the Fund can seek to benefit from the faster growth of several
of them. In addition, investing assets in a number of markets
may provide less portfolio volatility than might otherwise
result from investment in a single market.
The Fund's investments are allocated among equity securities,
debt securities and short term investments, according to the
Investment Advisor's anticipation of risks and returns for each
asset class. There are no limitations on the amount of the
Fund's assets which may be allocated to each of these three
asset classes. The Investment Advisor believes that, over time,
common stocks produce the greatest return among these asset
classes. Therefore, common stocks will normally comprise a
large percentage of the invested assets. Bonds, or other
evidences of indebtedness, will be used to generate income, to
seek capital gains and to dampen portfolio volatility. While
representation in markets and asset classes is the purpose of
the Fund, the Investment Advisor intends to retain the
flexibility necessary to move among asset classes and markets as
changing conditions of the United States and foreign economies
warrant. Asset classes will be considered both for their total
return potential as well as for the defensive or strategic
aspects they offer the portfolio. In that sense, interest-
earning short term investments will, in varying degrees, be a
component of the overall asset allocation.
Because the Fund invests in different types of securities in
proportions which will vary over time, investors should not
expect the Fund to exhibit stable asset allocations. Investors
should also realize that the Fund's performance will depend upon
the skill of the Investment Advisor to anticipate the relative
risks and return of stocks, bonds and other securities and to
adjust the portfolio accordingly.
Equity Securities, Debt Securities and Short-Term Investments
The three major asset classes in which the Fund will invest, as
defined by the Investment Advisor, are equity securities, debt
securities and short term investments. Short term investments
are debt securities with less than three years to maturity, and
are viewed as comprising a different type of investment risk
than longer term debt securities, involving less risk of
interest rate volatility.
Within each of these asset classes, the Fund may invest in
foreign or domestic securities.
Equity Securities consist of common stocks as well as warrants,
rights, and securities which are convertible into common stocks,
such as convertible bonds.
The Investment Advisor uses valuation screens for the Fund's
equity holdings primarily involving an analysis of a company's
cash flow return. Specifically, the Investment Advisor
determines the cash flow of a company and then applies a market
derived discount rate to the cash flows. Next the Investment
Advisor determines the free cash flow that can be reinvested
into the company and applies the same market derived discount
rate. The Investment Advisor also identifies industries which
are positioned to participate in strong demographic, societal or
economic trends and looks for companies within those industries
which have a particular competitive advantage or niche.
Stocks and other equity securities are subject to the risk that
specific stocks or the prices of equity securities in general
will decline in value over short or even extended periods of
time.
Debt Securities consist of the following bonds and other
obligations of indebtedness denominated in U.S. or foreign
currencies which are issued by governments, companies or other
issuers to borrow money from investors:
* obligations issued or guaranteed by the U.S. Government
or a foreign national government or the agencies,
instrumentalities or political subdivisions of the U.S.
Government or of a foreign government;
* obligations issued or guaranteed by supranational
organizations (e.g., European Investment Bank, Inter-
American Development Bank, the World Bank and other
organizations);
* obligations of foreign or domestic corporations;
* long term debt securities issued by banks or bank
holding companies;
* other debt securities whose purchase is consistent with
the investment objective of the Fund.
Debt securities may pay fixed or variable rates of interest, may
have varying maturity dates at which the issuers must repay
their debt, and have varying degrees of risk. The market values
of debt securities are influenced primarily by credit risk (the
risk that the issuer of the security will not maintain the
financial strength needed to pay principal and interest on its
debt securities) and interest rate risk, which is the risk that
changes in prevailing interest rates will increase or decrease
the prices of outstanding debt securities. Generally, the
market values of fixed-income debt securities vary inversely
with changes in prevailing interest rates. When interest rates
rise, fixed-rate debt securities fall in value. Conversely,
when interest rates fall, fixed-rate debt securities increase in
value.
There is no limit on the maturities of the debt securities
that the Investment Advisor will select. Rather, the Investment
Advisor will select debt securities for the Fund on the basis
of, among other things, credit quality, yield, potential for
capital gains and its fundamental outlook for currency and
interest rate trends around the world.
The Fund will invest in investment grade debt instruments that
bear the rating BBB or higher by Standard & Poor's Corporation
("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") or unrated securities which the Investment Advisor
deems to be of comparable quality. However, the Fund reserves
the right to invest its assets in lower quality debt securities,
which are commonly known as "junk bonds". It will do so to
avail itself of the higher yields available with these
securities or to seek to realize capital gains. The Fund does
not currently intend to invest more than 5% of its assets in
securities rated below investment grade or which are unrated but
are of comparable quality as determined by the Investment
Advisor. If that policy should change, the Fund will revise its
prospectus and advise the Fund's shareholders.
After its purchase by the Fund, a debt security may cease to be
rated or its rating may be reduced. Neither event would require
the elimination of the debt security from the portfolio.
Short Term Investments are obligations denominated in U.S. or
foreign currencies consisting of bank deposits, bankers
acceptances, certificates of deposit, commercial paper, short-
term government, government agency, supranational agency and
corporate obligations, and repurchase agreements. Depending on
the Investment Advisor's assessment of the prospects for the
various asset classes, all or a portion of the Fund's assets may
be invested in high quality short-term investments to protect
against adverse movements of interest rates or to provide
liquidity.
ADDITIONAL INFORMATION ON INVESTMENTS, POLICIES AND RISKS
The Fund may invest in the securities, and engage in the
investment practices described below, each of which may involve
the specific risks which are described. The Fund may not buy
all of these securities or engage in all of these investment
practices at any one point in time or even over an extended
period of time. See the Statement of Additional Information for
more detailed information about these securities and investment
practices, including limitations designed to reduce related
risks.
Foreign Securities and Depositary Receipts
Investing in foreign securities may involve special risks, such
as:
Social or Political Risk. Social or political instability,
limitations on the removal of funds from foreign countries,
expropriation, repudiation by a foreign government of its
debt, or confiscatory taxes could adversely affect the value
of the Fund's foreign investments.
Currency Risk. The U.S. dollar value of a foreign security
could decrease when the value of the U.S. dollar rises
against the foreign currency in which the security is
denominated, and could increase when the U.S. dollar falls
against that currency.
Market Risk. Foreign securities may be less liquid and show
greater price volatility than domestic securities.
Regulatory Risk. Foreign issuers of securities are not
generally subject to the regulatory controls or the
accounting and financial reporting standards imposed on U.S.
issuers. There is generally less publicly available
information about foreign securities than about domestic
securities. Also, judgments may be more difficult to
enforce abroad.
The foreign securities the Fund purchases may be bought directly
in their principal markets abroad or they may be acquired
through the use of depositary receipts. The Fund may invest in
both sponsored and unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and other
similar depositary receipts. ADRs are issued by an American
bank or trust company and evidence ownership of underlying
securities of a foreign company. EDRs are receipts issued in
Europe, usually by foreign banks, that evidence ownership of
either foreign or domestic underlying securities. Unsponsored
ADRs and EDRs are organized without the participation of the
issuer of the underlying securities. As a result, information
concerning the issuer may not be as current as for sponsored
ADRs and EDRs.
Convertible Securities
The Fund may invest in convertible securities. A convertible
security is a fixed-income security (a bond or preferred stock)
that may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of
the same or a different issuer. Through their conversion
feature, convertible securities provide an opportunity to
participate in capital appreciation resulting from an increase
in the value of a convertible security's underlying common
stock. The value of a convertible security is influenced by the
market value of the underlying common stock and tends to
increase as the market value of the underlying stock rises, and
tends to decrease as the market value of the underlying stock
declines. For purposes of considering convertible securities
for purchase by the Fund, the Investment Advisor evaluates
convertible securities by standards applicable to equity
securities and not by debt instrument ratings.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of
closed-end investment companies. Because of restrictions on
direct investment by U.S. entities in certain countries,
investment in other investment companies may be the most
practical or only manner in which the Fund can invest in the
securities markets of those countries. Investment in the shares
of other investment companies may involve duplicative investment
advisory and administrative expenses and is subject to
limitations under the Investment Company Act of 1940. See The
Statement of Additional Information for a description of these
limitations.
Zero Coupon Securities
The Fund may purchase zero coupon securities which pay no
cash income and are sold at substantial discounts from their
value at maturity. When held to maturity, their entire income,
which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity.
This accretion of discount will constitute additional taxable
income to the Fund which it is required to distribute at least
annually in order to comply with the Internal Revenue Code,
notwithstanding that it will not have received cash attributable
to such income until maturity or until the instrument is sold.
Zero coupon securities are subject to greater market value
fluctuations from changing interest rates than debt obligations
of comparable maturities which make current cash distributions
of interest.
Repurchase Agreements
As a means of earning income for periods as short as overnight,
the Fund may, without limit, enter into repurchase agreements,
which are collateralized by U.S. government securities, with
selected banks and broker/dealers. Under a repurchase
agreement, a fund acquires securities, subject to the seller's
agreement to repurchase at a specified time and price. The Fund
requires the party obligated to repurchase the securities to
provide it with collateral for that obligation.
If the seller under a repurchase agreement becomes insolvent,
the Fund's right to dispose of the securities may be restricted.
In the event of bankruptcy proceedings with respect to the
seller of the securities, before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the securities. Also, the
value of such securities may decline before it is able to
dispose of them.
When-Issued Securities
The Fund may purchase securities on a when-issued or forward
delivery basis, for payment and delivery at a later date. The
price and yield are generally fixed on the date of commitment to
purchase. During the period between purchase and settlement, no
interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the
purchase price. The Fund's net asset value reflects gains or
losses on such commitments each day, and the Fund segregates
assets each day sufficient to meet the Fund's obligations to pay
for the securities.
Illiquid Securities
Normally, the Fund will not invest more than 5% of its net
assets in securities which are illiquid or not readily
marketable; however, the Fund is permitted to invest up to 15%
of its net assets in illiquid securities.
Strategic Transactions
The Fund may, but is not required to, utilize various other
investment strategies, including the use of derivatives, as
described below to hedge various market risks (such as changes
in security prices, interest rates and currency exchange rates),
or to enhance potential gain. Such strategies are generally
accepted as modern portfolio management techniques and are
regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments may change over time as
new instruments and strategies are developed or regulatory
changes occur.
In the course of pursuing these investment strategies, the Fund
may purchase and sell exchange-listed put and call options on
securities and securities indices, and enter into various
currency transactions such as currency forward contracts, and
options on currencies (collectively, all of the above are called
"Strategic Transactions").
Strategic Transactions involving derivatives may be used to
attempt to protect against possible changes in the market value
of securities held in or to be purchased for the Fund's
portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect its unrealized gains in the value
of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to establish a position in
the options markets as a temporary substitute for purchasing or
selling particular securities, or as a means to efficiently
change country and/or currency allocation.
The ability of the Fund to utilize these Strategic Transactions
successfully will depend on the Investment Advisor's ability to
predict pertinent market movements, which cannot be assured.
The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including
possible default by the other party to the transaction,
illiquidity and, to the extent the Investment Advisor's view as
to certain market movements is incorrect, the risk that the use
of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale or purchase of
portfolio securities at inopportune times or for prices higher
than or lower than current market values, limit the amount of
appreciation it can realize on its investments or cause it to
hold a security it might otherwise sell. In addition, options
markets may not be liquid in all circumstances. As a result, in
certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all.
Although the use of options transactions for hedging should tend
to minimize the risk of loss due to a decline in the value of
the hedged position, at the same time it tends to limit any
potential gain which might result from an increase in value of
such position. The use of currency transactions can result in
the Fund incurring losses as a result of a number of factors,
including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified
currency. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income,
and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions
that the Fund may use and the risks of these techniques are
described more fully in the Statement of Additional Information.
Other Securities
The Fund may also invest in other types of securities which will
not constitute the Fund's principal portfolio emphasis, such as,
mortgage-backed securities, asset-backed securities, indexed
securities and warrants. Each of these types of securities
will, if used, comprise less than 5% of the Fund's total assets.
Please see the Statement of Additional Information for further
details.
Fundamental Limitations
The Fund has adopted certain fundamental limitations which may
not be changed without a shareholder vote and which are designed
to reduce its investment risk. Some of these limitations are
that the Fund may not:
* as to 75% of its assets, purchase the securities of any
issuer (other than obligations issued or guaranteed as to
principal and interest by the Government of the United
States or any agency or instrumentality thereof) if, as a
result of such purchase, more than 5% of its total assets
would be invested in the securities of such issuer;
* purchase stock or securities of an issuer (other than
obligations issued or guaranteed as to principal and
interest by the Government of the United States or any
agency or instrumentality thereof) if such purchase would
cause the Fund to own more than 10% of any class of the
outstanding stock or securities or more than 10% of any
class of voting securities of such issuer;
* borrow money, except through reverse repurchase agreements
or from banks for temporary or emergency purposes, and then
only in an amount not in excess of 20% of the value of the
Fund's net assets at the time the borrowing is made; or
* purchase the securities of any issuer (other than
obligations issued or guaranteed by the Government of the
United States or any agency or instrumentality thereof) if,
as a result of such purchase, more than 25% of the Fund's
total assets would be invested in any one industry.
These limitations apply at the time the Fund purchases
securities for the portfolio. See the Statement of Additional
Information for other investment limitations applicable to the
Fund.
PERFORMANCE
From time to time the Fund may advertise information regarding
its performance. All performance figures are historical, show
the performance of a hypothetical investment and are not
intended to indicate future performance. Advertising may
include the following performance measurements.
"Yield" is the ratio of income per share derived from the
portfolio investments to the current maximum offering price
expressed in terms of a percentage.
"Total return" is the total of all income and capital gains paid
to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original
investment, expressed as a percentage of the purchase price.
"Average annual total return" refers to the average annual
compound rate of return of an investment in the Fund assuming
that the investment has been held for one year and the life of
the Fund.
"Cumulative total return" represents the cumulative change in
value of an investment in the Fund for various periods. These
calculations assume that dividends and capital gains
distributions were reinvested.
"Capital change" measures return from capital, including
reinvestment of any capital gains distributions but not
reinvestment of dividends.
Performance will vary based upon, among other things, changes in
market conditions and the level of the Fund's expenses. Please
refer to the Statement of Additional Information for more
information on performance.
THE FUND'S MANAGEMENT
The Fund's Board of Directors is responsible for the supervision
of the general business of the Fund. The Directors act as
fiduciaries for shareholders under the laws of the State of
Maryland. The Board appointed John Pasco, III to serve as
President of TWF and appointed Jane H. Williams to serve as
President of the Fund. The Fund employs the following persons
to provide it with investment advice and to conduct its on-going
business:
Investment Advisor
Sand Hill Advisors, Inc. (the "Investment Advisor"), a
registered investment adviser, manages the investments of the
Fund pursuant to an Investment Advisory Agreement (the "Advisory
Agreement" ), dated December 29, 1994. The Advisory Agreement
is effective for an initial term of two years and thereafter may
be renewed annually by the Board of Directors of the Fund.
The Investment Advisor is a privately held corporation. In
addition to the assets of the Fund, the Investment Advisor
manages other assets of approximately $170 million as of the
date of this Prospectus. Although the Investment Advisor has no
prior experience managing a mutual fund portfolio, it has
approximately 12 years of experience managing investment
portfolios for private clients.
Ms. Jane H. Williams has been the manager of the Fund since its
inception in January of 1995. Ms. Williams is also the President
of the Fund, Vice President of The World Funds, Inc., and Executive
Vice President and a Director of the Investment Advisor which was
founded in September of 1982 by Ms. Williams. Ms. Williams owns
35.46% of the stock of the Investment Advisor.
Effective June 1, 1996 David W. Cost, Jr. will assist Ms. Williams
in the day-to-day management of the Fund. Mr. Cost joined the
Investment Advisor in 1993 as a Research Analyst. He holds a BA
from Dartmouth College and an MBA from the University of California
at Los Angeles. He received his CFA designation in 1995.
Pursuant to the Advisory Agreement, the Investment Advisor
provides the Fund with investment management services, subject
to the supervision of the Fund's Board of Directors, and with
office space, and pays the ordinary and necessary office and
clerical expenses relating to investment research, statistical
analysis, supervision of its portfolio and certain other costs.
The Investment Advisor also bears the cost of fees, salaries and
other remuneration of the Fund's directors, officers or
employees who are officers, directors, or employees of the
Investment Advisor. The Fund is responsible for all other costs
and expenses, such as, but not limited to, brokerage fees and
commissions in connection with the purchase and sale of
securities, legal, auditing, bookkeeping and record keeping
services, custodian and transfer agency fees and other costs and
fees of registration of its shares for sale under various state
and Federal securities laws.
Under the Advisory Agreement the monthly compensation paid to
the Investment Advisor is accrued daily at a rate equal to a fee
at the annual rate of 1% of the net assets of the Fund. This
fee is higher than that paid by most investment companies. If
the assets of the Fund exceed $100,000,000, the fee for such
assets will be computed at the annual rate of .75 of 1% on such
excess. The fee is paid monthly, within five (5) business days
after the end of the month. The Advisory Agreement provides
that the fee paid by the Fund will be reduced to the extent
necessary to comply with any applicable state expense limitation
provision to which the Fund may be subject. All expenses not
specifically assumed by the Investment Advisor are assumed by
the Fund. The address of the Investment Advisor is 3000 Sand
Hill Road, Building 3, Suite 150, Menlo Park, California 94025.
The Advisory Agreement contemplates the authority of the
Investment Advisor to place orders pursuant to its investment
determinations for the Fund either directly with the issuer or
with any broker or dealer. In placing orders with brokers or
dealers, the Investment Advisor will attempt to obtain the best
net price and the most favorable execution of its orders. The
Investment Advisor may purchase and sell securities to and from
brokers and dealers who provide research or investment
information which benefits the Fund, the Investment Advisor, or
the Investment Advisor's other clients, or who provide other
services to the Fund or sell its shares.
Administrator
Commonwealth Shareholder Services, Inc. ("CSS"), serves as
Administrator to the Fund pursuant to an Administrative Services
Agreement. CSS provides certain recordkeeping, administrative
and shareholder servicing functions required of registered
investment companies. CSS may furnish personnel to act as the
Fund's officers to conduct the Fund's business subject to the
supervision and instructions of the Board of Directors of the
Fund.
The Administrative Services Agreement provides that CSS will be
paid a monthly fee: (1) of $30 per hour for shareholder
servicing and blue sky matters; (2) the greater of .20% of the
average daily net assets of the Fund or $15,000 per year for
administration (which includes regulatory matters, backup of the
pricing of the Fund, administrative duties in connection with
the execution of portfolio trades, and certain services in
connection with fund accounting. The minimum fee for 1996 will
be $15,000.); and (3) certain out-of-pocket expenses. The
address of CSS is 1500 Forest Avenue, Suite 223, Richmond, VA
23229.
Custodian and Accounting Services Agent
Brown Brothers Harriman & Co. ("BBH") is currently the Fund's
Custodian and Accounting Services Agent. Effective August 1, 1996
Star Bank in Cincinnati, Ohio will be the Custodian and Accounting
Services Agent for the Fund. The Custodian collects income when
due and holds all of the Fund's portfolio securities and cash.
(BBH, with the Fund's consent, has designated The Depository Trust
Company of New York, as its agent to secure some of the assets
of the Fund.) The Custodian is authorized to appoint other
entities to act as sub-custodian to provide for the custody of
foreign securities which may be acquired and held by the Fund
outside the U.S. Such appointments are subject to appropriate
review by TWF's Board of Directors.
The Custodian, as the Accounting Service Agent, maintains and keeps
current the books, accounts, records, journals or other records
of original entry relating to the Fund's business. The address
of BBH is 40 Water Street, Boston, Massachusetts 02109 and the
address of Star Bank is 425 Walnut Street, P.O. Box 1118,
Cincinnati, Ohio 45201-1118.
Transfer and Dividend Disbursing Agent
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend
Disbursing Agent. John Pasco, III, Chairman of the Board of the
Fund owns one third of the stock of FSI, and, therefore, FSI
may be deemed to be an affiliate of the Fund. FSI provides all
the necessary facilities, equipment and personnel to perform the
usual and ordinary services of Transfer and Dividend Disbursing
Agent, including: receiving and processing orders and payments
for purchases of the Fund's shares, opening shareholder
accounts, preparing shareholder meeting lists, mailing proxy
material, receiving and tabulating proxies, mailing shareholder
reports and prospectuses, withholding certain taxes on
non-resident alien accounts, disbursing income dividends and
capital distributions, preparing and filing U.S. Treasury
Department Form 1099 (or equivalent) for all shareholders,
preparing and mailing confirmation forms to shareholders for all
purchases and redemptions of shares and all other confirmable
transactions in shareholders' accounts, and recording
reinvestment of dividends and distributions of TWF's shares.
Under an Agreement between TWF and FSI, as in effect on May 2,
1991, FSI is compensated pursuant to a schedule of services and
out-of-pocket expenses. The schedule calls for a minimum
payment of $16,500 per year. During the fiscal year ended
December 31, 1995 the Sand Hill Portfolio Manager Fund paid FSI
$12,579. The address of the Transfer and Dividend Disbursing
Agent is P.O. Box 26305, Richmond, VA 23260.
Principal Underwriter/Distributor
First Dominion Capital Corp. (the "Distributor") acts as the
Principal Underwriter for TWF pursuant to an agreement dated
January 1, 1994. Mr. John Pasco, III, who is President,
Director and Treasurer of the Distributor, owns 100% of the
stock of the Distributor. The address of the Distributor is
1500 Forest Avenue, Suite 223, Richmond, VA 23229.
HOW TO INVEST
Purchases of the Fund's shares are made at the net asset value
per share. A minimum initial investment of $25,000 is required
to open a shareholder account, and each subsequent investment
must be $50 or more. Under certain circumstances the Fund may
waive the minimum initial investment for purchases by officers,
directors and employees of TWF and its affiliated entities and
for certain related advisory accounts and retirement accounts.
The offering price per share is equal to the net asset value per
share next determined after the receipt of a purchase order.
To facilitate the handling of transactions with shareholders,
TWF uses an open account plan. The Transfer Agent will
automatically establish and maintain an open account for the
Fund's shareholders. Under the open account plan, your shares
are reflected in your open account. This service facilitates
the purchase, redemption or transfer of shares, and eliminates
the need to safeguard certificates and reduces time delays in
executing transactions.
Purchase by Mail
For initial purchases, the Account Application form which
accompanies this prospectus should be completed, signed, and
mailed to the Transfer Agent, together with your check or other
negotiable bank draft drawn on and payable by a U.S. Bank
payable to the Portfolio Manager Fund. For subsequent
purchases, include with your check the tear-off stub from a
prior purchase confirmation, or otherwise identify the name(s)
of the registered owner(s) and the social security number(s).
Investing by Wire
You may purchase shares by requesting your bank to transmit
"Federal Funds" by wire directly to the Transfer Agent. To
invest by wire please call the Transfer Agent for instructions,
then notify the Distributor by calling 800-527-9500. Your bank
may charge you a small fee for this service. The Account
Application which accompanies this Prospectus should be
completed and promptly forwarded to the Transfer Agent. This
application is required to complete the Fund's records in order
to allow you access to your shares. Once your account is opened
by mail or by wire, additional investments may be made at any
time through the wire procedure described above. Be sure to
include your name and account number in the wire instructions
you provide your bank.
Stock Certificates
Certificates for full shares will be issued by the Transfer
Agent upon written request but only after payment for the shares
is collected by the Transfer Agent.
HOW TO REDEEM SHARES
Shares may be redeemed at any time by mail or telephone. For
your protection, the Transfer Agent will not redeem your shares
until it has received all information and documents necessary
for your request to be in "proper order." (See "Signature
Guarantees.") You will be notified promptly by the Transfer
Agent if your redemption request is not in proper order.
The Fund's procedure is to redeem shares at the net asset value
next determined after receipt by the Transfer Agent of the
redemption request in proper order as described herein. Payment
will be made promptly, but no later than the seventh day
following receipt of the request in proper order. Please note
that the Transfer Agent cannot accept redemption requests which
specify a particular date for redemption, or which specify any
special conditions. If the shares you are redeeming were
purchased by you less than fifteen (15) days prior to the
receipt of your redemption request, the Transfer Agent must
ascertain that your check in payment of the shares you are
redeeming has cleared prior to disbursing the redemption
proceeds. If you anticipate the need to redeem before fifteen
(15) days, you should make your purchase by Federal Funds wire,
or by a certified, treasurer's or cashier's check.
The Fund may suspend the right to redeem shares for any period
during which the New York Stock Exchange is closed or the
Securities and Exchange Commission determines that there is an
emergency. In such circumstances you may withdraw your
redemption request or permit your request to be held for
processing at the net asset value per share next computed after
the suspension is terminated.
Redemption by Mail
To redeem shares by mail, send the following information to the
Transfer Agent: (1) a written request for redemption signed by
the registered owner(s) of the shares, exactly as the account is
registered; (2) the stock certificates for the shares you are
redeeming, if any were issued; (3) any required signature
guarantees (See "Signature Guarantees"); and (4) any additional
documents which might be required for redemption by
corporations, executors, administrators, trustees, guardians,
etc. The Transfer Agent will mail the proceeds to your
currently registered address, payable to the registered owner(s)
unless you specify otherwise in your redemption request. There
is no charge to shareholders for redemptions by mail.
Redemption by Telephone
You may redeem your shares by telephone if you request this
service at the time you complete your initial Account
Application. If you do not request this service at that time,
you must request approval of telephone redemption privileges in
writing (sent to the Fund's Transfer Agent) with a signature
guarantee before you can redeem shares by telephone. There is
no charge for establishing this service, but the Transfer Agent
will charge your account a $10.00 service fee each time you make
a telephone redemption. Once your telephone authorization is in
effect, you may redeem shares by calling the Transfer Agent at
(800) 628-4077. By establishing this service, you authorize the
Transfer Agent to act upon any telephone instructions it
believes to be genuine, to (1) redeem shares from your account
and (2) mail or wire redemption proceeds. There is a
$10.00 service fee for making a telephone redemption. The
amount of these service charges may be changed at any time,
without notice, by the Transfer Agent.
You cannot redeem shares by telephone if you hold a stock
certificate representing the shares you are redeeming or if you
paid for the shares with a personal, corporate, or government
check and your payment has been on the books of the Fund for
less than 15 days.
If it should become difficult to reach the Transfer Agent by
telephone during periods when market or economic conditions lead
to an unusually large volume of telephone requests, a
shareholder may send a redemption request to the Transfer Agent
by overnight mail.
The Fund employs procedures reasonably designed to confirm the
authenticity of your instructions communicated by telephone and,
if it does not, it may be liable for any losses due to the
unauthorized or fraudulent transactions; however, a shareholder
authorizing telephone redemption bears the risk of loss which
may result from unauthorized or fraudulent transactions which
the Fund believes to be genuine. When you request a telephone
redemption or transfer, you will be asked to respond to certain
questions designed to confirm your identity as a shareholder of
record. Your cooperation with these procedures will protect
your account and the Fund from unauthorized transactions.
Signature Guarantees
To protect you and the Fund (and its agents) from fraud,
signature guarantees are required for: (1) all redemptions
ordered by mail if you require that the check be payable to
another person or that the check be mailed to an address other
than the one indicated on the account registration; (2) all
requests to transfer the registration of shares to another
owner; and (3) all authorizations to establish or change
telephone redemption service, other than through your initial
account application.
In the case of redemption by mail, signature guarantees must
appear either: (a) on the written request for redemption; or (b)
on a separate instrument of assignment (usually referred to as
a "stock power") specifying the total number of shares being
redeemed. If shares held by the Transfer Agent are being
redeemed, the signature guarantee must be on the written request
or stock power. The Fund may waive these requirements in
certain instances.
The following institutions are acceptable guarantors: (a)
participants in good standing of the Securities Transfer Agents
Medallion Program ("STAMP"); (b) commercial banks which are
members of the Federal Deposit Insurance Corporation
("F.D.I.C."); (c) trust companies; (d) firms which are members
of a domestic stock exchange; (e) eligible guarantor
institutions qualifying under Rule 17Ad-15 of the Securities
Exchange Act of 1934 that are authorized by charter to provide
signature guarantees; and (f) foreign branches of any of the
above. In addition, the Fund will guarantee your signature if
you personally visit its offices at 1500 Forest Avenue, Suite
223, Richmond, VA 23229. The Transfer Agent cannot honor
guarantees from notaries public, savings and loan associations,
or savings banks.
Small Accounts
Due to the relatively higher cost of maintaining small accounts,
the Fund may deduct $10 (payable to the Transfer Agent) from
accounts valued at less than $1,000 unless the account value has
dropped below $1,000 solely as a result of share value
depreciation. Shareholders will receive 60 days written notice
to increase the account value before the fee is deducted.
HOW TO TRANSFER SHARES
If you wish to transfer shares to another owner, send a written
request to the Transfer Agent. Your request should include: (1)
the name of the fund and existing account registration; (2)
signature(s) of the registered owner(s); (3) the new account
registration, address, Social Security Number or taxpayer
identification number and how dividends and capital gains are to
be distributed; (4) any stock certificates which have been
issued for the shares being transferred; (5) signature
guarantees (see "Signature Guarantees"); and (6) any additional
documents which are required for transfer by corporations,
administrators, executors, trustees, guardians, etc. If you
have any questions about transferring shares, call the Transfer
Agent at (800) 628-4077.
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
Each time you purchase, redeem or transfer shares of the Fund,
you will receive a written confirmation. You will also receive
a year-end statement of your account if any dividends or capital
gains have been distributed, and the Fund's annual and
semi-annual reports to shareholders.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following four services for its
shareholders: Regular Account - allows shareholders to make
voluntary additions and withdrawals to and from their account as
often as they wish; Invest-A-Matic - permits automatic monthly
investments into the Fund from your checking account on a fixed
or flexible schedule; Individual Retirement Accounts (IRA's);
and Exchange Privileges - allows the shareholder to exchange his
or her shares for shares of certain other funds having a
different investment objective from the Fund. More information
on any of these services is available upon written request to
the Fund.
HOW NET ASSET VALUE IS DETERMINED
The Fund's Net Asset Value ("NAV") is determined as of the close
of trading of the New York Stock Exchange (currently 4:00 P.M.,
Eastern Time) on each business day from Monday to Friday or on
each day (other than a day during which no security was tendered
for redemption and no order to purchase or sell such security
was received by the Fund) in which there is a sufficient degree
of trading in the portfolio securities of the Fund that the
current NAV of the shares might be materially affected by
changes in the value of such portfolio security. The Fund's NAV
is calculated at the 4:00 p.m. time set by the Board of
Directors based upon its determination that this is the most
appropriate time to price the securities.
NAV per share is determined by dividing the total value of the
assets, less its liabilities, by the total number of shares then
outstanding. Generally, securities owned by the Fund are valued
at market value.
The Fund's management may compute the NAV per share more
frequently in order to protect shareholders' interests.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends from net investment income are declared annually.
The Fund intends to distribute annually realized net capital
gains, after utilization of capital loss carryforwards, if any,
to prevent application of a federal excise tax. However, it may
make an additional tax distribution any time prior to the due
date, including extensions, of filing its tax return, if
necessary to accomplish this result. Any dividends or capital
gains distributed pursuant to a dividend declaration declared in
October, November or December with a record date in such a month
and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on
December 31 of the calendar year declared. According to
preference, shareholders may receive distributions in cash or
have them reinvested in additional shares. Shareholders will be
subject to tax on all dividends declared or reinvested. If an
investment is in the form of a retirement plan, all dividends
and capital gains distributions must be reinvested into an
account.
Generally, dividends from net investment income are taxable to
investors as ordinary income. Certain gains or losses on the
sale or retirement of international securities held by the Fund,
to the extent attributable to fluctuations in currency exchange
rates, as well as certain other gains or losses attributable to
exchange rate fluctuations, must be treated as ordinary income
or loss. Such income or loss may increase or decrease (or
possibly eliminate) the income available for distribution to
shareholders. If, under the rules governing the tax treatment
of foreign currency gains and losses, the income available for
distribution is decreased or eliminated, all or a portion of the
dividends declared by the Fund may be treated for federal income
tax purposes as a return of capital, or in some circumstances,
as capital gain. Generally, a shareholder's tax basis in
his/her Fund shares will be reduced to the extent that an amount
distributed to the shareholder is treated as a return of
capital.
Long-term capital gains distributions, if any, are taxable as
net long-term capital gains when distributed regardless of the
length of time shareholders have owned their shares. Net short-
term capital gains and any other taxable income distributions
are taxable as ordinary income.
The Fund sends detailed tax information about the amount and
type of its distributions to its shareholders by January 31 of
the following year.
TAXES
The Fund will be treated as a separate corporation and will seek
to qualify and maintain its qualification as a regulated
investment company under Subchapter M of the Internal Revenue
Code of 1986 (the "Code"). Provided it maintains its
qualification as a regulated investment company under the Code,
the Fund will not be liable for federal income taxes on income
distributed as dividends to its shareholders or on net capital
gains which are distributed to its shareholders or imputed to
them under the Code, or for any excise tax, to the extent its
earnings are distributed as provided in the Code, and assuming
it meets the tax diversification test, 90% gross income test and
30% gross income test as required by the Code.
In order to meet the tax diversification test, at the close of
each quarter of its fiscal year, at least 50% of the value of
the Fund's total assets must be represented by cash and cash
items including receivables (for these purposes, currency and
demand deposits denominated in a currency other than the U.S.
dollar will not be considered cash, a cash item or a
receivable), U.S. Government securities, and securities of other
regulated investment companies, and other securities limited in
respect of any one issuer to an amount not greater than 5% of
the value of its total assets, and to not more than 10% of the
outstanding voting securities of such issuer, and, not more than
25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government
securities and the securities of other regulated investment
companies.)
The Fund will meet the 90% of gross income test if 90% of its
gross income is derived from dividends, interest, payments with
respect to certain securities loans, and gain from the sale or
disposition of stock or securities or foreign currencies, or
other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its
business of investing in such stock, securities, or currencies.
The Fund will meet the 30% of gross income test provided less
than 30% of its gross income for the fiscal year is derived from
the sale or disposition of any of the following held for less
than 3 months: stock or securities, options, futures, or
forward contracts (other than such contracts on foreign
currencies), and foreign currencies (or options, futures, or
forward contracts on foreign currencies ("hedging instruments"))
but only if such currencies (and hedging instruments) are not
directly related to the Fund's principal business of investing
in stock or securities (or options and futures with respect to
stock or securities.)
The Fund will act and invest so as to comply with the
requirements of Subchapter M outlined above. This may mean, for
example, that a series will be required to hold an investment
longer than it otherwise would, or not engage in a hedging
transaction which it otherwise would, in order to avoid
violating one of the tests outlined above.
The distribution to shareholders each year of investment income
and capital gains will represent taxable income to the
shareholders.
The Fund may be subject to foreign withholding taxes on income
from certain of its foreign securities. If more than 50% of the
value of its assets at the close of its taxable year consists of
stock or securities in foreign corporations, it may elect to
pass through to its shareholders the amount of foreign
withholding taxes it paid. If this election is made,
shareholders will be (i) required to include in their gross
income their pro rata share of foreign source income (including
any foreign taxes paid by the Fund), and (ii) entitled to either
deduct (as an itemized deduction in the case of individuals)
their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S.
income tax, subject to certain limitations under the Code. The
Fund will notify its shareholders of such election within 60
days of the close of its tax year. Shareholders may decide
whether to utilize such flow through amount as either a
deduction or a tax credit; individual shareholders will usually
find that the credit is more favorable. Tax exempt investors,
such as pension plans and individual retirement accounts, will
not benefit from this pass through, and therefore this Fund may
not be a suitable investment for such investors.
GENERAL INFORMATION ABOUT THE FUND
TWF is authorized to issue up to 500,000,000 shares of $0.01 par
value common stock, of which it has presently allocated
50,000,000 shares to the Fund, 50,000,000 to the Vontobel
EuroPacific Fund series, 50,000,000 to the Vontobel U.S. Value
Fund, 50,000,000 to the Vontobel International Bond Fund series
and 50,000,000 to the Vontobel Eastern European Equity Fund
series. The Board of Directors can allocate the remaining
authorized but unissued shares to any series of TWF or may
create additional series and allocate shares to such series. A
share of the Fund has priority in the assets of the Fund in the
event of a liquidation. The shares of the Fund will be fully
paid and non-assessable, will have no preference over other
shares of the Fund as to conversion, dividends, or retirement,
and will have no preemptive rights. Shares of the Fund will be
redeemable from the assets of the Fund at any time.
Each outstanding share of TWF is entitled to one vote for each
full share of stock and a fractional vote for fractional shares
of stock. All shareholders vote on matters which concern the
corporation as a whole. TWF is not required to hold a meeting
of shareholders each year, and may elect not to hold a meeting
in years when no meeting is necessary. The Fund shall vote
separately on matters which affect only the interest of the
Fund. TWF's shares do not have cumulative voting rights, which
means that the holders of more than 50% of the shares voting for
the election of directors can elect all of the directors if they
choose to do so. Shareholders have the right to call a meeting
to consider the removal of one or more of the Directors and will
be assisted in shareholder communications in such matter.
Limitation on Use of Name - The Advisory Agreement for the Fund
authorizes TWF to utilize the name "Sand Hill." TWF agrees
that if the Advisory Agreement is terminated it will promptly
redesignate the name of the Sand Hill Portfolio Manager Fund to
eliminate any reference to the name "Sand Hill" or any
derivation thereof unless the Investment Advisor waives this
requirement in writing.
<PAGE>
MORE INFORMATION
For further information on the Sand Hill Portfolio Manager Fund,
please contact Commonwealth Shareholder Services, Inc., P.O. Box
8687, Richmond, VA 23226, telephone: (800) 527-9500. Additional
information may also be obtained by requesting a copy of the
Fund's Statement of Additional Information.
Investment Advisor:
Sand Hill Advisors, Inc.
3000 Sand Hill Road
Building 3, Suite 150
Menlo Park, CA 94025
Distributor:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, VA 23229
Independent Auditors:
Tait, Weller & Baker
2 Penn Center
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Fund and
Marketing Services, call the Distributor at (800) 527-9500 Toll
Free.
Transfer Agent: For account information, wire purchases or
redemptions, call or write to the Fund's Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260
(800) 628-4077 Toll Free
More Information: For 24 hour, 7 days a week price information,
call 1-800-527-9500.
For information on any series of The World Funds, Inc.
investment plans, or other shareholder services, call 1-800-527-
9500 during normal business hours, or write The World Funds at
1500 Forest Avenue, Suite 223, Richmond, VA 23229.
THE WORLD FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION DATED May 2, 1996
VONTOBEL EUROPACIFIC FUND
The World Funds, Inc. ("TWF") is a diversified, open-ended,
management investment company commonly known as a "mutual fund."
This Statement of Additional Information is not a prospectus but
supplements the information contained in the current Prospectus of
the Vontobel EuroPacific Fund (the "Fund"), which is dated May 2,
1996. This Statement of Additional Information has been designed
to provide you with further information which is not contained in
the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS STATEMENT OF ADDITIONAL
INFORMATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS
AND SHOULD BE READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS, DATED
MAY 2, 1996. A PROSPECTUS OF THE FUND MAY BE OBTAINED AT NO CHARGE
UPON REQUEST TO THE FUND. RETAIN THIS STATEMENT OF ADDITIONAL
INFORMATION FOR FUTURE REFERENCE.
<PAGE>
CONTENTS PAGE
VONTOBEL EUROPACIFIC FUND 1
Investment Policies 1
Special Considerations 2
Hedging with Forward Foreign Currency Contracts
and Futures 3
Covered Call and Put Options 4
INVESTMENT RESTRICTIONS 6
VALUATION AND CALCULATION OF NET ASSET VALUE 7
DIVIDENDS, DISTRIBUTIONS AND TAXES 9
DIRECTORS AND OFFICERS 10
ADVISOR 12
TRANSFER AGENT 12
ADMINISTRATOR 13
ELIGIBLE BENEFIT PLANS 13
DISTRIBUTION 13
EXPENSES OF THE FUND 14
SPECIAL SHAREHOLDER SERVICES 14
ALLOCATION OF PORTFOLIO BROKERAGE 15
GENERAL INFORMATION AND HISTORY 16
PERFORMANCE 17
FINANCIAL STATEMENTS 20
<PAGE>
THE WORLD FUNDS, INC.
VONTOBEL EUROPACIFIC FUND
There is some market risk inherent in any investment, due in
part to changes in general economic and market conditions, and
therefore there is no assurance that the Fund's investment
objective will be realized. However, the investment policies of
the Fund is intended to provide the flexibility to take advantage
of opportunities while accepting only what Vontobel USA Inc. (the
"Advisor") believes to be reasonable risks.
Investment Policies
The Fund will select its non-equity investments from among
securities and obligations of all kinds including preferred stocks,
warrant rights, bonds (of any class or rating), repurchase
agreements, money market investments (such as U.S. Government
securities (see the description below) issued by the U.S. Treasury,
agencies or other instrumentalities) and other evidences of
indebtedness.
Under normal circumstances the Fund will have at least 65% of
its assets invested in a portfolio of common stocks or securities
convertible into common stocks of issuers from European and Pacific
Basin countries. The Fund will normally be invested in not less
than three countries, one of which may be the U.S. However, when
the Advisor believes that investments should be deployed in a
temporary defensive posture because of economic or market
conditions, the Fund may invest up to 100% of its assets in U.S.
Government securities (such as bills, notes, or bonds of the U.S.
Government and its agencies) or other forms of indebtedness such as
bonds, certificates of deposit or repurchase agreements.
The Fund may also acquire fixed income investments where these
fixed income securities are convertible into equity securities (and
which may therefore reflect appreciation in the underlying equity
security), and where anticipated interest rate movements, or
factors affecting the degree of risk inherent in a fixed income
security are expected to change significantly so as to produce
appreciation in the security consistent with the Fund's objective.
The fixed income securities in which the Fund may invest will be
rated at the time of purchase Baa or higher by Moody's Investor
Service, Inc., or BBB or higher by Standard and Poor's Corporation,
or if they are foreign securities which are not subject to standard
credit ratings the fixed income securities will be "investment
grade" issues (in the judgement of the Advisor) based on available
information. Securities rated as BBB are regarded as having
adequate capacity to pay interest and repay principal.
The Fund may enter into repurchase agreements (which enables
it to employ its assets pending investment) during very short
periods of time. Ordinarily these agreements permit the Fund to
maintain liquidity and earn higher rates of return than would
normally be available from other short-term money-market
instruments.
Under a repurchase agreement, a fund buys a money-market
instrument and obtains a simultaneous commitment from the seller to
repurchase the investment at a specified time and at an agreed upon
yield to the fund. The seller is required to pledge cash and or
collateral which is equal to at least 100 percent of the value of
the commitment to repurchase. The collateral is held by the fund's
custodian. The Fund will only enter into repurchase agreements
involving U.S. Government securities in which it may otherwise
invest.
The term "U.S. Government securities" refers to a variety of
securities which are issued or guaranteed by the United States
Treasury, by various agencies of the United States Government, and
by various instrumentalities which have been established or
sponsored by the United States Government. U.S. Treasury
securities are backed by the "full faith and credit" of the United
States. Securities issued or guaranteed by Federal agencies and
the U.S. Government sponsored instrumentalities may or may not be
backed by the full faith and credit of the United States. In the
case of securities not backed by the full faith and credit of the
United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not
meet its commitment. An instrumentality of the U.S. Government is
a government agency organized under Federal charter with government
supervision.
It is the Fund's practice to enter into repurchase agreements
with selected banks and securities dealers, depending upon the
availability of the most favorable yields. The Fund will always
seek to perfect its security interest in the collateral. If the
seller of a repurchase agreement defaults, the Fund may incur a
loss if the value of the collateral securing the repurchase
agreement declines. The Advisor monitors the value of the
collateral to ensure that its value always equals or exceeds the
repurchase price and also monitors the financial condition of the
issuer of the repurchase agreement. If the seller defaults, the
Fund may incur disposition costs in connection with liquidating the
collateral of that seller. If bankruptcy proceedings are commenced
with respect to the seller, realization upon the collateral by the
Fund may be delayed or limited.
The Fund is designed to take advantage of the opportunities
provided by the ability to invest overseas, and therefore may be
subject to some of the special risks described below.
As noted in the Prospectus, the Fund has the right to invest
in securities which may be considered to be "thinly-traded" if they
are deemed to offer the potential for appreciation, but it does not
presently intend to invest more than 5% of its assets in such
securities. The trading volume of such securities is generally
lower and their prices may be more volatile as a result, and such
securities are less likely to be exchange-listed securities. The
Fund may also invest, subject to certain restrictions described
below, in options (puts and calls) and, to a limited extent, in
restricted securities.
The Fund may utilize American Depository Receipts ("ADR's")
and European Depository Receipts ("EDR's"). Generally, ADR's are
dollar denominated securities issued in registered form and
designed for use in the United States securities markets. They
represent and may be converted into the underlying foreign
security. EDR's, in bearer form, are similarly designed for use in
the European securities markets. For purposes of determining the
country of origin, ADR's and closed-end investment companies will
not be deemed to be domestic securities.
It is the Fund's policy not to lend its portfolio securities,
although it is not restricted from so doing.
The Fund's investments will be subject to the market
fluctuations and risks which are inherent in all investments, and
although the Advisor will seek to attain the Fund's stated
objective there can be no assurance that the objective will be
achieved.
Special Considerations Regarding Investments In Foreign Securities
Investment in securities of issuers domiciled outside the
United States involves investment risks different from those
encountered in investing in securities of United States issuers.
Elements of risk and opportunity which must be recognized and
evaluated by the Advisor include trade balances and imbalances, and
related economic policies; currency exchange rate fluctuations;
foreign exchange control policies; expropriation or confiscatory
taxation; limitation on the removal of funds or other assets of the
Fund; political or social instability; the diverse structure and
liquidity of securities markets in various countries and regions;
policies of governments with respect to possible nationalization of
their own industries; and other specific local political and
economic considerations. Investment decisions made in the context
of the Fund's objective and policies necessarily require particular
attention to opportunities and risks presented by probable future
currency relationships, especially during periods of broad
adjustments in such relationships.
It is contemplated that most foreign securities will be
purchased on stock exchanges located in the countries in which the
respective principal offices of the issuers of the various
securities are located, if that is the best available market.
Foreign securities markets may not be as developed or as efficient
as those in the United States. While growing in volume, foreign
exchanges usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less
liquid and more volatile than securities of comparable United
States companies. Similarly, volume and liquidity in most foreign
bond markets is less than in the United States, and at times,
volatility of price can be greater in the United States.
Additional costs may be incurred which are related to the
Fund's international investment policy. Foreign brokerage
commissions are generally higher than in the United States and the
custodial costs associated with maintaining foreign portfolio
securities are higher. Fee expense may also be incurred on
currency exchanges when the Fund changes investments from one
country to another. Foreign companies and foreign investment
practices are not generally subject to uniform accounting, auditing
and financial reporting standards and practices or regulatory
requirements comparable to those applicable to United States
companies. There may be less public information available about
foreign companies.
At various times United States Government policies, through
imposition of interest equalization taxes and other restrictions,
have discouraged certain investments abroad by United States
investors such as the Fund. While such taxes or restrictions are
not presently in effect, they may be reinstituted from time to time
as a means of fostering a favorable United States balance of
payments. In addition, foreign countries may impose withholding
and taxes on dividends and interest received by the Fund.
Hedging with Forward Foreign Currency Contracts and Futures
The Fund's investment objective (as described in the
Prospectus) contemplates investment in securities of issuers
domiciled or operating outside of the United States. Such foreign
investments may require the Fund to temporarily hold funds in
foreign currencies prior to, during or following the completion of
investment programs. In such circumstances the value of the Fund's
assets, as measured in United States dollars, may be affected
favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations.
The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign exchange market or, when deemed necessary
to "hedge" the Fund's anticipated cash movements, through entering
into forward contracts to purchase or sell foreign currencies. A
forward foreign currency contract involves an obligation to
purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and
their customers. A forward foreign currency contract generally has
no deposit requirement, and no commissions are charged at any stage
for trades.
The Fund's custodian bank segregates cash or equity or debt
securities in an amount not less than the value of the Fund's
assets committed to forward foreign currency exchange contracts
entered into under this second type of transaction. If the value
of the securities segregated declines, additional cash or
securities is added so that the segregated amount is not less than
the amount of the Fund's commitments with respect to such
contracts. Under normal circumstances, the Fund expects that any
appreciation (depreciation) on such forward exchange contracts will
be approximately offset by the depreciation (appreciation) in
translation of the underlying foreign investment arising from
fluctuations in foreign currency exchange rates. Where the Advisor
determines a hedge is no longer necessary the Fund may enter into
a closing transaction.
The Fund may enter into forward foreign currency contracts for
two reasons. First, a desire to preserve the United States dollar
price of a security when it enters into a contract for the purchase
or sale of a security denominated in a foreign currency. The Fund
will be able to protect itself against possible losses resulting
from changes in the relationship between the United States dollar
and foreign currencies during the period between the date the
security is purchased or sold and the date on which payment is made
or received by entering into a forward contract for the purchase or
sale, for a fixed amount of dollars, of the amount of the foreign
currency involved in the underlying security transactions. Second,
when the Advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the United States
dollar, the Fund may enter into a forward foreign currency contract
to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of its portfolio
securities denominated in such foreign currency. The precise
matching of the forward foreign currency contract amount and the
value of the portfolio securities involved may not have a perfect
correlation since the future value of the securities hedged will
change as a consequence of market movements between the date the
forward contract is entered into and the date it matures. The
projection of short-term currency market movement is difficult, and
the successful execution of this short-term hedging strategy is
uncertain.
Although forward foreign currency contracts tend to minimize
the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain
which might result should the value of such currency increase.
The Fund may also seek to use certain financial futures for
"hedging" purposes. The use of futures for hedging is intended to
protect the Fund from (i) the risk that the value of its portfolio
of investments in a foreign market may decline before it can
liquidate its interest, or (ii) the risk that a foreign market in
which it proposes to invest may have significant increases in value
before it can cause its cash to be invested in that market. In the
first instance, the Fund will sell a future based upon a broad
market index which it is believed will move in a manner comparable
to the overall value of securities in that market. In the second
instance, the Fund will purchase the appropriate index as an
"anticipatory" hedge until it can otherwise acquire suitable direct
investments in that market. As with the hedging of foreign
currencies, the precise matching of financial futures on foreign
indices and the value of the cash or portfolio securities being
hedged may not have a perfect correlation. The projection of
future market movement and the movement of appropriate indices is
difficult, and the successful execution of this short-term hedging
strategy is uncertain. Regulatory policies governing the use of
such hedging techniques require the Fund to provide for the deposit
of initial margin and the segregation of suitable assets to meet
its obligation under futures contracts.
Covered Call and Put Options
The Fund may write (sell) "covered" call options and purchase
put options, and purchase call and write put options to close out
options previously written by it. The Fund may purchase put
options in the following two circumstances when: (1) it holds a
position in the security (that is, the put is covered), or (2) a
put option on a market index when, in the opinion of the Advisor,
such index is representative of the securities held in the
portfolio, therefore, the index will move in the same direction as
the securities held in the portfolio. The purpose of writing
covered call options and purchasing put options will be to reduce
the effect of price fluctuations of selected securities owned by it
on the net asset value per share. The hedging activities on
portfolio securities using options are separate and different from
the foreign currency hedging transactions (see above) entered into
by the Fund. Although additional revenues may be generated through
the use of covered call options, the Advisor does not consider the
additional revenues which may be generated as the primary reason
for writing covered call options, which is undertaken to hedge the
investments in a particular security. Similarly, foreign currency
hedging is intended to hedge currency movements, not to speculate
on currency gains or generate commission income. There is no
assurance that the Fund's portfolio will be hedged, or that the
hedge will be complete or in exact correlation with market
movement. In order to hedge its investment the Fund will generally
give up opportunities to gain from market movement.
A call option gives the holder (buyer) the "right to purchase"
a security from the Fund at a specified price (the exercise price)
at any time until a certain date (the expiration date). So long as
the obligation of the writer of a call option (the Fund) continues,
it may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring it to deliver the underlying
security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by
repurchasing the option which it previously sold. To secure the
obligation of the Fund to deliver the underlying security in the
case of a call option, the Fund may be required to deposit in
escrow the underlying security or other assets in accordance with
the rules of the Clearing Corporations and of the Exchanges. A put
option gives the holder (buyer) the "right to sell" a security at
a specified price (the exercise price) at any time until a certain
date (the expiration date). The Fund will only write covered call
options and purchase put options. It will write covered call
options and purchase put options in standard contracts which are
quoted on national securities exchanges or similar instruments in
comparable markets in the countries in which it invests and holds
its portfolio securities.
When writing a covered call option, the Fund, in return for
the premium, gives up the opportunity for profit from a price
increase in the underlying security above the exercise price, but
conversely retains the risk of loss should the price of the
security decline. If a call option which it has written expires,
it will realize a gain in the amount of the premium; however, such
gain may be offset by a decline in the market value of the
underlying security during the option period. If the call option
is exercised, the Fund will realize a gain or loss from the sale of
the underlying security. The purchase of put options will be
utilized to protect the holdings of the Fund in an underlying
security against a substantial decline in market value. Such
protection is, of course, only provided during the life of the put
option when the Fund, as the holder of the put option, is able to
sell the underlying security at the put exercise price regardless
of any decline in the underlying security's market price. By using
put options in this manner, the Fund will reduce any profit it
might otherwise have realized in its underlying security by the
premium paid for the put option and by transaction costs. The
security covering the call or put option will be maintained in a
segregated account under control of the Fund's custodian.
The premium received is the market value of an option. The
premium the Fund will receive from writing a call option, or, which
it will pay when purchasing a put option, will reflect, among other
things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the
historical price volatility of the underlying security, the length
of the option period, the general supply of and demand for credit
conditions, and the general interest rate environment. The premium
received by the Fund for writing covered call options will be
recorded as a liability in its statement of assets and liabilities.
This liability will be adjusted daily to the option's current
market value, which will be the latest sale price at the time at
which the Fund's net asset value per share is computed (close of
the New York Stock Exchange), or, in the absence of such sale, the
latest asked price. The liability will be extinguished upon
expiration of the option, the purchase of an identical option in a
closing transaction, or delivery of the underlying security upon
the exercise of the option.
The premium paid by the Fund when purchasing a put option will
be recorded as an asset in its statement of assets and liabilities.
This asset will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the
Fund's net asset value per share is computed (close of the New York
Stock Exchange), or, in the absence of such sale, the latest bid
price. The asset will be extinguished upon expiration of the
option, the selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security upon the
exercise of the option.
The Fund will only purchase a call option to close out a
covered call option it has written. It will only write a put
option to close out a put option it has purchased. Such closing
transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security
from being called or put, or, to permit the sale of the underlying
security. Furthermore, effecting a closing transaction will permit
the Fund to write another call option, or purchase another put
option, on the underlying security with either a different exercise
price or expiration date or both. If the Fund desires to sell a
particular security from its portfolio on which it has written a
call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the
security. There is, of course, no assurance that the Fund will be
able to effect such closing transactions at a favorable price. If
it cannot enter into such a transaction, it may be required to hold
a security that it might otherwise have sold, in which case it
would continue to be at market risk on the security. This could
result in higher transaction costs, including brokerage
commissions. The Fund will pay brokerage commissions in connection
with the writing or purchase of options to close out previously
written options. Such brokerage commissions are normally higher
than those applicable to purchases and sales of portfolio
securities.
Options written by the Fund will normally have expiration
dates between three and nine months from the date written. The
exercise price of the options may be below, equal to, or above the
current market values of the underlying securities at the time the
options are written. From time to time, the Fund may purchase an
underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such
security from its portfolio. In such cases additional brokerage
commissions will be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the
premium received from the writing of the option; however, any loss
so incurred in a closing purchase transaction may be partially or
entirely offset by the premium received from a simultaneous or
subsequent sale of a different call or put option. Also, because
increases in the market price of a call option will generally
reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the
current Prospectus, the Fund has adopted the investment
restrictions set forth below which, along with the investment
objective, cannot be changed without the approval of a majority of
the outstanding voting securities of the Fund. As provided in the
Investment Company Act of 1940 a "vote of a majority of the
outstanding voting securities" means the affirmative vote of the
lesser of (i) more than 50% of the outstanding shares of the Fund
or (ii) 67% or more of the shares present at a meeting if more than
50% of the outstanding shares are represented at the meeting in
person or by proxy. These investment restrictions provide that the
Fund will not:
* Invest in companies for the purpose of exercising
control.
* Invest in securities of other investment companies except
by purchase in the open market involving only customary
broker's commissions, or as part of a merger,
consolidation, or acquisition of assets.
* Purchase or sell commodities or commodity contracts.
* Invest in interests in oil, gas, or other mineral
explorations or development programs.
* Purchase securities on margin, except that it may utilize
such short-term credits as may be necessary for
clearance of purchases or sales of securities.
* Issue senior securities.
* Act as an underwriter of securities of other issuers.
* Concentrate its investments in any industry.
* Participate on a joint or a joint and several basis in
any securities trading account.
* Engage in short sales.
* Purchase or sell real estate, provided that liquid
securities of companies which deal in real estate or
interests therein will not be deemed to be investment in
real estate.
In order to satisfy certain state regulatory requirements the
Fund has agreed that, so long as shares of the Fund are offered for
sale in such state(s), it will not:
1. Purchase restricted securities (securities of issuers
which the Fund would be restricted from selling to the
public without registration under the Securities Act of
1933), if such purchase would cause the aggregate value
of restricted issues to exceed 10% of the Fund's total
assets;
2. Purchase (a) the securities of unseasoned issuers (those
in business for less than three years, including
predecessors) and (b) securities which are not readily
marketable, if such purchase would cause the Fund to own
more than 5% of its total assets in such issues;
3. Purchase the securities of foreign issuers which are not
listed on a recognized domestic or foreign securities
exchange, restricted securities referred to in 1, above,
and issues which are not readily marketable, referred to
in 2(b), above, if such purchase would cause the Fund to
own such securities in excess of 15% of its net assets;
4. Purchase warrants if such purchase would exceed 5% of the
Fund's net assets, including, within that limitation, 2%
of the Fund's net assets of warrants not listed on the
New York or American Stock Exchanges. For the purpose of
this limitation, warrants acquired by the Fund in units
or attached to securities may be deemed to be without
value;
5. Engage in arbitrage transactions;
6. Purchase restricted securities referred to in 1, above,
and securities or unseasoned issuers referred to in 2(a),
above, if such purchases would cause the value of all
such securities to exceed 10% of the Fund's net assets;
7. Purchase restricted securities, securities which are not
readily marketable or repurchase agreements maturing in
more than seven days if more than 10% of the Fund's
assets would be invested in such securities.
8. Purchase or sell options (puts or calls written by
others) unless the following conditions are met: (a) the
value of its investment in puts, calls, straddles,
spreads or any combination thereof is limited to 5% of
the Fund's net assets and the premiums paid therefore may
not exceed 2% of the Fund's net assets; and (b) options
must be listed on a national securities exchange or, for
foreign securities, on comparable exchanges in the
country of issuance of the underlying security;
9. Purchase or retain the securities of any issuer if the
officers and/or directors of TWF, its advisors, or
managers own beneficially more than one-half of one
percent of the securities of such issuer, or together
beneficially own more than 5% of the securities of such
issuers;
10. Purchase the securities of any issuer(s), if such
purchase at the time thereof would cause more than ten
percent of the voting securities of such issuer(s) to be
held by TWF;
11. Borrow, pledge, mortgage, or hypothecate the assets on
behalf of TWF in excess of one-third of the total assets
of TWF.
12. Purchase or retain the securities of any issuers if, to
the Fund's knowledge, those officers or directors of the
TWF or of the Advisor who individually own beneficially
more than 0.5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such
outstanding securities.
VALUATION AND CALCULATION OF NET ASSET VALUE
The Fund's Net Asset Value ("NAV") per share is calculated
daily each business day from Monday through Friday. The New York
Stock Exchange is currently closed on weekends and on the following
holidays: New Years Day, Washington's Birthday, Good Friday,
Memorial Day, July 4th, Labor Day, Thanksgiving Day and Christmas
Day, and the NAV is not computed those days. The NAV is calculated
at the time set by the Board of Directors based upon a
determination of the most appropriate time to price the Fund's
securities.
The NAV is determined as of the close of trading of the New
York Stock Exchange (currently 4:00 P.M., Eastern Time) on each
business day from Monday to Friday or on each day (other than a day
during which no security was tendered for redemption and no order
to purchase or sell such security was received) in which there is
a sufficient degree of trading in the Fund's portfolio securities
that the current NAV of the shares might be materially affected by
changes in the value of such portfolio security.
NAV per share is determined by dividing the total value of the
Fund's securities and other assets, less liabilities, by the total
number of shares then outstanding. Generally, the Fund's securities
are valued at market value.
Portfolio securities, including ADR's and EDR's, which are
traded on stock exchanges, are valued at the last sale price, prior
to the Fund's valuation time, on the exchange on which such
securities are traded, unless the Fund is aware of a material
change in the value prior to the time it values its securities, or,
lacking any sales, at the last available bid price. ADR's for
which such a value cannot be readily determined on any day will be
valued at the closing price of the underlying security adjusted for
the exchange rate.
In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by
TWF's Board of Directors as the primary market.
Securities traded on a national securities exchange or
included in the NASDAQ National Market System are valued at the
last reported sales price. Securities traded in the over-the-
counter market and listed securities for which no sale is reported
on that date are valued at the last reported bid price.
Securities and assets for which market quotations are not
readily available (including restricted securities which are
subject to limitations as to their sale) are valued at fair market
value as determined in good faith by or under the direction of
TWF's Board of Directors.
U.S. Treasury bills, and other short-term obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities, with original or remaining maturities in excess
of 60 days are valued at the mean of representative quoted bid and
asked prices for such securities or, if such prices are not
available, are valued at the mean of representative quoted bid and
asked prices for securities of comparable maturity, quality and
type. Short-term securities, with 60 days or less to maturity, are
amortized to maturity based on their cost if acquired within 60
days of maturity or, if already held, on the 60th day, based on the
value determined on the 61st day.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well
before the close of the business day in New York. In addition, Far
Eastern securities trading may not take place on all business days
in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which
are not business days in New York and on which the Fund's NAV is
not calculated.
The calculation of NAV may not take place contemporaneously
with the determination of the prices of portfolio securities used
in such calculations. Events affecting the values of portfolio
securities that occur between the time their prices are determined
and the close of the New York Stock Exchange will not be reflected
in the Fund's calculation of NAV unless TWF's Board of Directors
deems that the particular event would materially affect the NAV, in
which case an adjustment will be made. Assets or liabilities
initially expressed in terms of foreign currencies are translated
prior to the next determination of the NAV of the Fund's shares
into U.S. dollars at the prevailing market rates. The fair value of
all other assets is added to the value of securities to arrive at
the total assets.
The Fund's liabilities, including proper accruals of taxes and
other expenses, are deducted from its total assets and the net
assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the NAV
per share.
The Fund's management may compute its NAV per share more
frequently if necessary to protect shareholders' interests.
Any purchase order may be rejected by the Distributor or by
the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the policy of the Fund to distribute substantially all
of its net investment income and net realized capital gains, if
any, shortly before the close of the fiscal year (December 31st).
All dividend and capital gains distributions, if any, will be
reinvested in full and fractional shares based on NAV (without a
sales charge) as determined on the ex-dividend date for such
distributions. Shareholders may, however, elect to receive all
such payments, or the dividend or distribution portion thereof, in
cash, by sending written notice to this effect to the Transfer
Agent. This written notice will be effective as to any subsequent
payment if received by the Transfer Agent prior to the record date
used for determining the shareholders' entitlement to such payment.
Such an election will remain in effect unless or until the Transfer
Agent is notified by the shareholder in writing to the contrary.
The Fund must withhold 31% from dividends or redemptions that
occur in certain shareholder accounts if the shareholder has not
properly furnished a correct Taxpayer Identification Number or a
properly completed claim for exemption of IRS Form W-8 or W-9.
Amounts withheld are applied against the shareholder's tax
liability and a refund may be obtained from the Internal Revenue
Service, if withholding results in overpayment of taxes. A
shareholder should contact the Fund or the Transfer Agent if he/she
is uncertain whether a proper Taxpayer Identification Number is on
file with the Transfer Agent.
Status As a "Regulated Investment Company": The Fund seeks to
be treated under the Internal Revenue Code of 1986 ("IRC") as a
"regulated investment company" for purposes of the IRC. To qualify
for the tax treatment afforded a "regulated investment company"
under the IRC, the Fund must annually distribute at least 90% of
its investment company taxable income and meet certain
diversification of assets and other requirements of the IRC. If
the Fund qualifies for such tax treatment it will not be subject to
Federal income tax on the part of its ordinary income and its net
realized capital gains which are distributed to shareholders,
provided that it pays at least 98% of its investment company
taxable income and net capital gains in order to avoid any excise
tax.
Distributions of Net Investment Income: Dividends from net
investment income (including net short-term capital gains) are
taxable as investment company taxable income to shareholders who
are citizens and residents of the United States. If, as
anticipated, the Fund does not receive any dividend income from
U.S. corporations, dividends from the Fund will not be eligible for
the dividends received deduction allowed to corporations.
Dividends will be taxed for Federal income tax purposes in the same
manner, whether they are received as shares or in cash.
Net Realized Long-Term Capital Gains: Any distributions
designated as being made from the Fund's net realized long-term
capital gains will be taxable to shareholders who are citizens or
residents of the United States as long-term capital gains,
regardless of the holding period of the shareholders of the Fund's
shares.
Foreign Tax Credit to Shareholders: Dividends and interests
received by the Fund may give rise to withholding and other taxes
imposed by foreign countries, generally at rates 10% to 40%. Tax
conventions between certain countries and the United States may
reduce or eliminate such taxes. Foreign countries generally do not
impose taxes on capital gains in respect of investments by non-
resident investors.
If at the close of the Fund's fiscal year more than 50% of its
total assets consists of securities of foreign corporations, it
will be eligible to, and may, file elections with the Internal
Revenue Service pursuant to which its shareholders will be required
to include its pro rata portion as taxes paid by it, and deduct
such pro rata portion in computing its taxable income or,
alternatively, use them as a foreign tax credit against its United
States income taxes.
Non-U.S. Shareholders: It is anticipated that the Fund, under
normal conditions, will derive more than 80% of its gross income
from sources outside the United States, so that dividends out of
net investment income and any distributions of net realized long-
term capital gains to shareholders who are non-resident aliens and
foreign corporations and which dividends are not effectively
connected with their United States trade or business, if any, will
not be subject to United States Federal income tax. Similarly,
undistributed net realized long-term capital gains allocable to
such shareholders will not be included in their long-term gains
from U.S. sources, and such shareholders will be entitled to a
refund or credit, as the case may be, for the tax paid by the Fund
on the undistributed gains. In the event that 20% or more of the
Fund's income is derived from U.S. sources, distributions of net
investment income to non-resident aliens and foreign corporations
(which are deemed to include, for this purpose, each shareholder's
pro rata share of foreign taxes paid by the Fund - see the
discussion above of the "pass through" of the foreign tax credit to
U.S. shareholders), will be subject to U.S. tax. For shareholders
who are not engaged in a trade or business in the U.S. to which the
distribution is effectively connected, this tax would be imposed at
the rate of 30% upon the gross amount of the distribution in the
absence of a Tax Treaty providing for a reduced rate or exemption
from U.S. taxation. Distributions of net long-term capital gains
realized by the Fund are not subject to tax unless the distribution
is effectively connected with the conduct of the shareholder's
trade or business within the United States, or the foreign
shareholder is a non-resident alien individual who was physically
present in the U.S. during the tax year for more than 182 days.
General: Forward Contracts that are subject to section 1256
of the Code (other than Forward Contracts that are part of a "mixed
straddle") ("Section 1256 Forward Contracts") and that are held by
the Fund at the end of its taxable year generally will be required
to be "marked to market" for federal income tax purposes, that is
deemed to have been sold at market value. Sixty percent of any net
gain or loss recognized on these deemed sales and 60% of any net
realized gain or loss from any actual sales of section 1256 Forward
Contracts, will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Code section 988 also may apply to Forward Contracts and
options on foreign currencies. Under section 988, each foreign
currency gain or loss generally is computed separately and treated
as ordinary income or loss. In the case of overlap between
sections 1256 and 988, special provisions determine the character
and timing of any income, gain, or loss. The Fund attempts to
monitor section 988 transactions to avoid any adverse tax impact.
The foregoing is a general abbreviated summary of present
Federal income taxes on dividends and distribution. Investors are
urged to consult their own counsel for more detailed information
and for information regarding any state and local taxes applicable
to dividends and distributions received.
DIRECTORS AND OFFICERS
The following is a list of TWF's Directors and Officers and a
brief statement of their present positions and principal
occupations during the past five years.
*John Pasco, III;
Chairman, Director, and Treasurer
1500 Forest Ave, Suite 223; Richmond, VA 23229
Mr. Pasco is Treasurer and Director of Commonwealth
Shareholder Services, Inc., TWF's Administrator, since 1985.
Director and Shareholder of Fund Services, Inc., TWF's
Transfer and Disbursing Agent, since 1987. Mr. Pasco is also
a certified public accountant.
Samuel Boyd, Jr.
Director
10808 Hob Nail Court, Potomac, MD 20854
Mr. Boyd is presently the Manager of the Customer Services
Operations and Accounting Division of the Potomac Electric
Power Company. Mr. Boyd is also a certified public
accountant.
William E. Poist
Director
5272 River Road, Bethesda, MD 20816
Mr. Poist is a financial and tax consultant through his firm
Management Consulting for Professionals. Mr. Poist is also a
certified public accountant.
Paul M. Dickinson
Director
8704 Berwickshire Drive, Richmond, VA 23229
Mr. Dickinson is presently the President of Alfred J.
Dickinson, Inc., Realtors.
*Edwin D. Walczak
Vice President of TWF and President of the Vontobel U.S. Value
Fund
450 Park Avenue, New York, N.Y. 10022
First Vice President and Chief Investment Officer of Vontobel
USA Inc., a registered investment advisor, since 1988. From
1984 to 1988 Mr. Walczak was an institutional portfolio
manager at Lazard Freres Asset Management, New York.
*Sven Rump
Vice President of TWF and President of the Vontobel
International Bond Fund
Vice President of Vontobel USA Inc. since 1993. Mr. Rump is
currently (since October 1991) a Vice President of Vontobel
Asset Management, Switzerland, and is responsible for managing
fixed income mutual funds. From October 1990 to October 1991
Mr. Rump was a Vice President of Bank Vontobel (Switzerland)
and a fixed income specialist for the private banking group.
From September 1988 to October 1990 Mr. Rump was an Associate
with J.P. Morgan Securities (Switzerland) Ltd. in the Fixed
Income Department. Mr. Rump is also a Chartered Financial
Analyst.
*Fabrizio Pierallini
Vice President of TWF and President of the Vontobel
EuroPacific Fund
450 Park Avenue, New York, N.Y. 10022
Vice President and Portfolio Manager (International Equities),
Vontobel USA Inc. since April 1994. From 1991 to 1994 Mr.
Pierallini was Associate-Director/Portfolio Manager with Swiss
Bank Corporation in New York; from 1988 to 1991 he was a Vice-
President/Portfolio Manager with SBC Portfolio Management Ltd.
in Zurich, Switzerland; and from 1986 to 1988 he was an
Associate/Institutional Consultant with Bank Julius Baer in
Zurich, Switzerland.
*Arpad Pongracz
Vice President of TWF and President of the Vontobel Eastern
European Equity Fund
450 Park Avenue, New York, N.Y. 10022
Vice President of Vontobel USA inc. since January 1996. Mr.
Pongracz joined Vontobel Asset Management, Switzerland, in
1990 as an equity analyst. He was subsequently appointed
portfolio manager for all European equity institutional
accounts and mutual funds. Since 1995 he has been head of
Vontobel Asset Management's international equities team.
Prior to joining the Vontobel group, he worked at Union Bank
of Switzerland in Canada and in Switzerland as an equity
analyst. Mr. Pongracz is a Chartered Financial Analyst.
*F. Byron Parker, Jr.
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since
1986. Partner in the Law Firm Mustian & Parker.
* Persons deemed to be "interested" persons of TWF, Vontobel USA
Inc. or First Dominion Capital Corp. under the Investment Company
Act of 1940.
The directors and officers of TWF, as a group, do not own 1% or
more of the Fund. 36.52% of the shares of record are held by Bank
J. Vontobel for the benefit of its customers. 13.28% of the shares
of record are held by Summit Bank, NJ and 13.33% are held by
Charles Schwab.
THE ADVISOR
Vontobel USA Inc. (the "Advisor") manages the investment of
the assets of the Fund pursuant to an Investment Advisory Agreement
(the "Advisory Agreement"). The Advisory Agreement is described in
the Fund's Prospectus.
The Advisory Agreement is effective for a period of two years
from July 14, 1992. The Advisory Agreement will be renewed
thereafter only so long as such renewal and continuance is
specifically approved at least annually by TWF's Board of Directors
or by vote of a majority of the outstanding voting securities of
TWF, provided the continuance is also approved by a majority of the
Directors who are not "interested persons" of TWF or the Advisor by
vote cast in person at a meeting called for the purpose of voting
on such approval. The Advisory Agreement is terminable without
penalty on sixty days notice by TWF's Board of Directors or by the
Advisor. The Advisory Agreement provides that it will terminate
automatically in the event of its assignments.
The Advisor is a wholly owned subsidiary of Vontobel Holding
Ltd., a Swiss bank holding company. TWF has designated Fabrizio
Pierallini, a Vice President of the Advisor, as a Vice President of
TWF and President of the Fund.
The Advisor is compensated at the annual rate of 1% of the
average daily net assets of the Fund on the first $100,000,000.00
of assets and .75 of 1% of assets over $100,000,000.00. This fee
is subject to reduction in accordance with state expense limitation
provisions. No such reduction occurred during 1995.
During the fiscal years ended December 31, 1993, 1994 and
1995 the Fund paid advisory fees of $839,104, $1,352,106 and
$1,154,541.
The Advisory Agreement contemplates the authority of the
Advisor to place Fund orders, pursuant to its investment
determinations, either directly with the issuer or with any broker
or dealer. See "Allocation of Portfolio Brokerage" below.
The address of the Advisor is 450 Park Avenue, New York, N.Y.
10022.
TRANSFER AGENT
Fund Services, Inc. ("FSI") is TWF's Transfer and Disbursing
Agent, pursuant to a Transfer Agent Agreement. The Transfer Agent
Agreement is effective for one year from September 1, 1987, and
will be renewed thereafter only if the Board of Directors,
including a majority of the directors who are not interested
persons of TWF or the Transfer Agent, approve the extension at
least annually.
John Pasco, III, Chairman of the Board of TWF and an officer
and shareholder of Commonwealth Shareholder Services, Inc. (the
Administrator of the Fund) owns one third of the stock of FSI, and,
therefore, FSI may be deemed to be an affiliate of TWF and
Commonwealth Shareholder Services, Inc.
Pursuant to the Transfer Agent Agreement the minimum annual
fee for the Fund is $16,500. The Fund paid FSI $32,088 during
1995.
ADMINISTRATOR
Commonwealth Shareholder Services, Inc. is the Fund's
Administrator pursuant to an Administrative Services Agreement,
which is dated July 14, 1992. This agreement is described in the
Fund's Prospectus. The agreement was initially effective for one
year from July 14, 1992, and has been extended to December 31,
1994. The agreement may be continued thereafter only if the Board
of Directors, including a majority of the directors who are not
interested persons of TWF or the Administrator, approve the
extension at least annually. During the fiscal year ended December
31, 1995 the Fund paid the Administrator $253,134.
ELIGIBLE BENEFIT PLANS
An eligible benefit plan is an arrangement available to the
employees of an employer (or two or more affiliated employers)
having not less than 10 employees at the plan's inception, or such
an employer on behalf of employees of a trust or plan for such
employees, their spouses and their children under the age of 21 or
a trust or plan for such employees, which provides for purchases
through periodic payroll deductions or otherwise. There must be at
least 5 initial participants with accounts investing or invested in
shares of the Fund and/or certain other funds.
The initial purchase by the eligible benefit plan and prior
purchases by or for the benefit of the initial participants of the
plan must aggregate not less than $5,000 and subsequent purchases
must be at least $50 per account and must aggregate at least $250.
Purchases by the eligible benefit plan must be made pursuant to a
single order paid for by a single check or federal funds wire and
may not be made more often than monthly. A separate account will
be established for each employee, spouse or child for which
purchases are made. The requirements for initiating or continuing
purchases pursuant to an eligible benefit plan may be modified and
the offering to such plans may be terminated at any time without
prior notice.
DISTRIBUTION
Shares of the Fund are sold at net asset value on a continuous
basis, without a sales charge.
First Dominion Capital Corp. (the "Distributor"), 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, is the Fund's principal
underwriter pursuant to a Distribution Agreement between TWF and
the Distributor.
Prior to April 1, 1993 shares of the Fund were offered for
sale at net asset value plus a 5% maximum sales load. Prior to
April 1, 1993 the Distributor received commissions consisting of
that portion of the sales load remaining after the discounts which
it allows to investment dealers. The distributor retained 1% of
the offering price on sales through the dealer involving the
maximum sales load. During 1993, commissions paid to the
Distributor were $247 $997 was paid to or retained by other
dealers.
EXPENSES OF THE FUND
The Fund will pay its expenses not assumed by the Advisor,
including, but not limited to, the following: custodian; stock
transfer and dividend disbursing fees and expenses; taxes; expenses
of the issuance and redemption of Fund shares (including stock
certificates, registration and qualification fees and expenses);
legal and auditing expenses; and the cost of stationery and forms
prepared exclusively for the Fund.
The allocation of TWF's general expenses is made on a basis
that the Board of Directors deems fair and equitable, which may be
based on the relative net assets of each series of TWF or the
nature of the services performed and relative applicability to each
series.
Under the Advisory Agreement, the Advisor agreed to reimburse
the Fund if its annual ordinary operating expenses exceed the most
stringent limits prescribed by any state in which the Fund's shares
are offered for sale. This expense limitation is calculable based
on the Fund's aggregate net assets. Expenses which are not subject
to this limitation are interest, taxes and extraordinary expenses.
Expenditures, including costs incurred in connection with the
purchase or sale of portfolio securities, which are capitalized in
accordance with generally accepted accounting principles applicable
to investment companies, are accounted for as capital items and not
as expenses. Reimbursement, if any, will be on a monthly basis,
subject to year-end adjustment and limited to the amount of the
advisory fee due from the Fund.
Investors should understand that the Fund's expense ratio can
be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of
foreign securities and the rate of advisory fees paid by the Fund
is higher.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the Prospectus, TWF 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 Fund's Prospectus to
open your account.
Telephone Transactions: You may redeem shares or transfer
into another fund if you request this service at the time you
complete the initial Account Application. If you do not elect this
service at that time, you may do so at a later date by putting your
request in writing to the Transfer Agent and having your signature
guaranteed.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if
it does not, it may be liable for any losses due to unauthorized or
fraudulent transactions. As a result of this policy, a shareholder
authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which the Fund
believes to be genuine. When you request a telephone redemption or
transfer, you will be asked to respond to certain questions
designed to confirm your identity as a shareholder of record. Your
cooperation with these procedures will protect your account and the
Fund from unauthorized transactions.
Invest-A-Matic Account: Any shareholder may utilize this
feature, which provides for automatic monthly investments into your
account. Upon your request, the Transfer Agent will withdraw a
fixed amount each month from your checking account for investment
into your account. This does not require you to make a commitment
for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Invest-A-Matic Plan as desired by
notifying the Transfer Agent. This feature requires a separate Plan
application, in addition to the Account Application. To obtain an
application, or to receive more information, please call the
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 (or $2,250 with a
spouse who is not a wage earner). A special IRA program is
available for corporate employers under which the employers may
establish IRA accounts for their employees in lieu of establishing
corporate retirement plans. Known as SEP-IRA's (Simplified
Employee Pension-IRA), they free the corporate employer of many of
the recordkeeping requirements of establishing and maintaining a
corporate retirement plan trust.
If you have received a lump sum distribution from another
qualified retirement plan, you may rollover all or part of that
distribution into your Fund IRA. Your rollover contribution is not
subject to the limits on annual IRA contributions. By acting
within applicable time limits of the distribution you can continue
to defer Federal Income Taxes on your lump sum contribution and on
any income that is earned on that contribution.
How to Establish Retirement Accounts: Please call TWF to
obtain information regarding the establishment of individual
retirement plan accounts. The plan custodian charges nominal fees
in connection with plan establishment and maintenance. These fees
are detailed in the plan documents. You may wish to consult with
your attorney or other tax advisor for specific advice concerning
your tax status and plans.
Exchange Privilege: Shareholders may exchange shares of the
Fund for shares of any other series of TWF, provided the shares of
the fund the shareholder is exchanging into are registered for sale
in the shareholders state of residence. Each account must meet the
minimum investment requirements (currently $1,000). Exchange
Privilege Authorization Forms are available by calling TWF's
offices. Your special authorization form must have been completed
and must be on file with the Transfer Agent. To make an exchange,
an exchange order must comply with the requirements for a
redemption or repurchase order and must specify the value or the
number of shares to be exchanged. However, an investment dealer or
the Principal Underwriter who has been authorized by a shareholder
in writing acceptable to and delivered to the Principal
Underwriter, to make exchanges of Fund shares on behalf of the
shareholder may place exchange orders with the Principal
Underwriter by telephone or in writing without a signature
guarantee, or simply call the Transfer Agent at (800) 628-4077
before noon (Eastern Time). Your exchange will take effect as of
the next determination of the net asset value per share of each
fund involved (usually at the close of business on the same day).
The Transfer Agent will charge your account a $10.00 service fee
each time you make such an exchange. TWF 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 TWF 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 one fund and the purchase of those of the
second fund. Consequently, the sale may involve either a capital
gain or loss to the shareholder for Federal Income Tax purposes.
The Exchange Privilege is available only in states where it is
legally permissible to do so.
ALLOCATION OF PORTFOLIO BROKERAGE
It is the Fund's policy to seek the best possible price and
execution for its securities transactions taking into account both
the costs and the ability to complete the order in a manner which
will achieve the Fund's goals. After a purchase or sale decision
is made by the Advisor, the Advisor then arranges for execution of
the transaction in a manner deemed to provide the best result 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.
While there is no formula, agreement or undertaking to do so,
the Fund may allocate a portion of its brokerage commissions to
persons or firms providing the Advisor with investment
recommendations, statistical, research or similar services useful
to the daily operation of the Fund or other clients of these
persons. Such services are one of the many ways the Fund and its
Advisor can keep abreast of the information generally circulated
among institutional investors by broker-dealers. While this
information is useful in varying degrees, its value is
indeterminable. Such services received on the basis of
transactions for the Fund may be used by the Advisor for the
benefit of other clients, and the Fund may benefit from such
transactions effected for the benefit of other clients. Subject to
obtaining best price and execution (1) the Fund may consider sales
of its shares as a factor in the selection of brokers to execute
portfolio transactions, and (2) on two occasions the Board
authorized the Advisor to utilize brokerage commissions to acquire
specific research.
Effective May 1, 1991, the Advisor was authorized to place
Fund transactions with a broker-dealer with which it is affiliated
(Vontobel Securities Ltd.) provided that Vontobel Securities, Ltd.
stands ready to demonstrate to TWF that the Fund will receive (1)
a price and execution no less favorable than that available from
unaffiliated persons, and (2) a price and execution equivalent to
that offered to unaffiliated persons by that broker-dealer, in each
case on transactions of a like size and nature. In this regard,
TWF's Board of Directors has adopted policies and procedures which
govern such allocation of brokerage transactions, and the Board
reviews at its meetings details of all transactions which have been
placed pursuant to those policies.
When two or more funds managed by the Advisor are
simultaneously engaged in the purchase or sale of the same
security, the transactions are allocated in a manner deemed
equitable to each fund. It is recognized that in some cases the
procedure could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to
participate in volume transactions will be beneficial for the Fund.
It is the opinion of the Board of Directors that these advantages,
when combined with the other benefits available because of the
Advisor's organization, outweigh the disadvantages that may be said
to exist from exposure to simultaneous transactions.
The Fund paid $852,896, $329,824 and $587,813 in brokerage
commissions for the years ending December 31, 1993, 1994 and 1995
respectively. ^^^ During the period ended December 31, 1993,
1994, and 1995 the Fund paid brokerage commissions in the amount of
$445, 7,818 and $0 to Vontobel Securities, Inc. (an affiliated
broker dealer).
GENERAL INFORMATION AND HISTORY
TWF is authorized to issue up to 500,000,000 shares of $0.01
par value common stock, of which it has presently allocated
50,000,000 shares to the Fund, 50,000,000 to the Vontobel U.S.
Value Fund series, 50,000,000 to the Vontobel International Bond
Fund series, 50,000,000 to the Sand Hill Portfolio Manager Fund
series and 50,000,000 to the Vontobel Eastern European Equity Fund
series. The Board of Directors can allocate the remaining
authorized but unissued shares to any series or may create
additional series and allocate shares to such series. Each series
is required to have suitable investment objectives, policies and
restrictions, to maintain a separate portfolio of securities
suitable to its purposes, and to generally operate in the manner of
a separate investment company as required by the Investment Company
Act of 1940.
If additional series were to be formed, the rights of existing
Fund shareholders would not change, and the Fund's objective,
policies and investments would not be changed. A share of the Fund
would continue to have a priority in the assets of the Fund in the
event of a liquidation.
The shares of the Fund when issued will be fully paid and non-
assessable, will have no preference over other shares of the Fund
as to conversion, dividends, or retirement, and will have no
preemptive rights. The shares of the Fund will be redeemable from
the assets of the Fund at any time at a shareholder's request at
the current net asset value determined in accordance with the
provisions of the Investment Company Act of 1940 and the rules
thereunder. TWF's general corporate expenses (including
administrative expenses) will be allocated among the series in
proportion to net assets or as determined in good faith by the
Board of Directors.
The advisory fees payable to the Advisor by the Fund and the
Fund's expense limitation guarantee formula will be based upon the
Fund's assets. The Fund's shareholders will have the right to
choose or remove the Advisor of the investments of the Fund.
Voting and Control - Each outstanding share of TWF is entitled
to one vote for each full share of stock and a fractional share of
stock. All shareholders vote on matters which concern the
corporation as a whole. Election of Directors or ratification of
the auditor are examples of matters to be voted upon by all
shareholders. TWF is not required to hold a meeting of
shareholders each year. TWF intends to hold annual meetings when
it is required to do so by the Maryland General Corporate Law or
the Investment Company Act of 1940. Shareholders have the right to
call a meeting to consider the removal of one or more of the
Directors and will be assisted in Shareholder communication in such
matter.
The Fund shall vote separately on matters (1) when required by
the General Corporation Law of Maryland, (2) when required by the
Investment Company Act of 1940 and (3) when matters affect only the
interest of the Fund. An example of a matter affecting only the
Fund might be a proposed change in an investment restriction. The
shares will not have cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of
directors can elect all of the directors if they choose to do so.
Limitation on Use of Name - The Fund's Advisory Agreement
authorizes TWF to utilize the name "Vontobel." TWF agrees that if
the Advisory Agreement were to terminate it will promptly
redesignate the Fund's name to eliminate any reference to the name
"Vontobel" or any derivation thereof unless the Advisor waives this
requirement in writing.
On December 30, 1988, TWF, the Fund, and the Far East series
changed their names in connection with the change of TWF's
investment manager and the merger of two series of TWF. TWF
(Tyndall-Newport Fund, Inc.) was formerly known as The Commonwealth
Group, Inc.; the Tyndall-Newport Far East Fund series was formerly
called the Newport Far East Fund series; and the Tyndall-Newport
Global Growth Fund series was formerly called the Newport Global
Growth Fund. On July 6, 1990 Tyndall-Newport Fund, Inc. changed
its name to Tyndall World Funds, Inc. and the Tyndall-Newport Tiger
Fund changed its name to Tyndall Tiger Fund, the Tyndall-Newport
Far East Fund changed its name to Tyndall Far East Fund, and the
Tyndall-Newport Global Growth Fund changed its name to T.V.
EuroPacific Fund. On March 7, 1991 Tyndall World Funds, Inc.
changed its name to The World Funds, Inc., the Tyndall Tiger Fund
changed its name to the Newport Tiger Fund, and the T.V.
EuroPacific Fund changed its name to the Vontobel EuroPacific Fund.
The Vontobel U.S. Value Fund did not change its name.
Code of Ethics - The Fund has adopted a Code of Ethics which
imposes certain restrictions on the authority of the portfolio
manager and certain other personnel of the Fund and its advisors
governing personal securities activities and investments of those
persons and has instituted procedures to its Code of Ethics to
require such investment personnel to report such activities to the
compliance officer. The Code is reviewed and updated annually.
PERFORMANCE
Current yield and total return are the two primary methods of
measuring investment performance. Occasionally, however, the Fund
may include its distribution rate in sales literature. Yield, in
its simplest form, is the ratio of income per share derived from
the Fund's portfolio investments to a current maximum offering
price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. Total return,
on the other hand, is the total of all income and capital gains
paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment,
expressed as a percentage of the purchase price. The distribution
rate is the amount of distributions per share made by the Fund over
a twelve-month period divided by the current maximum offering
price.
Generally, as stated in the Prospectus, effective May 1, 1988,
performance quotations by investment companies are subject to
certain rules adopted by the Securities and Exchange Commission.
These rules require the use of standardized performance quotations,
or alternatively, that every non-standardized performance quotation
furnished by the Fund be accompanied by certain standardized
performance information computed as required by the Commission.
Current yield and total return quotations used by the Fund are
based on the standardized methods of computing performance mandated
by the Commission.
As indicated below current yield is determined by dividing the
net investment income per share earned during the period by the
maximum offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholder during the 30 day base period.
According to the new Securities and Exchange formula:
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.
The Fund's average annual total return for the period ended
December 31, 1995 is as follows:
One Year Five Year From
Period Period Inception
Fund Name Ending Ending to
12-31-95 12-31-95 12-31-95
EuroPacific Fund
10.91% 11.38% 5.78%
As the following formula indicates, the average annual total
return is determined by multiplying a hypothetical initial purchase
order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation and dividends and
distributions paid and reinvested) for the stated period less any
fees charged to all shareholder accounts and annualizing the
result. The calculation assumes that all dividends and
distributions are reinvested on the reinvestment dates during the
period. The quotation assumes the account was
completely redeemed at the end of each one, five and ten year
period and the deduction of all applicable charges and fees.
According to the Securities and Exchange Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year periods (or
fractional portion thereof).
Sales literature pertaining to the Fund may quote a
distribution rate in addition to the yield or total return. The
distribution rate is the amount of distributions per share made by
the Fund over a twelve-month period divided by the current maximum
offering price. The distribution rate differs from the yield
because it measures what the Fund paid to shareholders rather than
what the Fund earned from investments. It also differs from the
yield because it may include dividends paid from premium income
from option writing, if applicable, and short-term capital gains in
addition to dividends from investment income. Under certain
circumstances, such as when there has been a change in the amount
of dividend payout, or a fundamental change in investment policies,
it might be appropriate to annualize the distributions paid over
the period such policies were in effect, rather than using the
distributions paid during the past twelve months.
Occasionally statistics may be used to specify the Fund's
volatility or risk. Measures of volatility or risk are generally
used to compare the Fund's net asset value or performance relative
to a market index. One measure of volatility is beta. Beta is the
volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or
total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk
undertaken in achieving performance.
Sales literature referring to the use of the Fund as a
potential investment for Individual Retirement Accounts (IRAs),
Business Retirement Plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends
on which it is presumed no federal income tax applies.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
Comparisons and Advertisements
To help investors better evaluate how an investment in the
Fund might satisfy their investment objective, advertisements
regarding the Fund may discuss yield, total return, or volatility
as reported by various financial publications. Advertisements may
also compare yield, total return, or volatility (as calculated
above) to yield, total return, or volatility as reported by other
investments, indices, and averages. The following publications,
indices, and averages may be used:
(a) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company stocks
(Dow Jones Utilities Average), and 20 transportation company
stocks. Comparisons of performance assume reinvestment of
dividends.
(b) Standard & Poor's 500 Stock Index or its component indices -an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices -
unmanaged indices of all industrial, utilities, transportation, and
finance stocks listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the
market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume
reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed
Income Analysis, and Lipper Mutual Fund Indices - measures total
return and average current yield for the mutual fund industry.
Ranks individual mutual fund performance over specified time
periods assuming reinvestment of all distributions, exclusive of
sales charges.
(f) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
(g) Mutual Fund Source Book and other material, published by
Morningstar, Inc. - analyzes price, yield, risk, and total return
for equity funds.
(h) Financial publications: Business Week, Changing Times,
Financial World, Forbes, Fortune, and Money magazines - rates fund
performance over specified time periods.
(i) Consumer Price Index (or Cost of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure of
change, over time, in the price of goods and services, in major
expenditure groups.
(j) Standard & Poor's 100 Stock Index - an unmanaged index based
on the price of 100 blue-chip stocks, including 92 industrials, one
utility, two transportation companies, and 5 financial
institutions. The S&P 100 Stock Index is a smaller more flexible
index for option trading.
In assessing such comparisons of yield, return, or volatility,
an investor should keep in mind that the composition of the
investments in the reported indices and averages in not identical
to the Fund's portfolio, that the averages are generally unmanaged,
and that the items included in the calculations of such averages
may not be identical to the formula used by the Fund to calculate
its figures. In addition there can be no assurance that the Fund
will continue this performance as compared to such other averages.
FINANCIAL STATEMENTS
The Fund's books will be audited at least once each year by
Tait, Weller and Baker, of Philadelphia, PA, independent public
accountants. The Annual Report to Shareholders is incorporated by
reference to this Statement of Additional Information.
<PAGE>
Advisor: Vontobel USA Inc.
450 Park Ave.
New York, N.Y. 10022
Distributor: First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Fund and
Marketing Services, call the Distributor
at (800) 527-9500 Toll Free.
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260
(800) 628-4077 Toll Free
More Information: For 24 hour, 7 days a week price
information call 1-800-527-9500.
For information on any series of TWF,
investment plans, or other shareholder
services, call TWF at 1-800-527-9500
during normal business hours, or write
TWF at 1500 Forest Avenue, Suite 223,
Richmond, VA 23229.
NASDAQ SYMBOL: VNEPX
THE WORLD FUNDS, INC.
VONTOBEL U.S. VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION DATED May 2, 1996
The World Funds, Inc. ("TWF") is a diversified, open-ended,
management investment company, commonly known as a "mutual fund."
This Statement of Additional Information is not a prospectus but
supplements the information contained in the current Prospectus of
the Vontobel U.S. Value Fund (the "Fund"), which is dated May 2,
1996. This Statement of Additional Information has been designed
to provide you with further information which is not contained in
the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS STATEMENT OF ADDITIONAL
INFORMATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS
AND SHOULD BE READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS, DATED
MAY 2, 1996. A PROSPECTUS OF THE FUND MAY BE OBTAINED AT NO CHARGE
UPON REQUEST TO THE FUND. RETAIN THIS STATEMENT OF ADDITIONAL
INFORMATION FOR FUTURE REFERENCE.
<PAGE>
CONTENTS PAGE
INVESTMENT POLICIES 1
INVESTMENT RESTRICTIONS 2
VALUATION AND CALCULATION OF NET ASSET VALUE 3
DIVIDENDS, DISTRIBUTIONS AND TAXES 4
DIRECTORS AND OFFICERS 5
THE ADVISOR 7
TRANSFER AGENT 7
ADMINISTRATOR 7
ELIGIBLE BENEFIT PLANS 8
DISTRIBUTION 8
EXPENSES OF THE FUND 8
SPECIAL SHAREHOLDER SERVICES 9
ALLOCATION OF PORTFOLIO BROKERAGE 10
GENERAL INFORMATION AND HISTORY 11
PERFORMANCE 12
FINANCIAL STATEMENTS 15
<PAGE>
THE WORLD FUNDS, INC.
VONTOBEL U.S. VALUE FUND
There is some market risk inherent in any investment, due in
part to changes in general economic and market conditions, and
therefore there is no assurance that the Fund's investment
objective will be realized. However, the Fund's investment
policies are intended to provide the flexibility to take advantage
of opportunities while accepting only what Vontobel USA Inc. (the
"Advisor") believes to be reasonable risks.
Investment Policies
The Fund may enter into repurchase agreements (which enables
it to employ its assets pending investment) during very short
periods of time. Ordinarily these agreements permit the Fund to
maintain liquidity and earn higher rates of return than would
normally be available from other short-term money-market
instruments.
Under a repurchase agreement, a fund buys a money-market
instrument and obtains a simultaneous commitment from the seller to
repurchase the investment at a specified time and at an agreed upon
yield to the fund. The seller is required to pledge cash and or
collateral which is equal to at least 100 percent of the value of
the commitment to repurchase. The collateral is held by the fund's
custodian. The Fund will only enter into repurchase agreements
involving U.S. Government securities in which it may otherwise
invest.
The term "U.S. Government securities" refers to a variety of
securities which are issued or guaranteed by the United States
Treasury, by various agencies of the United States Government, and
by various instrumentalities which have been established or
sponsored by the United States Government. U.S. Treasury
securities are backed by the "full faith and credit" of the United
States. Securities issued or guaranteed by Federal agencies and
the U.S. Government sponsored instrumentalities may or may not be
backed by the full faith and credit of the United States. In the
case of securities not backed by the full faith and credit of the
United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not
meet its commitment. An instrumentality of the U.S. Government is
a government agency organized under Federal charter with government
supervision.
It is the practice of the Fund to enter into repurchase
agreements with selected banks and securities dealers, depending
upon the availability of the most favorable yields. The Fund will
always seek to perfect its security interest in the collateral. If
the seller of a repurchase agreement defaults, the Fund may incur
a loss if the value of the collateral securing the repurchase
agreement declines. The Advisor monitors the value of the
collateral to ensure that its value always equals or exceeds the
repurchase price and also monitors the financial condition of the
issuer of the repurchase agreement. If the seller defaults, the
Fund may incur disposition costs in connection with liquidating the
collateral of that seller. If bankruptcy proceedings are commenced
with respect to the seller, realization upon the collateral by the
Fund may be delayed or limited.
It is the policy of the Fund not to lend its portfolio
securities, although it is not restricted from so doing.
The Board of Directors of TWF and the Advisor compare the
actual performance of the Fund to market indicators such as the S&P
500 to determine if and the extent to which the Fund has met its
objective of achieving long-term capital returns in excess of the
broad market over a full market cycle.
The Fund's investments will be subject to the market
fluctuations and risks which are inherent in all investments, and
although the Advisor will seek to attain the Fund's stated
objective there can be no assurance that the objective will be
achieved.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the
current Prospectus, the Fund has adopted the investment
restrictions set forth below which, along with the Investment
Objective, cannot be changed without the approval of a majority of
the outstanding voting securities of the Fund. As provided in the
Investment Company Act of 1940 a "vote of a majority of the
outstanding voting securities" means the affirmative vote of the
lesser of (i) more than 50% of the outstanding shares of the Fund
or (ii) 67% or more of the shares present at a meeting if more than
50% of the outstanding shares are represented at the meeting in
person or by proxy. These investment restrictions provide that the
Fund will not:
* Invest in companies for the purpose of exercising
control.
* Invest in securities of other investment companies except
by purchase in the open market involving only customary
broker's commissions, or as part of a merger,
consolidation, or acquisition of assets.
* Purchase or sell commodities or commodity contracts.
* Invest in interests in oil, gas, or other mineral
explorations or development programs.
* Purchase securities on margin, except that it may utilize
such short-term credits as may be necessary for
clearance of purchases or sales of securities.
* Issue senior securities.
* Act as an underwriter of securities of other issuers.
* Concentrate its investments in any industry.
* Participate on a joint or a joint and several basis in
any securities trading account.
* Engage in short sales.
* Purchase or sell real estate, provided that liquid
securities of companies which deal in real estate or
interests therein will not be deemed to be investment in
real estate.
* Write or trade in put or call options.
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. Purchase restricted securities (securities of issuers
which the Fund would be restricted from selling to the
public without registration under the Securities Act of
1933), if such purchase would cause the aggregate value
of restricted issues to exceed 10% of the Fund's total
assets;
2. Purchase (a) the securities of unseasoned issuers (those
in business for less than three years, including
predecessors) and (b) securities which are not readily
marketable, if such purchase would cause the Fund to own
more than 5% of its total assets in such issues;
3. Purchase the securities of foreign issuers which are not
listed on a recognized domestic or foreign securities
exchange, restricted securities referred to in 1, above,
and issues which are not readily marketable, referred to
in 2(b), above, if such purchase would cause the Fund to
own such securities in excess of 15% of its net assets;
4. Purchase warrants if such purchase would exceed 5% of the
Fund's net assets, including, within that limitation, 2%
of the Fund's net assets of warrants not listed on the
New York or American Stock Exchanges. For the purpose of
this limitation, warrants acquired by the Fund in units
or attached to securities may be deemed to be without
value;
5. Engage in arbitrage transactions;
6. Purchase restricted securities referred to in 1, above,
and securities or unseasoned issuers referred to in 2(a),
above, if such purchases would cause the value of all
such securities to exceed 10% of the Fund's net assets;
7. Purchase restricted securities, securities which are not
readily marketable or repurchase agreements maturing in
more than seven days if more than 10% of the Fund's
assets would be invested in such securities.
8. Purchase or sell options (puts or calls written by
others) unless the following conditions are met: (a) the
value of its investment in puts, calls, straddles,
spreads or any combination thereof is limited to 5% of
the Fund's net assets and the premiums paid therefore may
not exceed 2% of the Fund's net assets; and (b) options
must be listed on a national securities exchange or, for
foreign securities, on comparable exchanges in the
country of issuance of the underlying security;
9. Write or purchase call or put options, except for fully
covered call options;
10. Purchase or retain the securities of any issuer if the
officers and/or directors of TWF, its advisors, or
managers own beneficially more than one-half of one
percent of the securities of such issuer, or together
beneficially own more than 5% of the securities of such
issuers;
11. Purchase the securities of any issuer(s), if such
purchase at the time thereof would cause more than ten
percent of the voting securities of such issuer(s) to be
held by the Fund;
12. Borrow, pledge, mortgage, or hypothecate the assets on
behalf of the Fund in excess of one-third of the total
Fund assets.
13. Purchase or retain the securities of any issuers if, to
the Fund's knowledge, those officers or directors of TWF
or of its managers or advisors who individually own
beneficially more than 0.5% of the outstanding securities
of such issuer, together own beneficially more than 5% of
such outstanding securities.
VALUATION AND CALCULATION OF NET ASSET VALUE
The Fund's Net Asset Value ("NAV") per share for is calculated
daily each business day from Monday through Friday. The New York
Stock Exchange is currently closed on weekends and on the following
holidays: New Years Day, Washington's Birthday, Good Friday,
Memorial Day, July 4th, Labor Day, Thanksgiving Day and Christmas
Day, and the NAV is not computed those days. The NAV is calculated
at the time set for the Fund by the Board of Directors based upon
a determination of the most appropriate time to price the
securities.
The NAV is determined as of the close of trading of the New
York Stock Exchange (currently 4:00 P.M., Eastern Time) on each
business day from Monday to Friday or on each day (other than a day
during which no security was tendered for redemption and no order
to purchase or sell such security was received by the Fund) in
which there is a sufficient degree of trading in the Fund's
portfolio securities that the current NAV might be materially
affected by changes in the value of such portfolio security.
NAV per share is determined by dividing the total value of the
Fund's securities and other assets, less liabilities, by the total
number of shares then outstanding. Generally, securities owned by
the Fund are valued at market value.
Portfolio securities which are traded on stock exchanges, are
valued at the last sale price, prior to the Fund's valuation time,
on the exchange on which such securities are traded, unless the
Fund is aware of a material change in the value prior to the time
the Fund values its securities, or, lacking any sales, at the last
available bid price.
In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by
TWF's Board of Directors as the primary market.
Securities traded on a national securities exchange or
included in the NASDAQ National Market System are valued at the
last reported sales price. Securities traded in the over-the-
counter market and listed securities for which no sale is reported
on that date are valued at the last reported bid price.
Securities and assets for which market quotations are not
readily available (including restricted securities which are
subject to limitations as to their sale) are valued at fair market
value as determined in good faith by or under the direction of
TWF's Board of Directors.
U.S. Treasury bills, and other short-term obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities, with original or remaining maturities in excess
of 60 days are valued at the mean of representative quoted bid and
asked prices for such securities or, if such prices are not
available, are valued at the mean of representative quoted bid and
asked prices for securities of comparable maturity, quality and
type. Short-term securities, with 60 days or less to maturity, are
amortized to maturity based on their cost if acquired within 60
days of maturity or, if already held, on the 60th day, based on the
value determined on the 61st day.
The Fund's liabilities, including proper accruals of taxes and
other expenses, are deducted from its total assets and the net
assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the NAV
per share.
The Fund's management may compute the NAV per share more
frequently if necessary to protect shareholders' interests.
Any purchase order may be rejected by the Distributor or by
the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Fund's policy to distribute substantially all of its
net investment income and net realized capital gains, if any,
shortly before the close of the fiscal year (December 31st).
All dividend and capital gains distributions, if any, will be
reinvested in full and fractional shares based on NAV as determined
on the ex-dividend date for such distributions. Shareholders may,
however, elect to receive all such payments, or the dividend or
distribution portion thereof, in cash, by sending written notice to
this effect to the Transfer Agent. This written notice will be
effective as to any subsequent payment if received by the Transfer
Agent prior to the record date used for determining the
shareholders' entitlement to such payment. Such an election will
remain in effect unless or until the Transfer Agent is notified by
the shareholder in writing to the contrary.
The Fund must withhold 31% from dividends or redemptions that
occur in certain shareholder accounts if the shareholder has not
properly furnished a correct Taxpayer Identification Number or a
properly completed claim for exemption of IRS Form W-8 or W-9.
Amounts withheld are applied against the shareholder's tax
liability and a refund may be obtained from the Internal Revenue
Service, if withholding results in overpayment of taxes. A
shareholder should contact the Transfer Agent if he/she is
uncertain whether a proper Taxpayer Identification Number is on
file with the Fund.
Status As a "Regulated Investment Company": The Fund seeks to
be treated under the Internal Revenue Code of 1986 ("IRC") as a
"regulated investment company" for purposes of the IRC. To qualify
for the tax treatment afforded a "regulated investment company"
under the IRC, the Fund must annually distribute at least 90% of
its investment company taxable income and meet certain
diversification of assets and other requirements of the IRC. If
the Fund qualifies for such tax treatment it will not be subject to
Federal income tax on the part of its investment company taxable
income and its net realized capital gains which are distributed to
shareholders, provided that it pays at least 98% of its ordinary
income and net capital gains in order to avoid any excise tax.
Distributions of Net Investment Income: Dividends from net
investment income (including net short-term capital gains), whether
received as shares or in cash, are taxable as investment company
taxable income to shareholders who are citizens and residents of
the United States.
Net Realized Long-Term Capital Gains: Any distributions
designated as being made from the Fund's net realized long-term
capital gains will be taxable to shareholders who are citizens or
residents of the United States as long-term capital gains,
regardless of the shareholders' holding period of the Fund's
shares.
General: The foregoing is a general abbreviated summary of
present Federal income taxes on dividends and distribution.
Investors are urged to consult their own counsel for more detailed
information and for information regarding any state and local taxes
applicable to dividends and distributions received.
DIRECTORS AND OFFICERS
The following is a list of TWF's Directors and Officers and a
brief statement of their present positions and principal
occupations during the past five years.
*John Pasco, III;
Chairman, Director, and Treasurer
1500 Forest Ave, Suite 223; Richmond, VA 23229
Mr. Pasco is Treasurer and Director of Commonwealth
Shareholder Services, Inc., TWF's Administrator, since 1985.
Director, President and Treasurer of Commonwealth Capital
Management, Inc. (a registered Investment Advisor) since 1983.
Director and Shareholder of Fund Services, Inc., TWF's
Transfer and Disbursing Agent, since 1987. Mr. Pasco is also
a certified public accountant.
Samuel Boyd, Jr.
Director
10808 Hob Nail Court, Potomac, MD 20854
Mr. Boyd is presently the Manager of the Customer Services
Operations and Accounting Division of the Potomac Electric
Power Company. Mr. Boyd is also a certified public
accountant.
William E. Poist
Director
5272 River Road, Bethesda, MD 20816
Mr. Poist is a financial and tax consultant through his firm
Management Consulting for Professionals. Mr. Poist is also a
certified public accountant.
Paul M. Dickinson
Director
8704 Berwickshire Drive, Richmond, VA 23229
Mr. Dickinson is presently the President of Alfred J.
Dickinson, Inc., Realtors.
*Edwin D. Walczak
Vice President of TWF and President of the Vontobel U.S. Value
Fund
450 Park Avenue, New York, N.Y. 10022
First Vice President and Chief Investment Officer of Vontobel
USA Inc., a registered investment advisor, since 1988. From
1984 to 1988 Mr. Walczak was an institutional portfolio
manager at Lazard Freres Asset Management, New York.
*Sven Rump
Vice President of TWF and President of the Vontobel
International Bond Fund
Vice President of Vontobel USA Inc. since 1993. Mr. Rump is
currently (since October 1991) a Vice President of Vontobel
Asset Management, Switzerland, and is responsible for managing
fixed income mutual funds. From October 1990 to October 1991
Mr. Rump was a Vice President of Bank Vontobel (Switzerland)
and a fixed income specialist for the private banking group.
From September 1988 to October 1990 Mr. Rump was an Associate
with J.P. Morgan Securities (Switzerland) Ltd. in the Fixed
Income Department. Mr. Rump is also a Chartered Financial
Analyst.
*Fabrizio Pierallini
Vice President of TWF and President of the Vontobel
EuroPacific Fund
450 Park Avenue, New York, N.Y. 10022
Vice President and Portfolio Manager (International Equities),
Vontobel USA Inc. since April 1994. From 1991 to 1994 Mr.
Pierallini was Associate-Director/Portfolio Manager with Swiss
Bank Corporation in New York; from 1988 to 1991 he was a Vice-
President/Portfolio Manager with SBC Portfolio Management Ltd.
in Zurich, Switzerland; and from 1986 to 1988 he was an
Associate/Institutional Consultant with Bank Julius Baer in
Zurich, Switzerland.
*Arpad Pongracz
Vice President of TWF and President of the Vontobel Eastern
European Equity Fund
450 Park Avenue, New York, N.Y. 10022
Vice President of Vontobel USA Inc. since January 1996. Mr.
Pongracz joined Vontobel Asset Management, Switzerland, in
1990 as an equity analyst. He was subsequently appointed
portfolio manager for all European equity institutional
accounts and mutual funds. Since 1995 he has been head of
Vontobel Asset Management's international equities team.
Prior to joining the Vontobel group, he worked at Union Bank
of Switzerland in Canada and in Switzerland as an equity
analyst. Mr. Pongracz is a Chartered Financial Analyst.
*F. Byron Parker, Jr.
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since
1986. Partner in the Law Firm Mustian & Parker.
* Persons deemed to be "interested" persons of TWF, Vontobel USA
Inc. or First Dominion Capital Corp. under the Investment Company
Act of 1940.
The directors and officers of TWF, as a group, do not own 1%
or more of the Fund. 28.98% of the shares of record are held by
Bank J. Vontobel and its affiliates for the benefit of its
customers. 27.67% of the shares of record are held by Charles
Schwab and 5.25% are held by National Financial Services
THE ADVISOR
Vontobel USA Inc. (the "Advisor") manages the investment of
the Fund's assets pursuant to Investment Advisory Agreement (the
"Advisory Agreement").
The Advisory Agreement is effective for a period of two years
from July 14, 1992. The Advisory Agreement will be renewed
thereafter only so long as such renewal and continuance is
specifically approved at least annually by TWF's Board of Directors
or by vote of a majority of the outstanding voting securities of
TWF, provided the continuance is also approved by a majority of the
Directors who are not "interested persons" of TWF, or the Advisor
by vote cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement is terminable
without penalty on sixty days notice by TWF's Board of Directors,
or by the Advisor. The Advisory Agreement provides that it will
terminate automatically in the event of its assignment.
The Advisor is a wholly owned subsidiary of Vontobel Holding
Ltd., a Swiss bank holding company. TWF has designated Edwin D.
Walczak, First Vice President of the Advisor, as President of the
Fund.
The Advisor is compensated at the annual rate of 1% of the
Fund's average daily net assets on the first $100,000,000.00 of
assets and .75 of 1% of assets over $100,000,000.00. This fee is
subject to reduction in accordance with state expense limitation
provisions. During 1995 the Advisor voluntarily waived $22,500 of
the management fee in connection with its 1994 acquisition of the
assets of the Centurion Growth Fund.
During the fiscal years ended December 31, 1993, 1994, and
1995 the Fund paid advisory fees of $339,516, $330,768 and $385,289
respectively.
The Advisory Agreement contemplates the authority of the
Advisor to place Fund orders pursuant to its investment
determinations either directly with the issuer or with any broker
or dealer. See "Allocation of Portfolio Brokerage" below.
The address of the Advisor is 450 Park Avenue, New York, N.Y.
10022.
TRANSFER AGENT
Fund Services, Inc. ("FSI") is the Fund's Transfer and
Disbursing Agent, pursuant to a Transfer Agent Agreement. The
Transfer Agent Agreement is effective for one year from September
1, 1987, and will be renewed thereafter only if the Board of
Directors, including a majority of the directors who are not
interested persons of TWF or the Transfer Agent, approve the
extension at least annually.
John Pasco, III, Chairman of the Board of TWF and an officer
and shareholder of Commonwealth Shareholder Services, Inc. (the
Administrator of the Fund) owns one third of the stock of FSI,
and, therefore, FSI may be deemed to be an affiliate of TWF and
Commonwealth Shareholder Services, Inc.
Pursuant to the Transfer Agent Agreement the minimum annual
fee for the Fund is $16,500. The Fund paid the Transfer and
Disbursing Agent $35,652 during 1995.
ADMINISTRATOR
Commonwealth Shareholder Services, Inc. is the Fund's
Administrator pursuant to an Administrative Services Agreement,
which is dated July 14, 1992. This agreement is described in the
Fund's Prospectus. The agreement was initially effective for one
year from July 14, 1992, and has been extended to December 31,
1994. The agreement may be continued thereafter only if the Board
of Directors, including a majority of the directors who are not
interested persons of TWF or the Administrator, approve the
extension at least annually. During the fiscal year ended December
31, 1995 the Fund paid the Administrator $85,256.
ELIGIBLE BENEFIT PLANS
An eligible benefit plan is an arrangement available to the
employees of an employer (or two or more affiliated employers)
having not less than 10 employees at the plan's inception, or such
an employer on behalf of employees of a trust or plan for such
employees, their spouses and their children under the age of 21 or
a trust or plan for such employees, which provides for purchases
through periodic payroll deductions or otherwise. There must be at
least 5 initial participants with accounts investing or invested in
shares of the Fund and/or certain other funds.
The initial purchase by the eligible benefit plan and prior
purchases by or for the benefit of the initial participants of the
plan must aggregate not less than $5,000 and subsequent purchases
must be at least $50 per account and must aggregate at least $250.
Purchases by the eligible benefit plan must be made pursuant to a
single order paid for by a single check or federal funds wire and
may not be made more often than monthly. A separate account will
be established for each employee, spouse or child for which
purchases are made. The requirements for initiating or continuing
purchases pursuant to an eligible benefit plan may be modified and
the offering to such plans may be terminated at any time without
prior notice.
DISTRIBUTION
Shares of the Fund are sold at net asset value on a continuous
basis, without a sales charge.
First Dominion Capital Corp. (the "Distributor"), 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, is the Fund's principal
underwriter pursuant to a Distribution Agreement between TWF and
the Distributor.
All activities involving sales or marketing of the Fund to
residents of Texas will be conducted solely by licensed dealer
personnel qualified in Texas and the Distributor will engage in
such activities only through such licensed dealers.
EXPENSES OF THE FUND
The Fund will pay its expenses not assumed by the Advisor,
including, but not limited to, the following: custodian; stock
transfer and dividend disbursing fees and expenses; taxes; expenses
of the issuance and redemption of Fund shares (including stock
certificates, registration and qualification fees and expenses);
legal and auditing expenses; and the cost of stationery and forms
prepared exclusively for the Fund.
The allocation of the general expenses of TWF is made on a
basis that TWF's Board of Directors deems fair and equitable, which
may be based on the relative net assets of each series or the
nature of the services performed and relative applicability to each
series.
Under the Advisory Agreement the Advisor has agreed to
reimburse the Fund if its annual ordinary operating expenses exceed
the most stringent limits prescribed by any state in which the
Fund's shares are offered for sale. This expense limitation is
calculable based on the Fund's aggregate net assets. Expenses
which are not subject to this limitation are interest, taxes and
extraordinary expenses. Expenditures, including costs incurred in
connection with the purchase or sale of portfolio securities, which
are capitalized in accordance with generally accepted accounting
principles applicable to investment companies, are accounted for as
capital items and not as expenses. Reimbursement, if any, will be
on a monthly basis, subject to year-end adjustment and limited to
the amount of the advisory fee due from the Fund.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the Prospectus, TWF offers the
following shareholder services:
Regular Account: The regular account allows for voluntary
investments to be made at any time. Available to individuals,
custodians, corporations, trusts, estates, corporate retirement
plans and others, investors are free to make additions and
withdrawals to or from their account as often as they wish. Simply
use the Account Application provided with the Prospectus to open
your account.
Telephone Transactions: You may redeem shares or transfer
into another fund if you request this service at the time you
complete the initial Account Application. If you do not elect this
service at that time, you may do so at a later date by putting your
request in writing to the Transfer Agent and having your signature
guaranteed.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if
it does not, it may be liable for any losses due to unauthorized or
fraudulent transactions. As a result of this policy, a shareholder
authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which the Fund
believes to be genuine. When you request a telephone redemption or
transfer, you will be asked to respond to certain questions
designed to confirm your identity as a shareholder of record. Your
cooperation with these procedures will protect your account and the
Fund from unauthorized transactions.
Invest-A-Matic Account: Any shareholder may utilize this
feature, which provides for automatic monthly investments into your
account. Upon your request, the Transfer Agent will withdraw a
fixed amount each month from your checking account for investment
into your account. This does not require you to make a commitment
for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Invest-A-Matic Plan as desired by
notifying the Transfer Agent. This feature requires a separate
Plan application, in addition to the Account Application. To
obtain an application, or to receive more information, please call
the Fund offices.
Individual Retirement Account (IRA) - All wage earners under
70-1/2, even those who participate in a company sponsored or
government retirement plan, may establish their own IRA. You can
contribute 100% of your earnings up to $2,000 (or $2,250 with a
spouse who is not a wage earner). A special IRA program is
available for corporate employers under which the employers may
establish IRA accounts for their employees in lieu of establishing
corporate retirement plans. Known as SEP-IRA's (Simplified
Employee Pension-IRA), they free the corporate employer of many of
the recordkeeping requirements of establishing and maintaining a
corporate retirement plan trust.
If you have received a lump sum distribution from another
qualified retirement plan, you may rollover all or part of that
distribution into your Fund IRA. Your rollover contribution is not
subject to the limits on annual IRA contributions. By acting
within applicable time limits of the distribution you can continue
to defer Federal Income Taxes on your lump sum contribution and on
any income that is earned on that contribution.
How to Establish Retirement Accounts: Please call TWF to
obtain information regarding the establishment of individual
retirement plan accounts. The plan custodian charges nominal fees
in connection with plan establishment and maintenance. These fees
are detailed in the plan documents. You may wish to consult with
your attorney or other tax advisor for specific advice concerning
your tax status and plans.
Exchange Privilege: Shareholders of the Fund may exchange
their shares for shares of any other series of TWF, provided the
shares of the fund the shareholder is exchanging into are
registered for sale in the shareholders state of residence. Each
account must meet the minimum investment requirements (currently
$1,000). Exchange Privilege Authorization Forms are available by
calling the TWF' offices. Your special authorization form must
have been completed and must be on file with the Transfer Agent.
To make an exchange, an exchange order must comply with the
requirements for a redemption or repurchase order and must specify
the value or the number of shares to be exchanged. However, an
investment dealer or the Principal Underwriter who has been
authorized by a shareholder in writing to make exchanges of Fund
shares on behalf of the shareholder may place exchange orders with
the Principal Underwriter by telephone or in writing without a
signature guarantee, or by simply calling the Transfer Agent at
(800) 628-4077 before noon (Eastern Time). Your exchange will take
effect as of the next determination of Fund's net asset value per
share (usually at the close of business on the same day). The
Transfer Agent will charge your account a $10.00 service fee each
time you make such an exchange. TWF 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 TWF determine that it would be in the best interest of its
shareholders to do so. For tax purposes an exchange constitutes
the sale of your Fund shares and the purchase of those of the
second fund. Consequently, the sale may involve either a capital
gain or loss to the shareholder for Federal Income Tax purposes.
The Exchange Privilege is available only in states where it is
legally permissible to do so.
ALLOCATION OF PORTFOLIO BROKERAGE
It is the Fund's policy to seek the best possible price and
execution for its securities transactions taking into account both
the costs and the ability to complete the order in a manner which
will achieve its goals. After a purchase or sale decision is made
by the Advisor, the Advisor then arranges for execution of the
transaction in a manner deemed to provide the best result 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.
While there is no formula, agreement or undertaking to do so,
the Fund may allocate a portion of its brokerage commissions to
persons or firms providing the Advisor with investment
recommendations, statistical, research or similar services useful
to the daily operation of the Fund or other clients of these
persons. Such services are one of the many ways the Fund and its
Advisor can keep abreast of the information generally circulated
among institutional investors by broker-dealers. While this
information is useful in varying degrees, its value is
indeterminable. Such services received on the basis of
transactions for the Fund may be used by the Advisor for the
benefit of other clients, and the Fund may benefit from such
transactions effected for the benefit of other clients. Subject to
obtaining best price and execution (1) the Fund may consider sales
of its shares as a factor in the selection of brokers to execute
portfolio transactions, and (2) on one occasion the Board
authorized allocation of brokerage in consideration of payment by
the broker of certain bills which would otherwise be payable by the
Fund in the amount of $35,209.
Effective May 1, 1991, the Advisor was authorized to place
Fund transactions with a broker-dealer with which it is affiliated
(Vontobel Securities Ltd.) provided that Vontobel Securities, Ltd.
stands ready to demonstrate to TWF that the Fund will receive (1)
a price and execution no less favorable than that available from
unaffiliated persons, and (2) a price and execution equivalent to
that offered to unaffiliated persons by that broker-dealer, in each
case on transactions of a like size and nature. In this regard,
the Board of Directors of TWF has adopted policies and procedures
which govern such allocation of brokerage transactions, and the
Board reviews at its meetings details of all transactions which
have been placed pursuant to those policies.
When two or more funds managed by the Advisor are
simultaneously engaged in the purchase or sale of the same
security, the transactions are allocated in a manner deemed
equitable to each fund. It is recognized that in some cases the
procedure could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to
participate in volume transactions will be beneficial for the Fund.
It is the opinion of the Board of Directors of TWF that these
advantages, when combined with the other benefits available because
of the Advisor's organization, outweigh the disadvantages that may
be said to exist from exposure to simultaneous transactions.
The Fund paid $242,782, $155,168 and $171,098 in brokerage
commissions for the years ended December 31, 1993, 1994, and 1995,
respectively. No brokerage commissions were paid to Vontobel
Securities, Ltd. (an affiliated Broker Dealer) during the periods
ended December 31, 1993, 1994 and 1995).
GENERAL INFORMATION AND HISTORY
TWF is authorized to issue up to 500,000,000 shares of $0.01
par value common stock, of which it has presently allocated
50,000,000 shares to the Fund, 50,000,000 to the Vontobel
EuroPacific Fund series, 50,000,000 to the Vontobel International
Bond Fund series, 50,000,000 to the Sand Hill Portfolio Manager
Fund series and 50,000,000 to the Vontobel Eastern European Equity
Fund series. The Board of Directors can allocate the remaining
authorized but unissued shares to any series of TWF, or may create
additional series and allocate shares to such series. Each series
is required to have suitable investment objectives, policies and
restrictions, to maintain a separate portfolio of securities
suitable to its purposes, and to generally operate in the manner of
a separate investment company as required by the Investment Company
Act of 1940.
If additional series were to be formed, the rights of existing
Fund shareholders would not change, and the Fund's objective,
policies and investments would not be changed. A share of the Fund
would continue to have a priority in the assets of the Fund in the
event of a liquidation.
The shares of the Fund when issued will be fully paid and non-
assessable, will have no preference over other shares of the Fund
as to conversion, dividends, or retirement, and will have no
preemptive rights. The shares of the Fund will be redeemable from
the assets of the Fund at any time at a shareholder's request at
the current net asset value determined in accordance with the
provisions of the Investment Company Act of 1940 and the rules
thereunder. TWF's general corporate expenses (including
administrative expenses) will be allocated among the series in
proportion to net assets or as determined in good faith by the
Board.
The investment advisory fees payable to the Advisor by the
Fund and the Fund's expense limitation guarantee formula will be
based upon the Fund's assets. The Fund's shareholders will have
the right to choose or remove the Advisor of the investments of the
Fund.
Voting and Control - Each outstanding share of TWF is entitled
to one vote for each full share of stock and a fractional share of
stock. All shareholders vote on matters which concern the
corporation as a whole. Election of Directors or ratification of
the auditor are examples of matters to be voted upon by all
shareholders. TWF is not required to hold a meeting of
shareholders each year. TWF intends to hold annual meetings when
it is required to do so by the Maryland General Corporate Law or
the Investment Company Act of 1940. Shareholders have the right to
call a meeting to consider the removal of one or more of the
Directors and will be assisted in Shareholder communication in such
matter.
The Fund shall vote separately on matters (1) when required by
the General Corporation Law of Maryland, (2) when required by the
Investment Company Act of 1940 and (3) when matters affect only the
interest of the Fund. An example of a matter affecting only the
Fund might be a proposed change in the Fund's investment
restriction. The shares will not have cumulative voting rights,
which means that the holders of more than 50% of the shares voting
for the election of directors can elect all of the directors if
they choose to do so.
Limitation on Use of Name - The Fund's Advisory Agreement
authorizes TWF to utilize the name "Vontobel." TWF agrees that if
the Advisory Agreement is terminated it will promptly redesignate
the Fund's name to eliminate any reference to the name "Vontobel"
or any derivation thereof unless the Advisor waives this
requirement in writing.
On December 30, 1988, TWF, the Far East series and the
EuroPacific series of TWF changed their names in connection with
the change of TWF's investment manager and the merger of two series
of TWF. TWF was formerly known as The Commonwealth Group, Inc.;
the Tyndall-Newport Far East Fund series was formerly called the
Newport Far East Fund series; and the Tyndall-Newport Global Growth
Fund series was formerly called the Newport Global Growth Fund. On
July 6, 1990 Tyndall-Newport Fund, Inc. changed its name to Tyndall
World Funds, Inc. and the Tyndall-Newport Tiger Fund changed its
name to Tyndall Tiger Fund, the Tyndall-Newport Far East Fund
changed its name to Tyndall Far East Fund, and the Tyndall-Newport
Global Growth Fund changed its name to T.V. EuroPacific Fund. On
March 7, 1991 Tyndall World Funds, Inc. changed its name to The
World Funds, Inc., the Tyndall Tiger Fund changed its name to the
Newport Tiger Fund, and the T.V. EuroPacific Fund changed its name
to the Vontobel EuroPacific Fund. The Vontobel U.S. Value Fund did
not change its name.
Code of Ethics The Fund has adopted a Code of Ethics which
imposes certain restrictions on the authority of portfolio managers
and certain other personnel of the Fund and its advisors governing
personal securities activ`ities and investments of those persons
and has instituted procedures to its Code of Ethics to require such
investment personnel to report such activities to the compliance
officer. The Code is reviewed and updated annually.
PERFORMANCE
Current yield and total return are the two primary methods of
measuring investment performance. Occasionally, however, the Fund
may include their distribution rate in sales literature. Yield, in
its simplest form, is the ratio of income per share derived from
the Fund's portfolio investments to a current maximum offering
price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. Total return,
on the other hand, is the total of all income and capital gains
paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment,
expressed as a percentage of the purchase price. The distribution
rate is the amount of distributions per share made by the Fund over
a twelve-month period divided by the current maximum offering
price.
Generally, as stated in the prospectus, effective May 1, 1988,
performance quotations by investment companies are subject to
certain new rules adopted by the Securities and Exchange
Commission. These rules require the use of standardized
performance quotations, or alternatively, that every non-
standardized performance quotation furnished by the Fund be
accompanied by certain standardized performance information
computed as required by the Commission. Current yield and total
return quotations used by the Fund are based on the standardized
methods of computing performance mandated by the Commission.
As indicated below current yield is determined by dividing the
net investment income per share earned during the period by the
maximum offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholder during the 30 day base period.
According to the new Securities and Exchange formula:
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.
The Fund's average annual total return for the period ended
December 31, 1995 is as follows:
One Year Five Year
Period Period From Inception
Fund Name Ending Ending to
12-31-95 12/31/95 12-31-95
U.S. Value Fund 40.36% 18.84% 14.11%
As the following formula indicates, the average annual total
return is determined by multiplying a hypothetical initial purchase
order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation and dividends and
distributions paid and reinvested) for the stated period less any
fees charged to all shareholder accounts and annualizing the
result. The calculation assumes that all dividends and
distributions are reinvested at the public offering price on the
reinvestment dates during the period. The quotation assumes the
account was completely redeemed at the end of each one, five and
ten year period and the deduction of all applicable charges and
fees. According to the Securities and Exchange Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year periods (or
fractional portion thereof).
Sales literature pertaining to the Fund may quote a
distribution rate in addition to the yield or total return. The
distribution rate is the amount of distributions per share made by
the Fund over a twelve-month period divided by the current maximum
offering price. The distribution rate differs from the yield
because it measures what the Fund paid to shareholders rather than
what the Fund earned from investments. It also differs from the
yield because it may include dividends paid from premium income
from option writing, if applicable, and short-term capital gains in
addition to dividends from investment income. Under certain
circumstances, such as when there has been a change in the amount
of dividend payout, or a fundamental change in investment policies,
it might be appropriate to annualize the distributions paid over
the period such policies were in effect, rather than using the
distributions paid during the past twelve months.
Occasionally statistics may be used to specify the Fund's
volatility or risk. Measures of volatility or risk are generally
used to compare the Fund's net asset value or performance relative
to a market index. One measure of volatility is beta. Beta is the
volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or
total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk
undertaken in achieving performance.
Sales literature referring to the use of the Fund as a
potential investment for Individual Retirement Accounts (IRAs),
Business Retirement Plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends
on which it is presumed no federal income tax applies.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
Comparisons and Advertisements
To help investors better evaluate how an investment in the
Fund might satisfy their investment objective, advertisements
regarding the Fund may discuss yield, total return, or volatility
as reported by various financial publications. Advertisements may
also compare yield, total return, or volatility (as calculated
above) to yield, total return, or volatility as reported by other
investments, indices, and averages. The following publications,
indices, and averages may be used:
(a) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company stocks
(Dow Jones Utilities Average), and 20 transportation company
stocks. Comparisons of performance assume reinvestment of
dividends.
(b) Standard & Poor's 500 Stock Index or its component indices -an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices -
unmanaged indices of all industrial, utilities, transportation, and
finance stocks listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the
market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume
reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed
Income Analysis, and Lipper Mutual Fund Indices - measures total
return and average current yield for the mutual fund industry.
Ranks individual mutual fund performance over specified time
periods assuming reinvestment of all distributions, exclusive of
sales charges.
(f) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
(g) Mutual Fund Source Book and other material, published by
Morningstar, Inc. - analyzes price, yield, risk, and total return
for equity funds.
(h) Financial publications: Business Week, Changing Times,
Financial World, Forbes, Fortune, and Money magazines - rates fund
performance over specified time periods.
(i) Consumer Price Index (or Cost of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure of
change, over time, in the price of goods and services, in major
expenditure groups.
(j) Standard & Poor's 100 Stock Index - an unmanaged index based
on the price of 100 blue-chip stocks, including 92 industrials, one
utility, two transportation companies, and 5 financial
institutions. The S&P 100 Stock Index is a smaller more flexible
index for option trading.
In assessing such comparisons of yield, return, or volatility,
an investor should keep in mind that the composition of the
investments in the reported indices and averages in not identical
to the Fund's portfolio, that the averages are generally unmanaged,
and that the items included in the calculations of such averages
may not be identical to the formula used by the Fund to calculate
its figures. In addition there can be no assurance that the Fund
will continue this performance as compared to such other averages.
FINANCIAL STATEMENTS
The Fund's books will be audited at least once each year by
Tait, Weller and Baker, of Philadelphia, PA, independent public
accountants. The Annual Report to Shareholders is incorporated by
reference to this Statement of Additional Information.
<PAGE>
Advisor: Vontobel USA Inc.
450 Park Ave.
New York, N.Y. 10022
Distributor: First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Fund and
Marketing Services, call the Distributor
at (800) 527-9500 Toll Free.
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260
(800) 628-4077 Toll Free
More Information: For 24 hour, 7 days a week price
information call 1-800-527-9500.
For information on any series of TWF,
investment plans, or other shareholder
services, call TWF at 1-800-527-9500
during normal business hours, or write
TWF at 1500 Forest Avenue, Suite 223,
Richmond, VA 23229.
NASDAQ SYMBOL: VUSVX
<PAGE>
THE WORLD FUNDS, INC.
VONTOBEL INTERNATIONAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 2, 1996
The World Funds, Inc. ("TWF") is an open-ended management
investment company commonly known as a "mutual fund." This
Statement of Additional Information is not a prospectus but
supplements the information contained in the current Prospectus of
the Vontobel International Bond Fund (the "Fund"), dated May 2,
1996. It should be read in conjunction with the Prospectus, and
has been designed to provide you with further information which is
not contained in the Prospectus. A prospectus of the Fund may be
obtained at no charge upon request to the Fund. Please retain this
Statement of Additional Information for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS STATEMENT OF ADDITIONAL
INFORMATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
Investment Objective and Policies 1
Special Investment Considerations 1
Investment Techniques
Debt Securities 3
Strategic Transactions 3
Repurchase Agreements & Reverse
Repurchase Agreements 9
Investment Restrictions 11
Other Investment Policies 11
Taxes 13
Dividends and Distributions 17
Portfolio Transactions 17
Net Asset Value 18
Directors and Officers 20
Investment Advisor 22
Transfer Agent 22
Administrator 22
Eligible Benefit Plans 23
Distribution 23
Expenses of the Fund 23
Special Shareholder Services 24
General Information and History 25
Performance 26
Financial Statements 29
Appendix - Bond Ratings 29
THE WORLD FUNDS, INC.
VONTOBEL INTERNATIONAL BOND FUND
The Fund is a series of TWF, a Maryland corporation which is
an open-end, management investment company, commonly known as a
"mutual fund." The Fund is a no-load non-diversified series of
TWF.
Investment Objective and Policies
The Fund's investment objective is to maximize total return
from capital growth and income. The investment objective may not
be changed without the approval of shareholders. However, the
investment policies are not fundamental and may be changed with the
approval of TWF's Board of Directors. There is some market risk
inherent in any investment, due in part to changes in general
economic and market conditions, and therefore there is no assurance
that the Fund's investment objective will be realized. However,
investment policies are intended to provide the flexibility to take
advantage of opportunities while accepting only what management
believes to be reasonable risks.
Changes in portfolio securities are made on the basis of
investment considerations, and it is against the policy of
management to make changes for trading purposes.
The Fund offers investors a convenient way to invest in a
managed portfolio of foreign currency denominated debt securities.
It seeks to achieve its objective of total return primarily by
investing in a managed portfolio of high-grade bonds denominated in
foreign currencies. It will seek protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
To achieve its objective, the Fund will primarily invest in
international bonds that are denominated in foreign currencies,
including bonds denominated in the European Currency Unit (ECU).
International bonds are defined as bonds issued in countries other
than the United States. The Fund's investments may include debt
securities issued or guaranteed by a foreign national government,
its agencies, instrumentalities or political subdivisions, debt
securities issued or guaranteed by supranational organizations,
corporate debt securities, bank or holding company debt securities
and other debt securities including those convertible into common
stock. The Fund will invest in very high investment grade
instruments that will bear the rating of A or higher by Standard &
Poor's Corporation ("S&P") or A or higher by Moody's Investor
Service, Inc. ("Moody's") or unrated securities which the Advisor
believes to be of comparable quality. However, the Fund reserves
the right to invest its assets in lower rated securities (including
unrated securities which the Advisor believes to be of such lower
quality). (See the Appendix for Bond Ratings). The Fund will
invest no more than 5% of its assets in securities rated below
investment grade or which are unrated but are of comparable quality
as determined by the Advisor. (See "Special Risk Considerations"
in the Fund's Prospectus.)
Special Investment Considerations of the Fund
The Fund is intended to provide individual and institutional
investors with an opportunity to invest a portion of their assets
in a globally and/or internationally oriented portfolio, according
to the Fund's objective and policies, and is designed for long-term
investors who can accept international investment risk. The Fund's
Advisor believes that allocation of assets on a global or
international basis decreases the degree to which events in any one
country, including the United States, will affect an investor's
entire investment holdings. In the period since World War II, many
leading foreign economies have grown more rapidly than the United
States economy, thus providing investment opportunities, although
there can be no assurance that this will be true in the future. As
with any long-term investment, the value of the Fund's shares when
sold may be higher or lower than when purchased.
Investors should recognize that investing in foreign
securities involves certain special considerations, including those
set forth below, which are not typically associated with investing
in United States securities and which may favorably or unfavorably
affect the performance of the Fund. As foreign companies are not
generally subject to the same uniform standards, practices and
requirements, with respect to accounting, auditing and financial
reporting, as are domestic companies, there may be less publicly
available information about a foreign company than about a domestic
company. Many foreign securities markets, while growing in volume
of trading activity, have substantially less volume in the U.S.
market, and securities of some foreign issuers are less liquid and
more volatile than securities of domestic issuers. Similarly,
volume and liquidity in most foreign bond markets is less than in
the United States and, at times, volatility of price can be greater
than in the United States. Further, foreign markets have different
clearance and settlement procedures and in certain markets there
have been times when settlements have been unable to keep pace with
the volume of securities transactions making it difficult to
conduct such transactions. Delays in settlement could result in
temporary periods when assets of a fund are uninvested and no
return is earned thereon. The inability of a fund to make intended
security purchases due to settlement problems could cause a fund to
miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result
in losses to a fund due to subsequent declines in value of the
portfolio security or, if a fund has entered into a contract to
sell the security, could result in possible liability to the
purchaser. Fixed commissions on some foreign securities exchanges
and bid to asked spreads in foreign bond markets are generally
higher than negotiated commissions on U.S. exchanges and bid to
asked spreads in the U.S. bond market, although the Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. Further, a fund may encounter difficulties or be
unable to pursue legal remedies and obtain judgments in foreign
courts. There is generally less government supervision and
regulation of business and industry practices, securities
exchanges, brokers and listed companies than in the United States.
Communications between the United States and foreign countries may
be less reliable than within the United States, thus increasing the
risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. In addition, with respect
to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect United
States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the
United States economy in such respects as growth of gross national
product rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The Fund's
Advisor seeks to mitigate the risks associated with the foregoing
considerations through continuous professional management.
Investments in foreign securities usually will involve
currencies of foreign countries. Because of the considerations
discussed above, the value of the assets of the Fund, as measured
in U.S. dollars, may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with
conversions between various currencies. Although the Fund values
its assets daily in terms of U.S. dollars, it does not intend to
convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a fund at
one rate, while offering a lesser rate of exchange should the fund
desire to resell that currency to the dealer. The Fund will
conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into the forward or
futures contracts (or option thereon) to purchase or sell foreign
currencies. The Fund may, for hedging purposes, purchase foreign
currencies in the form of bank deposits.
Because the Fund may be invested in both U.S. and foreign
securities markets, changes in its share price may have a low
correlation with movements in the U.S. markets. The Fund's share
price will reflect the movements of the bond markets in which it is
invested and of the currencies in which the investments are
denominated; the strength or weakness of the U.S. dollar against
foreign currencies may account for part of the Fund's investment
performance. Foreign securities such as those purchased by the
Fund may be subject to foreign government taxes which could reduce
the yield on such securities, although a shareholder of the Fund
may, subject to certain limitations, be entitled to claim a credit
or deduction for U.S. federal income tax purposes for his or her
proportionate share of such foreign taxes paid by the Fund (see
"Taxes"). U.S. and foreign securities markets do not always move
in step with each other and the total returns from different
markets may vary significantly. The Fund intends to invest in many
securities markets around the world in an attempt to take advantage
of opportunities wherever they may arise.
Because of the Fund's investment considerations discussed
above and its investment policies, investments in the Fund are not
intended to provide a complete investment program for an investor.
The Fund cannot guarantee a gain or eliminate the risk of
loss. The Fund's net asset value per share will increase or
decrease with changes in the market price of the Fund's
investments, and there is no assurance that the Fund's investment
objective will be achieved.
Investment Techniques
Debt Securities. The Fund may purchase "investment-grade"
bonds, which are those rated A or higher by Moody's or A or higher
by S&P, or unrated securities which the Advisor believes are of
comparable quality. The Fund may also invest up to 5% of its
assets in lower rated securities or securities which are unrated
but are of comparable quality as determined by the Advisor. Bonds
rated Baa or BBB may have speculative elements as well as
investment-grade characteristics. The Fund may invest in debt
securities which are rated as low as C by Moody's or D by S&P.
Securities rated D may be in default with respect to payment of
principal or interest.
Strategic Transactions. The Fund may, but is not required to,
utilize various other investment strategies described below to
hedge various market risks (such as interest rates, currency
exchange rates, and broad specific equity or fixed-income market
movements), to manage the effective maturity or duration of
fixed-income securities, or to enhance potential gain. Such
strategies are generally accepted as modern portfolio management
and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the
Fund may purchase and sell exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other
financial instruments, purchase and sell financial futures
contracts and options thereon, enter into various interest rate
transactions such as swaps, caps, floors or collars, and enter into
various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called
"Strategic Transactions"). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of
securities held in, or to be purchased for, the Fund's portfolio
resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value
of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some Strategic
Transactions may also be used to enhance potential gain although no
more than 5% of the Fund's assets will be committed to futures and
options on futures entered into for non-hedging purposes. Any or
all of these investment techniques may be used at any time and
there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction
is a function of numerous variables including market conditions.
The ability of the Fund to utilize these Strategic Transactions
successfully will depend on the Advisor's ability to predict
pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will
be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes and not for speculative
purposes.
Strategic Transactions have risks associated with them
including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain
market movements is incorrect, the risk that the use of such
Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in
losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the
case of put options) or lower than (in the case of call options)
current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security
it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures of transactions entails
certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price
movements in the related portfolio position of the Fund creates the
possibility that losses on the hedging instrument may be greater
than gains in the value of the Fund's position. In addition,
futures and options markets may not be liquid in all circumstances
and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out
a transaction without incurring substantial losses, if at all.
Although the use of futures and 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 they tend to limit
any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements
for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure
is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if
the Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call
options typically have similar structural characteristics and
operational mechanics regardless of the underlying instrument on
which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of the Fund's
assets in special accounts, as described below under "Use of
Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment
of a premium, the right to sell, and the writer the obligation to
buy, the underlying security, commodity, index, 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. 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,
financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of
the underlying instrument. 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 and
over-the-counter options ("OTC options"). 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 and Eurocurrency instruments are
cash settled for the net amount, 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 instrument 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: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying
securities including reaching daily price limits; (iv) interruption
of the normal operations of the OCC or an exchange; (v) inadequacy
of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue
the trading of options (or a particular class or series of
options), in which event the relevant market for that option on
that exchange would cease to exist, although outstanding options on
that exchange would generally continue to be exercisable in
accordance with their terms.
The hours of trading for listed options may not coincide with
the hours during which the underlying financial instruments are
traded. To the extent that the option markets close before the
markets for the underlying financial instruments, significant price
and rate movements can take place in the underlying markets that
cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers,
financial institutions or other parties ("Counterparties") through
direct bilateral agreement with the Counterparty. In contrast to
exchange listed options, which generally have standardized terms
and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the
parties. The Fund will only sell OTC options (other than OTC
currency options) that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option
back to the Fund at a formula price within seven days. The Fund
expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central
clearing or guaranty function in an OTC option. As a result, if
the Counterparty fails to make or take delivery of the security,
currency or other instrument underlying an OTC option it has
entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Advisor
must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to
determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only
with United States government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers," or broker
dealers, domestic or foreign banks or other financial institutions
which have received (or the guarantors of the obligation of which
have received) a short-term credit rating of A-1 from Standard &
Poor's Corporation ("S&P") or P-1 from Moody's Investor Services
("Moody's") or an equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of
the SEC currently takes the position that OTC options purchased by
a fund, and portfolio securities "covering" the amount of a fund's
obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to a fund's limitation on investing no more than 10% of
its assets in illiquid securities.
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 call options on securities
including U.S. Treasury and agency securities, mortgage-backed
securities, corporate debt securities, and Eurocurrency instruments
(see Page 16 for a discussion on Eurocurrency Instruments) that are
traded in U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and
futures contracts. All calls sold by the Fund must be "covered"
(i.e., the Fund must own the securities or futures contract 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 put options on securities
including U.S. Treasury and agency securities, mortgage-backed
securities, foreign sovereign debt, corporate debt securities,
convertible securities, and Eurocurrency instruments (whether or
not it holds the above securities in its portfolio), and on
securities indices, currencies and futures contracts other than
futures on individual corporate debt securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to
futures and options thereon. 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.
General Characteristics of Futures. The Fund may enter into
financial futures contracts or purchases or sell put and call
options on such futures as a hedge against anticipated interest
rate or currency market changes, for duration management and for
risk management purposes. Futures are generally bought and sold on
the commodities exchanges where they are listed with payment of
initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller,
to deliver to the buyer the specific type of financial instrument
called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurocurrency
instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and
obligates the seller to deliver such position.
The Fund's use of financial futures and options thereon will
in all cases be consistent with applicable regulatory requirements
and in particular the rules and regulations of the Commodity
Futures Trading Commission and will be entered into only for bona
fide hedging, risk management (including duration management) or
other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial
margin) which initially is typically 1% to 10% of the face amount
of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be
deposited thereafter on a daily basis as the mark to market value
of the contract fluctuates. The purchase of an option on financial
futures involves payment of a premium for the option without any
further obligation on the part of the Fund. If the Fund exercises
an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position.
Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no
assurance that the position can be offset prior to settlement at an
advantage price, nor that delivery will occur.
The Fund will not enter into a futures contract or related
option (except for closing transactions) if immediately thereafter,
the sum of the amount of its initial margin and premiums on open
futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an
option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded calculating the 5% limitation.
The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices.
The Fund may also purchase and sell call and put options on
securities indices and other financial indices and in so doing can
achieve many of the same objectives it would achieve through the
sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial
indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement, i.e., an
option on an index gives the holder the right to receive, upon
exercise of the option an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a
call or is less than, in the case of a put, the exercise price of
the option (except if, in the case of an OTC option physical
delivery is specified). 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. Currency transactions include
forward currency contracts, exchange listed currency futures,
exchange listed and OTC options on currencies, and currency swaps.
A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required)
a specific currency at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional difference
among two or more currencies and operates similarly to an interest
rate swap, which is described below. The Fund may enter into
currency transactions with Counterparties which have received (or
the guarantors of the obligations of which have received) a credit
rating of A-1 or P-1 by S&P or Moody's, respectively, or that have
an equivalent rating from a NRSRO or (except for OTC currency
options) are determined to be of equivalent credit quality by the
Advisor.
The Fund's dealings in forward currency contracts and other
currency transactions such as futures options, options on futures
and swaps will be limited to hedging involving either specific
transactions or portfolio positions. Specific transaction hedging
is entering into a currency transaction with respect to specific
assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or
the receipt of income therefrom. Position hedging is entering into
a currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the
aggregate market value (at the time of entering into the
transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into
such currency, other than with respect to proxy hedging as
described below.
The Fund may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are
expected to decline in value relative to other currencies to which
the Fund has or in which the Fund expects to have portfolio
exposure.
To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the Fund
may also engage in proxy hedging. Proxy hedging is often used when
the currency to which a fund's portfolio is exposed is difficult to
hedge or to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency whose changes
in value are generally considered to be linked to a currency or
currencies in which some or all of the fund's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars.
The amount of the contract would not exceed the value of the Fund's
securities denominated in linked currencies. For example, if the
Advisor considers that the Austrian schilling is linked to the
German deutschemark (the "D-mark"), the Fund holds securities
denominated in schillings and the Advisor believes that the value
of schillings will decline against the U.S. dollar, the Advisor may
enter into a contract to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can
result in losses to a fund if the currency being hedged fluctuates
in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during
the particular time that a fund is engaging in proxy hedging. If
a fund enters into a currency hedging transaction, the fund will
comply with the asset segregation requirements described below.
Cross currency hedges may not be considered "directly related" to
the Fund's principal business of investing in stock or securities
(or options and futures thereon), resulting in gains therefrom not
qualifying under the less than 30% of gross income" test of
Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code").
Risks of Currency Transactions. Currency transactions are
subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages,
and manipulations or exchange restrictions imposed by governments.
These can result in losses to a fund if it is unable to deliver or
receive currency or funds in settlement of obligations and could
also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for
the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively
new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may
not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
Combined Transactions. The Fund may enter into multiple
transactions, including multiple options transactions, multiple
futures transactions, multiple currency transactions (including
forward currency contracts) and multiple interest rate transactions
and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy
when, in the opinion of the Advisor, it is in the best interests of
the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered
into based on the Advisor's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio
management objective.
Eurocurrency Instruments. The Fund may make investments in
Eurocurrency instruments. Eurocurrency instruments are futures
contracts or options thereon which are linked to the London
Interbank Offered Rate ("LIBOR") or to the interbank rates offered
in other financial centers. Eurocurrency futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and
sellers to obtain a fixed rate for borrowings. The Fund might use
Eurocurrency futures contracts and options thereon to hedge against
changes in LIBOR and other interbank rates, to which many interest
rate swaps and fixed income instruments are linked.
Risks of Strategic Transactions Outside the United States.
When conducted outside the United States, Strategic Transactions
may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and are
subject to the risk of governmental actions affecting trading in,
or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in
a fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the United States, (iv) the
imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and
(v) lower trading volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic
Transactions, in addition to other requirements, require that a
fund segregate liquid high grade assets with its custodian to the
extent fund obligations are not otherwise "covered" through the
ownership of the underlying security, financial instruments or
currency. In general, either the full amount of any obligation by
a fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of
cash or liquid high grade securities at least equal to the current
amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer
necessary to segregate them. For example, a call option written by
a fund will require the fund to hold the securities subject to the
call (or securities convertible into the needed securities without
additional consideration) or to segregate liquid high-grade
securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a fund on an index will
require the fund to own portfolio securities which correlate with
the index or segregate liquid high grade assets equal to the excess
of the index value over the exercise price on a current basis. A
put option written by a fund requires the fund to segregate liquid,
high grade assets equal to the exercise price.
Except when a fund enters into a forward contract for the
purchase or sale of a security denominated in a particular
currency, which requires no segregation, a currency contract which
obligates a fund to buy or sell currency will generally require the
fund to hold an amount of that currency or liquid securities
denominated in that currency equal to the fund's obligations or to
segregate liquid high grade assets equal to the amount of the
fund's obligation.
OTC options entered into by the Fund, including those on
securities, currency, financial instruments or indices and 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 in-the-money amount plus any sell-back formula
amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. OCC issued and exchange
listed options sold by the Fund other than those generally settle
with physical delivery, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, the
Fund must deposit initial margin and possible daily variation
margin in addition to segregating assets sufficient to meet its
obligation to purchase or provide securities or currencies, or to
pay the amount owed at the expiration of an index-based futures
contract. Such assets may consist of cash, cash equivalents,
liquid debt securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of
the excess, if any, of its obligations over its entitlements with
respect to each swap on a daily basis and will segregate an amount
of cash or liquid high grade securities having a value equal to the
accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when
consistent with applicable regulatory policies. The Fund may also
enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding
obligation in related options and Strategic Transactions. For
example, the Fund could purchase a put option if the strike price
of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets
if the Fund held a futures or forward contract, it could purchase
a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. Other
Strategic Transactions may also be offered in combinations. If the
offsetting transaction terminates at the time of or after the
primary transaction no segregation is required, but if it
terminates prior to such time, assets equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue
Code for qualification as a regulated investment company. (See
"Taxes.")
Repurchase Agreements and Reverse Repurchase Agreements. The
Fund may enter into repurchase agreements with member banks of the
Federal Reserve System, any foreign bank or with any domestic or
foreign broker/dealer which is a reporting government securities
dealer or its equivalent which may be a foreign bank whose
creditworthiness is equal to the standards set for the Fund's
direct investment in debt obligations, if the creditworthiness of
the bank or broker/dealer has been determined by the Advisor to be
at least as high as that of other obligations the Fund may
purchase.
A repurchase agreement provides a means for a fund to earn
income on funds for periods as short as overnight. It is an
arrangement under which the purchaser (i.e. a fund) acquires a debt
security ("Obligation") and the seller agrees, at the time of sale,
to repurchase the Obligation at a specified time and price.
Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities is kept at
least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the
difference being income to a fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to a
fund together with the repurchase price on repurchase. In either
case, the income to a fund is unrelated to the interest rate on the
Obligation itself. Obligations will be physically held by the
Fund's custodian (Brown Brothers Harriman and Company) or in the
Federal Reserve Book Entry system.
For purposes of the Investment Company Act of 1940, as amended
(the "1940 Act"), a repurchase agreement is deemed to be a loan
from a fund to the seller of the Obligation subject to the
repurchase agreement and is therefore subject to that fund's
investment restrictions applicable to loans. It is not clear
whether a court would consider the Obligation purchased by a fund
subject to a repurchase agreement as being owned by the fund or as
being collateral for a loan by the fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of
the Obligation under a repurchase agreement, a fund may encounter
delay and incur costs before being able to sell the security.
Delays may involve loss of interest or decline in price of the
Obligation. If the court characterizes the transaction as a loan
and a fund has not perfected a security interest in the Obligation,
the fund may be required to return the Obligation to the seller's
estate and be treated as an unsecured creditor of the seller. As
an unsecured creditor, a fund would be at risk of losing some or
all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for the Fund, the
Advisor seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in
this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that
the seller may fail to repurchase the security. However, if the
market value of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including interest), the
Fund will direct the seller of the Obligation to deliver additional
securities so that the market value of all securities subject to
the repurchase agreement will equal or exceed the repurchase price.
It is possible that the Fund will be unsuccessful in seeking to
enforce the seller's contractual obligation to deliver additional
securities. A repurchase agreement with foreign banks may be
available with respect to government securities of the particular
foreign jurisdiction, and such repurchase agreements involve risks
similar to repurchase agreements with U.S. entities.
The Fund may also enter into repurchase commitments with any
party deemed creditworthy by the Advisor, if the transaction is
entered into for investment purposes and the counterparty's
creditworthiness is at least equal to that of issuers of securities
which the Fund may purchase. Such transactions may not provide the
Fund with collateral which is marked-to-market during the term of
the commitment.
A reverse repurchase agreement is an arrangement under which
the seller (i.e. a fund) sells an Obligation to a buyer, and
agrees, at the time of sale, to repurchase the Obligation at a
specified time and price. The Fund may enter into reverse
repurchase agreements with member banks of the Federal Reserve
System, any foreign bank or with any domestic or foreign
broker/dealer which is a reporting government securities dealer or
its equivalent which may be a foreign bank whose creditworthiness
is equal to the standards set for the Fund's direct investment in
debt obligations.
A reverse repurchase agreement provides a means for a fund to
earn income on funds which would otherwise be invested in debt
securities, for periods as short as overnight. Securities subject
to a repurchase agreement are held by the purchaser, and the seller
holds, and may invest, the price received for the security. The
repurchase price may be higher than the purchase price, the
difference being an expense to a fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate
payable by a fund together with the repurchase price on repurchase.
In either case, the income paid by a fund is unrelated to the
interest rate on the Obligation itself. When the Fund is subject
to repurchase an Obligation under a reverse repurchase agreement,
it will segregate with its custodian (Brown Brothers Harriman and
Company) cash, U.S. government securities, or other high quality
debt instruments equal in value to the amount payable by it under
the agreement.
The risk to the Fund is that if the buyer does not resell the
Obligations to the Fund, the Fund may encounter expense or delay in
applying the cash held by it to acquire replacement securities. If
the market price of the securities to be acquired rises, the Fund
may have to bear an additional cost when making such a purchase.
If the buyer is in bankruptcy, the Fund may face claims of the
Trustee seeking the assets held by the Fund.
Investment Restrictions
The policies set forth below are fundamental policies of the
Fund and may not be changed without approval of a majority of the
outstanding voting securities of the Fund. As used in this
Statement of Additional Information a "majority of the outstanding
voting securities of the Fund" means the lesser of (1) 67% or more
of the voting securities present at such meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (2) more than 50% of the
outstanding voting securities of the Fund.
As a matter of fundamental policy, the Fund may not:
1. borrow money, except as a temporary measure for extraordinary
or emergency purposes; or except in connection with reverse
repurchase agreements, provided that the Fund maintains asset
coverage of 300% in connection with issuance of senior
securities. However, to avoid the untimely disposition of
assets to meet redemptions the Fund may borrow up to 20% of
the value of its assets to meet redemptions. The Fund may not
make other investments while such borrowings are outstanding;
2. purchase or sell real estate (except that the Fund may invest
in (i) securities of companies which deal in real estate or
mortgages, and (ii) securities secured by real estate or
interest therein, and that the Fund reserves freedom of action
to hold and to sell real estate acquired as a result of the
Fund's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities;
3. act as underwriter of securities issued by others, except to
the extent that it may be deemed an underwriter in connection
with the disposition of portfolio securities of the Fund;
4. make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent the entry into repurchase
agreements and the purchase of debt securities in accordance
with its investment objectives and investment policies may be
deemed to be loans;
5. issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur and except for
shares of the separate classes or series of the Corporation;
provided that collateral arrangements with respect to
currency-related contracts, futures contracts, option or other
permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction; or
6. purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase
to be invested in the securities of one or more issuers having
their principal business activities in the same industry,
provided that there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (for the purpose
of this restriction: telephone companies are considered to be
in a separate industry from gas and electric public utilities,
and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily
related to financing the activities of their parents).
Other Investment Policies
The Directors of TWF have voluntarily adopted certain policies
and restrictions which are observed in the conduct of the Fund's
affairs. These represent intentions of the Directors based upon
current circumstances. They differ from fundamental investment
policies in that they may be changed or amended by action of the
Directors without requiring prior notice to or approval of
shareholders.
As a matter of non-fundamental policy, the Fund may not:
(a) purchase or retain securities of any open-end investment
company, or 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 purchases, or
except when such purchase, though not made in the open market,
is part of a plan of merger, consolidation, reorganization on
acquisition of assets; in any event the Fund may not purchase
more than 3% of the outstanding voting securities of another
investment company, may not invest more than 5% of its assets
in another investment company, and may not invest more than
10% of its assets in other investment companies;
(b) borrow, pledge, mortgage or hypothecate its assets in excess,
together with permitted borrowings, of 1/3 of its total
assets;
(c) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer or director of TWF or a member, officer, or director
of the Fund's Advisor if one or more of such individuals owns
beneficially more than one-half of one percent (1/2%) of the
outstanding shares or securities or both (taken at market
value) of such issuer and such individuals owning more than
one-half of one percent (1/2%) of such shares or securities
together own beneficially more than 5% of such shares or
securities or both;
(d) purchase securities on margin; or make short sales unless it
holds such securities or, by virtue of its ownership of other
securities it has the right to obtain securities equivalent in
kind and amount of the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except
(i) in connection with arbitrage transactions and, (ii) that
the Fund may obtain such short-term credits as may be
necessary for the clearance of purchases and sales of
securities;
(e) invest more than 5% of its net assets in securities which are
not readily marketable, the disposition of which is restricted
under Federal securities laws, or in repurchase agreements not
terminable within 7 days, or in the securities of unseasoned
issuers (those in business for less than three years,
including predecessors); and the Fund will not invest more
than 5% of its total assets in restricted securities;
(f) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of its net assets; or sell put
options on securities if, as a result, the aggregate value of
the obligations underlying such put options would exceed 50%
of the Fund's net assets;
(g) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% of the Fund's
total assets, provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5% limit;
(h) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which
own or invest in such interests);
(i) purchase or sell real estate limited partnership interests.
(j) purchase securities which are not bonds denominated in foreign
currency ("international bonds") if, immediately after such
purchase, less than 65% of its total assets would be invested
in international bonds, except that for temporary defensive
purposes the Fund may purchase securities which are not
international bonds without limitation;
(k) invest more than 5% of its net assets in the securities of
issuers in emerging countries; and
(l) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of its aggregate
investment in such types of securities exceeds 5% of its total
assets.
Restrictions with respect to repurchase agreements shall be
construed to be for repurchase agreements entered into for the
investment of available cash consistent with the Fund's repurchase
agreement procedures, not repurchase commitments entered into for
general investment purposes.
If a percentage restriction on investment or utilization of
assets as set forth under "Investment Restrictions" and "Other
Investment Policies" above is adhered to at the time an investment
is made, a later change in percentage resulting from changes in the
value or the total cost of the Fund's assets will not be considered
a violation of the restriction.
In order to satisfy certain state regulatory requirements the
Fund has agreed that, so long as its shares are offered for sale in
such state(s), it will not:
1. Purchase the securities of any issuer(s) if such purchase
at the time thereof would cause the Fund to hold more
than 10% of the voting securities of such issuer(s); and
2. Purchase (a) the securities of unseasoned issuer(s)
(those in business for less than three years, including
predecessors), and (b) securities which are not readily
marketable, if such purchase would cause the Fund to own
more than 15% of its total assets in such issue(s).
Taxes
The Fund will seek to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve
governmental supervision or management of investment practices or
policy.
A regulated investment company qualifying under Subchapter M
of the Code is required to distribute to its shareholders at least
90% of its investment company taxable income (including net
short-term capital gain) and generally is not subject to federal
income tax (assuming the Fund meets the 90% and 30% of gross income
tests and the tax diversification test of Subchapter M) to the
extent that it distributes annually its investment company taxable
income and net realized capital gains in the manner required under
the Code. The Fund intends to distribute at least annually all of
its investment company taxable income and net realized capital
gains and therefore generally does not expect to pay federal income
taxes.
The Fund is subject to a 4% nondeductible excise tax on
amounts required to be but which are not distributed under a
prescribed formula. The formula requires payment to shareholders
during a calendar year of distributions representing at least 98%
of the Fund's investment company taxable income for the calendar
year, at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses prescribed by the
Code) realized during the one-year period ending October 31 during
such year, and all ordinary income and capital gains for prior
years that were not previously distributed.
Investment company taxable income generally includes
dividends, interest, net short-term capital gains in excess of net
long-term capital losses, and net foreign currency gains, if any,
less expenses. Realized net capital gains for a fiscal year are
computed by taking into account any capital loss carryforward of
the Fund.
If any net realized long-term capital gains in excess of net
realized short-term capital losses are retained by the Fund for
reinvestment, requiring federal income taxes to be paid thereon by
the Fund, the Fund intends to elect to treat such capital gains as
having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital
gains, will be able to claim his/her share of federal income taxes
paid by the Fund on such gains as a credit against his/her own
federal income tax liability, and will be entitled to increase the
adjusted tax basis of his/her Fund shares by the difference between
his/her pro rata share of such gains and his/her tax credit.
Distributions of investment company taxable income are taxable
to shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over
net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares
of the Fund have been held by such shareholders. Such
distributions are not eligible for a dividends-received deduction
for corporate investors. Any loss realized upon the redemption of
shares held at the time of redemption for six months or less from
the date of their purchase will be treated as a long-term capital
loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net
realized capital gains will be taxable as described above, whether
received in shares or in cash. Shareholders electing to receive
distributions in the form of additional shares will have a cost
basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and
realized net capital gain, whether received in shares or in cash,
must be reported by each shareholder on his or her federal income
tax return. Dividends and capital gains distributions declared in
October, November or December and payable to shareholders of record
in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following
year. Redemptions of shares, including exchanges for shares of
another Vontobel fund, may result in tax consequences (gain or
loss) to the shareholder and are also subject to information
reporting requirements.
An individual may make a deductible IRA contribution of up to
$2,000 or, if less, the amount of the individual's earned income
for any taxable year if (i) neither the individual nor his or her
spouse (unless filing separate returns) is an active participant in
an employer's retirement plan, or (ii) the individual (and his or
her spouse, if applicable) has an adjusted gross income below a
certain level ($40,000 for married individuals filing a joint
return, with a phase-out of the deduction for adjusted gross income
between $40,000 and $50,000; $25,000 for a single individual, with
a phase-out for adjusted gross income between $25,000 and $35,000).
However, an individual not permitted to make a deductible
contribution to an IRA for any such taxable year may nonetheless
make nondeductible contributions up to $2,000, or 100% of taxable
compensation if less, to an IRA (up to $2,250 to IRAs for an
individual and his or her nonearning spouse) for that year. There
are special rules for determining how withdrawals are to be taxed
if an IRA contains both deductible and nondeductible amounts. In
general, a proportionate amount of each withdrawal will be deemed
to be made from nondeductible contributions; amounts treated as a
return of nondeductible contributions will not be taxable. Also,
annual contributions may be made to a spousal IRA even if the
spouse has earnings in a given year if the spouse elects to be
treated as having no earnings (for IRA contribution purposes) for
the year.
Distributions by the Fund result in a reduction in the net
asset value of such Fund's shares. Should a distribution reduce
the net asset value below a shareholder's cost basis, such
distribution would nevertheless be taxable to the shareholder as
ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return
of capital. In particular, investors should consider the tax
implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the
forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
The Fund intends to qualify for and may make the election
permitted under Section 853 of the Code so that shareholders may
(subject to limitations) be able to claim a credit or deduction on
their federal income tax returns for, and may be required to treat
as part of the amounts distributed to them, their pro rata portion
of qualified taxes paid by the Fund to foreign countries (which
taxes relate primarily to investment income). The Fund may make an
election under Section 853 of the Code, provided that more than 50%
of the value of the total assets of the Fund at the close of the
taxable year consists of securities in foreign corporations. The
foreign tax credit available to shareholders is subject to certain
limitations imposed by the Code.
If the Fund invests in stock of certain foreign investment
companies, the Fund may be subject to U.S. federal income taxation
on a portion of any "excess distribution" with respect to, or gain
from the disposition of, such stock. The tax would be determined
by allocating such distribution or gain ratably to each day of the
Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable
year of the excess distribution or disposition, would be taxed to
the Fund at the highest ordinary income rate in effect for such
year, and the tax would be further increased by an interest charge
to reflect the value of the tax deferral deemed to have resulted
from the ownership of the foreign company's stock. Any amount of
distribution or gain allocated to the taxable year of the
distribution or disposition would be included in the Fund's
investment company taxable income and, accordingly, would not be
taxable to the Fund to the extent distributed by the Fund as a
dividend to its shareholders.
The Fund may be able to make an election, in lieu of being
taxable in the manner described above, to include annually in
income its pro rata share of the ordinary earnings and net capital
gain of the foreign investment company, regardless of whether it
actually received any distributions from the foreign company.
These amounts would be included in the Fund's investment company
taxable income and net capital gain which, to the extent
distributed by the Fund as ordinary or capital gain dividends, as
the case may be, would not be taxable to the Fund. In order to
make this election, the Fund would be required to obtain certain
annual information from the foreign investment companies in which
it invests, which in many cases may be difficult to obtain. The
Fund may make an election with respect to those foreign investment
companies which provide the Fund with the required information.
Many futures contracts (including foreign currency futures
contracts) entered into by the Fund, certain forward foreign
currency contracts, and all listed nonequity options written or
purchased by the Fund (including options on debt securities,
options on futures contracts, options on securities indices and
options on broad-based stock indices) will be governed by Section
1256 of the Code. Absent a tax election to the contrary, gain or
loss attributable to the lapse, exercise or closing out of any such
position generally will be treated as 60% long-term and 40%
short-term capital gain or loss, and on the last trading day of the
Fund's fiscal year, all outstanding Section 1256 positions will be
marked to market (i.e., treated as if such positions were closed
out at their closing price on such day), with any resulting gain or
loss recognized as 60% long-term and 40% short-term capital gain or
loss. Under certain circumstances, entry into a futures contract
to sell a security may constitute a short sale for federal income
tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in a
Fund's portfolio. Under Section 988 of the Code, discussed below,
foreign currency gains or loss from foreign currency related
forward contracts, certain futures and similar financial
instruments entered into or acquired by the Fund will be treated as
ordinary income or loss.
Subchapter M requires that the Fund realize less than 30% of
its annual gross income from the sale or other disposition of
stock, securities and certain options, futures and forward
contracts held for less than three months. The Fund's options,
futures and forward transactions may increase the amount of gains
realized by the Fund that are subject to this 30% limitation.
Accordingly, the amount of such transactions that the Fund may
undertake may be limited.
Positions of the Fund which consist of at least one stock and
at least one stock option or other position with respect to a
related security which substantially diminishes a Fund's risk of
loss with respect to such stock could be treated as a "straddle"
which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital
losses into long-term capital losses. An exception to these
straddle rules exists for any "qualified covered call options" on
stock written by the Fund.
Positions of the Fund which consist of at least one position
not governed by Section 1256 and at least one futures contract or
forward contract or nonequity option governed by Section 1256 which
substantially diminishes the Fund's risk of loss with respect to
such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, certain tax elections exist for them
which reduce or eliminate the operation of these rules. The Fund
will monitor its transactions in options and futures and may make
certain tax elections in connection with these investments.
Under the Code, gains or losses attributable to fluctuations
in exchange rates which occur between the time the Fund accrues
interest or other receivables, or accrues expenses or other
liabilities, denominated in a foreign currency and the time the
Fund actually collects such receivables, or pays such liabilities,
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures and forward
contracts, gains or losses attributable to fluctuations in the
value of foreign currency between the date of acquisition of the
security or contract and the date of disposition are also treated
as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease
the amount of the Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
A portion of the difference between the issue price of zero
coupon securities and their face value ("original issue discount")
is considered to be income to the Fund each year, even though the
Fund will not receive cash interest payments from these securities.
The original issue discount imputed income will comprise a part of
the Fund's investment company taxable income which must be
distributed to shareholders in order to maintain the Fund's
qualification as a regulated investment company and to avoid
federal income tax.
The Fund will be required to report to the IRS all
distributions of investment company taxable income and capital
gains as well as gross proceeds from the redemption or exchange of
Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the
Code, distributions of investment company taxable income and
capital gains and proceeds from the redemption or exchange of the
shares of a regulated investment company may be subject to
withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company
with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax
law. Withholding may also be required if the Fund is notified by
the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder
has previously failed to report interest or dividend income. If
the withholding provisions are applicable, any such distributions
and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Amounts withheld are applied against the shareholder's tax
liability and a refund may be obtained from the Internal Revenue
Service, if withholding results in overpayment of taxes. A
shareholder should contact the Fund or the Transfer Agent if the
shareholder is uncertain whether a proper Taxpayer Identification
Number is on file with the series.
Shareholders of the Fund may be subject to state and local
taxes on distributions received from the Fund and on redemptions of
the Fund's shares.
In January of each year TWF's Transfer Agent issues to each
shareholder a statement of the federal income tax status of all
distributions.
The foregoing discussion of U.S. federal income tax law
relates solely to the application of that law to U.S. persons,
i.e., U.S. citizens and residents and U.S. corporations,
partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences
of ownership of Fund shares, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of
30% (or at a lower rate under an applicable income tax treaty) on
amounts constituting ordinary income received by him or her, where
such amounts are treated as income from U.S. sources under the
Code.
Shareholders should consult their tax advisers about the
application of the provisions of the tax law described in this
Statement of Additional Information in light of their particular
tax situations.
Dividends and Distributions
As stated previously, it is the policy of the Fund to
distribute substantially all of its net investment income and net
realized capital gains, if any, shortly before the close of the
fiscal year (December 31st).
All dividend and capital gains distributions, if any, will be
reinvested in full and fractional shares based on net asset value
(without a sales charge) as determined on the ex-dividend date for
such distributions. Shareholders may, however, elect to receive
all such payments, or the dividend or distribution portion thereof,
in cash, by sending written notice to this effect to the Transfer
Agent. This written notice will be effective as to any subsequent
payment if received by the Transfer Agent prior to the record date
used for determining the shareholders' entitlement to such payment.
Such an election will remain in effect unless or until the Transfer
Agent is notified by the shareholder in writing to the contrary.
Portfolio Transactions
It is the policy of the Advisor, in placing orders for the
purchase and sale of the Fund's securities, to seek to obtain the
best possible price and execution for its securities transactions
taking into account such factors as price, commission, where
applicable, (which is negotiable in the case of U.S. national
securities exchange transactions but which is generally fixed in
the case of foreign exchange transactions), size of order,
difficulty of execution and skill required of the executing
broker/dealer. After a purchase or sale decision is made by the
Advisor, the Advisor then arranges for execution of the transaction
in a manner deemed to provide the best result for the Fund.
While there is no formula, agreement or undertaking to do so,
and when it can be done consistently with the policy of obtaining
the most favorable net results, the Advisor may allocate a portion
of its brokerage commissions to persons or firms providing the
Advisor with investment recommendations, statistical, research or
similar services useful to the daily operation of the Fund or other
clients of these persons. The term "investment recommendations,
statistical, research or similar services" means advice as to the
value of securities, the advisability of investing in, purchasing
or selling securities, and the availability of securities or
purchasers or sellers of securities, and furnishing analysis and
reports concerning issuers, industries, securities, economic
factors and trends, and portfolio strategy. Such services are one
of the many ways the Fund's Advisor can keep abreast of the
information generally circulated among institutional investors by
broker-dealers. While this information is useful in varying
degrees, its value is indeterminable. Such services received on
the basis of transactions for the Fund may be used by the Advisor
for the benefit of other clients, and the Fund may benefit from
such transactions effected for the benefit of other clients.
Subject to obtaining best price and execution the Fund may consider
sales of its shares as a factor in the selection of brokers to
execute portfolio transactions. The Advisor 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 account
of the receipt of research, market or statistical information. The
Advisor does not place orders with brokers or dealers on the basis
that the broker or dealer has or has not sold Fund shares. Except
for implementing the policy stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or
groups thereof.
Effective May 1, 1991, the Advisor has been instructed not to
place transactions with a broker-dealer with which it is affiliated
unless that broker-dealer, Vontobel Securities Ltd., stands ready
to demonstrate to TWF that the Fund will receive (1) a price and
execution no less favorable than that available from unaffiliated
persons, and (2) a price and execution equivalent to that offered
to unaffiliated persons by that broker-dealer, in each case on
transactions of a like size and nature. In this regard, the Board
of Directors of TWF has adopted policies and procedures which
govern such allocation of brokerage transactions, and the Board
reviews at its meetings details of all transactions which have been
placed pursuant to those policies.
When two or more funds managed by the Advisor are
simultaneously engaged in the purchase or sale of the same
security, the transactions are allocated in a manner deemed
equitable to each fund. It is recognized that in some cases the
procedure could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to participate
in volume transactions will be beneficial for the Fund. It is the
opinion of the Board of Directors of TWF that these advantages,
when combined with the other benefits available because of the
Advisor's organization, outweigh the disadvantages that may be said
to exist from exposure to simultaneous transactions.
Exchange-listed securities are generally traded on their
principal exchange unless another market offers a better result.
Securities traded only in the over-the-counter market may be
executed on a principal basis with primary market makers in such
securities except for fixed price offerings and except where the
Fund may obtain better prices or executions on a commission basis
or by dealing with other than a primary market maker.
Average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the
portfolio securities owned during the year, excluding from both the
numerator and the denominator all securities with maturities at the
time of acquisition of one year or less. A higher rate involves
greater transaction expenses to a fund and may result in the
realization of net capital gains, which would be taxable to
shareholders when distributed. Purchases and sales are made for
the Fund's portfolio whenever necessary, in the Advisor's opinion,
to meet the Fund's objective. The Advisor anticipates that the
Fund's average annual portfolio rate will be less than 100%.
Net Asset Value
The Fund's Net Asset Value ("NAV") per share is calculated
daily each business day from Monday through Friday. The New York
Stock Exchange (the "Exchange") is currently closed on weekends and
on the following holidays: New Years Day, Washington's Birthday,
Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving Day
and Christmas Day, and the NAV is not computed those days. The
Fund's NAV is calculated at the time set by the Board of Directors
based upon a determination of the most appropriate time to price
the Fund's securities.
The Board of Directors has determined that the Fund's NAV be
calculated as of the close of trading of the Exchange (currently
4:00 P.M., Eastern Time) on each business day from Monday to Friday
or on each day (other than a day during which no security was
tendered for redemption and no order to purchase or sell such
security was received by the Fund) in which there is a sufficient
degree of trading in the Fund's portfolio securities that the
current NAV of the Fund's shares might be materially affected by
changes in the value of such portfolio security.
NAV per share is determined by dividing the total value of the
Fund's securities and other assets, less liabilities (including
proper accruals of taxes and other expenses), by the total number
of shares then outstanding, and the result, rounded to the nearer
cent, is the NAV per share. Generally, securities owned by the
Fund are valued at market value.
The Fund may compute its NAV per share more frequently if
necessary to protect shareholders' interests.
In valuing the Fund's assets, a security listed on the
Exchange will be valued at its last sale price prior to the close
of regular trading on the Exchange. Lacking any sales, the
security will be valued at the last asked price prior to the close
of regular trading on the Exchange. Securities listed on other
exchanges will be similarly valued, using quotations on the
exchange on which the security is traded most extensively.
Unlisted securities which are quoted on the NASD's National
Market System, for which there have been sales of such securities,
shall be valued at the last sale price reported on such system. If
there are no such sales, the value shall be the high or "inside"
bid, which is the bid supplied by the NASD on its NASDAQ Screen for
such securities in the over-the-counter market. The value of such
securities quoted on the NASDAQ System, but not listed on the
National Market System, shall be valued at the high or "inside"
bid. Unlisted securities which are not quoted on the NASDAQ System
and for which the over-the-counter market quotations are readily
available will be valued at the current asked prices for such
securities in the over-the-counter market. Other unlisted
securities (and listed securities subject to restriction on sale)
will be valued at their fair value as determined in good faith by
the Board of Directors. Open futures contracts are valued at the
most recent settlement price, unless such price does not reflect
the fair value of the contract, in which case such positions will
be valued by or under the direction of the Board of Directors.
The value of a security traded or dealt in upon an exchange
may be valued at what TWF's pricing agent determines is fair market
value on the basis of all available information, including the last
determined value, if the pricing agent determines that the last bid
does not represent the value of the security, or if such
information is not available. For example, the pricing agent may
determine that the price of a security listed on a foreign stock
exchange that was fixed by reason of a limit on the daily price
change does not represent the fair market value of the security.
Similarly, the value of a security not traded or dealt in upon an
exchange may be valued at what the pricing agent determines is fair
market value if the pricing agent determines that the last sale,
inside bid does not represent the value of the security, provided
that such amount is not higher than the current bid price.
Notwithstanding the foregoing, money market investments with
a remaining maturity of less than sixty days shall be valued by the
amortized cost method; debt securities are valued by appraising
them at prices supplied by a pricing agent approved by the Fund,
which prices may reflect broker-dealer supplied valuations and
electronic data processing techniques and are representative of
market values at the close of the Exchange; options on securities,
futures contracts and options on futures listed or admitted to
trading on a national exchange shall be valued at their last sale
on such exchange prior to the time of determining net asset value;
or if no sales are reported on such exchange on that day, at the
mean between the most recent bid and asked price; and forward
contracts shall be valued at their last sale as reported by the
Fund's pricing service, or lacking a report by the service, at the
value of the underlying currencies at the prevailing currency
rates.
The value of a security which is subject to legal or
contractual delays in or restrictions on resale by the Fund shall
be taken to be the fair value thereof as determined in accordance
with procedures established by the Fund's Board, on the basis of
such relevant factors as the following: the cost of such security
to the Fund, the market price of unrestricted securities of the
same class at the time of purchase and subsequent changes in such
market price, potential expiration or release of the restrictions
affecting such security, the existence of any registration rights,
the fact that the Fund may have to bear part or all of the expense
of registering such security, and any potential sale of such
security to another investor. The value of other property owned by
the Fund shall be determined in a manner which, in the discretion
of the pricing agent of the Fund, most fairly reflects fair market
value of the property on such date.
Following the calculation of security values in terms of
currency in which the market quotation used is expressed ("local
currency"), the pricing agent shall calculate these values in terms
of United States dollars on the basis of the conversion of the
local currencies (if other than U.S.) into United States dollars at
the rates of exchange prevailing at the value time as determined by
the pricing agent.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well
before the close of business on each business day in New York
(i.e., a day on which the New York Stock Exchange is open). In
addition, European or Far Eastern securities trading generally or
in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign
markets on days which are not business days in New York and on
which the Fund's net asset value is not calculated. The Fund
calculates net asset value per share, and therefore, effects sales,
redemptions and repurchases of its shares, as of the close of the
Exchange once on each day on which that Exchange is open. Such
calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio
securities used in such calculation. If events materially
affecting the value of a portfolio security occur between the time
when its price is determined and the time when the Fund's net asset
value is calculated, such a security will be valued at fair value
as determined in good faith by the Board of Directors.
In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated in
accordance with procedures approved by the Board of Directors of
the Fund as the primary market. Securities traded on a national
securities exchange or included in the NASDAQ National Market
System are valued at the last reported sales price. Securities
traded in the over-the-counter market and listed securities for
which no sale is reported on that date are valued at the last
reported bid price.
U.S. Treasury bills, and other short-term obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities, with original or remaining maturities in excess
of 60 days are valued at the mean of representative quoted bid and
asked prices for such securities or, if such prices are not
available, are valued at the mean of representative quoted bid and
asked prices for securities of comparable maturity, quality and
type. Short-term securities, with 60 days or less to maturity, are
amortized to maturity based on their cost if acquired within 60
days of maturity or, if already held, on the 60th day, based on the
value determined on the 61st day.
Any purchase order may be rejected by the Distributor or by
the Fund.
Directors and Officers
The following is a list of TWF's Directors and Officers and a
brief statement of their present positions and principal
occupations during the past five years.
*John Pasco, III;
Chairman, Director, and Treasurer
1500 Forest Ave, Suite 223; Richmond, VA 23229
Mr. Pasco is Treasurer and Director of Commonwealth
Shareholder Services, Inc., TWF's Administrator, since 1985.
Director, President and Treasurer of Commonwealth Capital
Management, Inc. (a registered Investment Advisor) since 1983.
Director and Shareholder of Fund Services, Inc., TWF's
Transfer and Disbursing Agent, since 1987. Mr. Pasco is also
a certified public accountant.
Samuel Boyd, Jr.
Director
10808 Hob Nail Court, Potomac, MD 20854
Mr. Boyd is presently the Manager of the Customer Services
Operations and Accounting Division of the Potomac Electric
Power Company. Mr. Boyd is also a certified public
accountant.
William E. Poist
Director
5272 River Road, Bethesda, MD 20816
Mr. Poist is a financial and tax consultant through his firm
Management Consulting for Professionals. Mr. Poist is also a
certified public accountant.
Paul M. Dickinson
Director
8704 Berwickshire Drive, Richmond, VA 23229
Mr. Dickinson is presently the President of Alfred J.
Dickinson, Inc., Realtors.
*Edwin D. Walczak
Vice President of TWF and President of the Vontobel U.S. Value
Fund
450 Park Avenue, New York, N.Y. 10022
First Vice President and Chief Investment Officer of Vontobel
USA Inc., a registered investment advisor, since 1988. From
1984 to 1988 Mr. Walczak was an institutional portfolio
manager at Lazard Freres Asset Management, New York.
*Sven Rump
Vice President of TWF and President of the Vontobel
International Bond Fund
Vice President of Vontobel USA Inc. since 1993. Mr. Rump is
currently (since October 1991) a Vice President of Vontobel
Asset Management, Switzerland, and is responsible for managing
fixed income mutual funds. From October 1990 to October 1991
Mr. Rump was a Vice President of Bank Vontobel (Switzerland)
and a fixed income specialist for the private banking group.
From September 1988 to October 1990 Mr. Rump was an Associate
with J.P. Morgan Securities (Switzerland) Ltd. in the Fixed
Income Department. Mr. Rump is also a Chartered Financial
Analyst.
*Fabrizio Pierallini
Vice President of TWF and President of the Vontobel
EuroPacific Fund
450 Park Avenue, New York, N.Y. 10022
Vice President and Portfolio Manager (International Equities),
Vontobel USA Inc. since April 1994. From 1991 to 1994 Mr.
Pierallini was Associate-Director/Portfolio Manager with Swiss
Bank Corporation in New York; from 1988 to 1991 he was a Vice-
President/Portfolio Manager with SBC Portfolio Management Ltd.
in Zurich, Switzerland; and from 1986 to 1988 he was an
Associate/Institutional Consultant with Bank Julius Baer in
Zurich, Switzerland.
*Arpad Pongracz
Vice President of TWF and President of the Vontobel Eastern
European Equity Fund
450 Park Avenue, New York, N.Y. 10022
Vice President of Vontobel USA Inc. since January 1966. Mr.
Pongracz joined Vontobel Asset Management, Switzerland, in
1990 as an equity analyst. He was subsequently appointed
portfolio manager for all European equity institutional
accounts and mutual funds. Since 1995 he has been head of
Vontobel Asset Management's international equities team.
Prior to joining the Vontobel group, he worked at Union Bank
of Switzerland in Canada and in Switzerland as an equity
analyst. Mr. Pongracz is a Chartered Financial Analyst.
*F. Byron Parker, Jr.
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since
1986. Partner in the Law Firm Mustian & Parker.
* Persons deemed to be "interested" persons of TWF, Vontobel USA
Inc. or First Dominion Capital Corp. under the Investment Company
Act of 1940.
The directors and officers of TWF, as a group, do not own 1%
or more of the Fund. 40.509% of the shares of record are held by
Bank J. Vontobel for the benefit of its customers.
Investment Advisor
Vontobel USA Inc. (the "Advisor") manages the investment of
the assets of the Fund pursuant to an Investment Advisory Agreement
(the "Advisory Agreement"). The Advisory Agreement is effective
for a period of two years from February 10, 1994, and will be
renewed thereafter only so long as such renewal and continuance is
specifically approved at least annually by TWF's Board of Directors
or by vote of a majority of the outstanding voting securities of
TWF, provided the continuance is also approved by a majority of the
Directors who are not "interested persons" of TWF or the Advisor by
vote cast in person at a meeting called for the purpose of voting
on such approval. The Advisory Agreement is terminable without
penalty on sixty days notice by TWF's Board of Directors or by the
Advisor. The Advisory Agreement provides that it will terminate
automatically in the event of its assignment.
The Advisor is a wholly owned subsidiary of Vontobel Holding
Ltd., a Swiss bank holding company. TWF has designated Sven Rump,
a Vice President of the Advisor, as a Vice President of TWF and
President of the Fund.
The Advisor is compensated at the annual rate of 1% of the
average daily net assets of the Fund. This fee is subject to
reduction in accordance with state expense limitation provisions.
During 1994 and 1995 the Advisor voluntarily put a limit of 1.35%
on the Expenses of the Fund. The fee was $147,151 in 1994 of which
$27,001 was waived and $128,371 in 1995 all of which was waived.
The Advisory Agreement contemplates the authority of the
Advisor to place orders pursuant to its investment determinations
for the Fund either directly with the issuer or with any broker or
dealer. In placing orders with brokers or dealers, the Advisor
will attempt to obtain the best net price and the most favorable
execution of its orders. The Advisor may purchase and sell
securities to and from brokers and dealers who provide the Fund
with research advice and other services, or who sell shares of the
Fund.
The address of the Advisor is 450 Park Avenue, New York, N.Y.
10022.
Transfer Agent
Fund Services, Inc. ("FSI") is TWF's Transfer and Disbursing
Agent, pursuant to a Transfer Agent Agreement. The Transfer Agent
Agreement is dated September 1, 1987, and has been renewed each
year by the Board of Directors of TWF, including a majority of the
directors who are not interested persons of TWF or the Transfer
Agent.
John Pasco, III, Chairman of the Board of TWF and an officer
and shareholder of Commonwealth Shareholder Services, Inc (the
Administrator of the Fund) owns one third of the stock of FSI, and,
therefore, FSI may be deemed to be an affiliate of TWF and
Commonwealth Shareholder Services, Inc.
Pursuant to the Transfer Agent Agreement the minimum annual
fee for the Fund is $16,500. During 1995, the Transfer Agent was
paid $17,313.
Administrator
Commonwealth Shareholder Services, Inc. is TWF's Administrator
pursuant to an Administrative Services Agreement (the "Service
Agreement"), which is dated February 10, 1994. The Service
Agreement is described in the Fund's Prospectus. This agreement
will continue in effect for a period of one year from February 10,
1994, and may be continued thereafter only if the Board of
Directors, including a majority of the directors who are not
interested persons of TWF or the Administrator, approve the
extension at least annually. During 1995, CSS was paid $63,907.
Eligible Benefit Plans
An eligible benefit plan is an arrangement available to the
employees of an employer (or two or more affiliated employers)
having not less than 10 employees at the plan's inception, or such
an employer on behalf of employees of a trust or plan for such
employees, their spouses and their children under the age of 21 or
a trust or plan for such employees, which provides for purchases
through periodic payroll deductions or otherwise. There must be at
least 5 initial participants with accounts investing or invested in
shares of the Fund and/or certain other funds.
The initial purchase by the eligible benefit plan and prior
purchases by or for the benefit of the initial participants of the
plan must aggregate not less than $5,000 and subsequent purchases
must be at least $50 per account and must aggregate at least $250.
Purchases by the eligible benefit plan must be made pursuant to a
single order paid for by a single check or federal funds wire and
may not be made more often than monthly. A separate account will
be established for each employee, spouse or child for which
purchases are made. The requirements for initiating or continuing
purchases pursuant to an eligible benefit plan may be modified and
the offering to such plans may be terminated at any time without
prior notice.
Distribution
Shares of the Fund are sold at net asset value on a continuous
basis, without a sales charge.
First Dominion Capital Corp. (the "Distributor"), 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, is TWF's principal
underwriter pursuant to a Distribution Agreement between TWF and
the Distributor. John Pasco, III, Chairman of the Board of TWF
owns 100% of the Distributor, and is its President, Treasurer and
a Director.
Expenses of the Fund
The Fund will pay its expenses not assumed by the Advisor,
including, but not limited to, the following: custodian; stock
transfer and dividend disbursing fees and expenses; taxes; expenses
of the issuance and redemption of Fund shares (including stock
certificates, registration and qualification fees and expenses);
legal and auditing expenses; and the cost of stationery and forms
prepared exclusively for the Fund.
The allocation of the general expenses of the Fund is made on
a basis that TWF's Board of Directors deems fair and equitable,
which may be based on the relative net assets of the series of TWF
or the nature of the services performed and relative applicability
to each series of TWF.
Under the Advisory Agreement, the Advisor have agreed to
reimburse the Fund if the annual ordinary operating expenses of the
Fund exceeds the most stringent limits prescribed by any state in
which the Fund's shares are offered for sale. This expense
limitation is calculable based on the aggregate net assets of the
Fund. Expenses which are not subject to this limitation are
interest, taxes and extraordinary expenses. Expenditures,
including costs incurred in connection with the purchase or sale of
portfolio securities, which are capitalized in accordance with
generally accepted accounting principles applicable to investment
companies, are accounted for as capital items and not as expenses.
Reimbursement, if any, will be on a monthly basis, subject to year-
end adjustment and limited to the amount of the advisory fee due
from the Fund.
Investors should understand that the Fund's expense ratio can
be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of
foreign securities and the rate of advisory fees paid by the Fund
is higher.
Special Shareholder Services
As described briefly in the Prospectus, the Fund offers the
following shareholder services:
Regular Account: The regular account allows for voluntary
investments to be made at any time. Available to individuals,
custodians, corporations, trusts, estates, corporate retirement
plans and others, investors are free to make additions and
withdrawals to or from their account as often as they wish. Simply
use the Account Application provided with the Prospectus to open
your account.
Telephone Transactions: You may redeem shares or transfer
into another fund if you request this service at the time you
complete the initial Account Application. If you do not elect this
service at that time, you may do so at a later date by putting your
request in writing to the Transfer Agent and having your signature
guaranteed.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if
it does not, it may be liable for any losses due to unauthorized or
fraudulent transactions. As a result of this policy, a shareholder
authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which the Fund
believes to be genuine. When you request a telephone redemption or
transfer, you will be asked to respond to certain questions
designed to confirm your identity as a shareholder of record. Your
cooperation with these procedures will protect your account and the
Fund from unauthorized transactions.
Invest-A-Matic Account: Any shareholder may utilize this
feature, which provides for automatic monthly investments into your
account. Upon your request, the Transfer Agent will withdraw a
fixed amount each month from your checking account for investment
into your account. This does not require you to make a commitment
for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Invest-A-Matic Plan as desired by
notifying the Transfer Agent. This feature requires a separate Plan
application, in addition to the Account Application. To obtain an
application, or to receive more information, please call the
offices of TWF.
Individual Retirement Account (IRA) - All wage earners under
70-1/2, even those who participate in a company sponsored or
government retirement plan, may establish their own IRA. You can
contribute 100% of your earnings up to $2,000 (or $2,250 with a
spouse who is not a wage earner). A special IRA program is
available for corporate employers under which the employers may
establish IRA accounts for their employees in lieu of establishing
corporate retirement plans. Known as SEP-IRA's (Simplified
Employee Pension-IRA), they free the corporate employer of many of
the recordkeeping requirements of establishing and maintaining a
corporate retirement plan trust.
If you have received a lump sum distribution from another
qualified retirement plan, you may rollover all or part of that
distribution into your Fund IRA. Your rollover contribution is not
subject to the limits on annual IRA contributions. By acting
within applicable time limits of the distribution you can continue
to defer Federal Income Taxes on your lump sum contribution and on
any income that is earned on that contribution.
How to Establish Retirement Accounts: Please call TWF to
obtain information regarding the establishment of individual
retirement plan accounts. The plan custodian charges nominal fees
in connection with plan establishment and maintenance. These fees
are detailed in the plan documents. You may wish to consult with
your attorney or other tax advisor for specific advice concerning
your tax status and plans.
Exchange Privilege: Shareholders may exchange their shares
for shares of any other TWF series, provided the shares of the fund
the shareholder is exchanging into are registered for sale in the
shareholders state of residence. Each account must meet the
minimum investment requirements (currently $1,000). Exchange
Privilege Authorization Forms are available by calling TWF. Your
special authorization form must have been completed and must be on
file with the Transfer Agent. To make an exchange, an exchange
order must comply with the requirements for a redemption or
repurchase order and must specify the value or the number of shares
to be exchanged. However, an investment dealer or the Principal
Underwriter who has been authorized by a shareholder in writing
acceptable to and delivered to the Principal Underwriter, to make
exchanges of Fund shares on behalf of the shareholder may place
exchange orders with the Principal Underwriter by telephone or in
writing without a signature guarantee, or simply call the Transfer
Agent at (800) 628-4077 before noon (Eastern Time). Your exchange
will take effect as of the next determination of the Fund's net
asset value per share (usually at the close of business on the same
day). The Transfer Agent will charge your account a $10.00 service
fee each time you make such an exchange. TWF 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 TWF 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 and the purchase of those of the
second series. Consequently, the sale may involve either a capital
gain or loss to the shareholder for Federal Income Tax purposes.
The Exchange Privilege is available only in states where it is
legally permissible to do so.
General Information and History
TWF is authorized to issue up to 500,000,000 shares of $0.01
par value common stock, of which it has presently allocated
50,000,000 shares to the Fund, 50,000,000 shares to the Vontobel
EuroPacific Fund Series, 50,000,000 to the Vontobel U.S. Value Fund
Series, 50,000,000 to the Sand Hill Portfolio Manager Fund series,
and 50,000,000 to the Vontobel Eastern European Equity Fund series.
The Board of Directors can allocate the remaining authorized but
unissued shares to any series of TWF, or may create additional
series and allocate shares to such series. Each series is required
to have suitable investment objectives, policies and restrictions,
to maintain a separate portfolio of securities suitable to its
purposes, and to generally operate in the manner of a separate
investment company as required by the Investment Company Act of
1940.
If additional series were to be formed, the rights of existing
series shareholders would not change, and the objective, policies
and investments of each series would not be changed. A share of
any series would continue to have a priority in the assets of that
series in the event of a liquidation.
The shares of each series when issued will be fully paid and
non-assessable, will have no preference over other shares of the
same series as to conversion, dividends, or retirement, and will
have no preemptive rights. The shares of any series will be
redeemable from the assets of that series at any time at a
shareholder's request at the current net asset value of that series
determined in accordance with the provisions of the Investment
Company Act of 1940 and the rules thereunder. TWF's general
corporate expenses (including administrative expenses) will be
allocated among the series in proportion to net assets or as
determined in good faith by the Board.
The investment management fees payable to Sand Hill Advisors,
Inc. and the investment advisory fees payable to Vontobel USA Inc.
by each series and the expense limitation guarantee formula of each
series will be based upon the separate assets of each series. The
shareholders of the Sand Hill Advisors, Inc. Fund series, and the
shareholders of the Fund, the Vontobel EuroPacific Fund series, and
the Vontobel U.S. Value Fund series will have the right to choose
or remove Sand Hill Advisors, Inc. or Vontobel USA Inc. of the
investments of their series.
Voting and Control - Each outstanding share of TWF is entitled
to one vote for each full share of stock and a fractional share of
stock. All shareholders vote on matters which concern the
corporation as a whole. Election of Directors or ratification of
the auditor are examples of matters to be voted upon by all
shareholders. TWF is not required to hold a meeting of
shareholders each year. TWF intends to hold annual meetings when
it is required to do so by the Maryland General Corporate Law or
the Investment Company Act of 1940. Shareholders have the right to
call a meeting to consider the removal of one or more of the
Directors and will be assisted in Shareholder communication in such
matter. Each series shall vote separately on matters (1) when
required by the General Corporation Law of Maryland, (2) when
required by the Investment Company Act of 1940 and (3) when matters
affect only the interest of the particular series. An example of
a matter affecting only one series might be a proposed change in an
investment restriction of one series. The shares will not have
cumulative voting rights, which means that the holders of more than
50% of the shares voting for the election of directors can elect
all of the directors if they choose to do so.
Limitation on Use of Name - The Advisory Agreement for the Fund
authorizes TWF to utilize the name "Vontobel." TWF agrees that if
the Advisory Agreement is terminated it will present to
shareholders a proposal to redesignate the name of the Fund to
eliminate any reference to the name "Vontobel" or any derivation
thereof unless the Advisor waives this requirement in writing.
Code of Ethics - The Fund has adopted a Code of Ethics which
imposes certain restrictions on the authority of portfolio managers
and certain other personnel of the Fund and its advisors governing
personal securities activities and investments of those persons and
has instituted procedures to its Code of Ethics to require such
investment personnel to report such activities to the compliance
officer. The Code is reviewed and updated annually.
Performance
Current yield and total return are the two primary methods of
measuring investment performance. Occasionally, however, the Fund
may include its distribution rate in sales literature. Yield, in
its simplest form, is the ratio of income per share derived from
the Fund's portfolio investments to the current maximum offering
price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. Total return,
on the other hand, is the total of all income and capital gains
paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment,
expressed as a percentage of the purchase price. The distribution
rate is the amount of distributions per share made by the Fund over
a twelve-month period divided by the current maximum offering
price.
Generally, as stated in the Fund's prospectus, effective May
1, 1988, performance quotations by investment companies are subject
to certain new rules adopted by the Securities and Exchange
Commission. These rules require the use of standardized
performance quotations, or alternatively, that every non-
standardized performance quotation furnished by the Fund be
accompanied by certain standardized performance information
computed as required by the Commission. Current yield and total
return quotations used by the Fund are based on the standardized
methods of computing performance mandated by the Commission.
As indicated below current yield is determined by dividing the
net investment income per share earned during the period by the
maximum offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholder during the 30 day base period.
According to the new Securities and Exchange formula:
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.
The Fund's average annual total return for the period ended
December 31, 1995 is as follows:
One Year
Period From Inception
Fund Name Ending to
12/31/95 12/31/95
17.61% 10.42%
As the following formula indicates, the average annual total
return is determined by multiplying a hypothetical initial purchase
order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation and dividends and
distributions paid and reinvested) for the stated period less any
fees charged to all shareholder accounts and annualizing the
result. The calculation assumes the maximum sales load is deducted
from the initial $1,000 purchase order and that all dividends and
distributions are reinvested at the public offering price on the
reinvestment dates during the period. The quotation assumes the
account was completely redeemed at the end of each one, five and
ten year period and the deduction of all applicable charges and
fees. According to the Securities and Exchange Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year periods (or
fractional portion thereof).
Sales literature pertaining to the Fund may quote a
distribution rate in addition to the yield or total return. The
distribution rate is the amount of distributions per share made by
the Fund over a twelve-month period divided by the current maximum
offering price. The distribution rate differs from the yield
because it measures what the Fund paid to shareholders rather than
what the Fund earned from investments. It also differs from the
yield because it may include dividends paid from premium income
from option writing, if applicable, and short-term capital gains in
addition to dividends from investment income. Under certain
circumstances, such as when there has been a change in the amount
of dividend payout, or a fundamental change in investment policies,
it might be appropriate to annualize the distributions paid over
the period such policies were in effect, rather than using the
distributions paid during the past twelve months.
Occasionally statistics may be used to specify the Fund's
volatility or risk. Measures of volatility or risk are generally
used to compare the Fund's net asset value or performance relative
to a market index. One measure of volatility is beta. Beta is the
volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or
total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk
undertaken in achieving performance.
Sales literature referring to the use of the Fund as a
potential investment for Individual Retirement Accounts (IRAs),
Business Retirement Plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends
on which it is presumed no federal income tax applies.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
Comparisons and Advertisements
To help investors better evaluate how an investment in the
Fund might satisfy their investment objective, advertisements
regarding the Fund may discuss yield, total return, or Fund
volatility as reported by various financial publications.
Advertisements may also compare yield, total return, or volatility
(as calculated above) to yield, total return, or volatility as
reported by other investments, indices, and averages. The
following publications, indices, and averages may be used:
(a) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company stocks
(Dow Jones Utilities Average), and 20 transportation company
stocks. Comparisons of performance assume reinvestment of
dividends.
(b) Standard & Poor's 500 Stock Index or its component indices -an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices -
unmanaged indices of all industrial, utilities, transportation, and
finance stocks listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the
market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume
reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed
Income Analysis, and Lipper Mutual Fund Indices - measures total
return and average current yield for the mutual fund industry.
Ranks individual mutual fund performance over specified time
periods assuming reinvestment of all distributions, exclusive of
sales charges.
(f) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
(g) Mutual Fund Source Book and other material, published by
Morningstar, Inc. - analyzes price, yield, risk, and total return
for equity funds.
(h) Financial publications: Business Week, Changing Times,
Financial World, Forbes, Fortune, and Money magazines - rates fund
performance over specified time periods.
(i) Consumer Price Index (or Cost of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure of
change, over time, in the price of goods and services, in major
expenditure groups.
(j) Standard & Poor's 100 Stock Index - an unmanaged index based
on the price of 100 blue-chip stocks, including 92 industrials, one
utility, two transportation companies, and 5 financial
institutions. The S&P 100 Stock Index is a smaller more flexible
index for option trading.
In assessing such comparisons of yield, return, or volatility,
an investor should keep in mind that the composition of the
investments in the reported indices and averages in not identical
to the Fund's portfolio, that the averages are generally unmanaged,
and that the items included in the calculations of such averages
may not be identical to the formula used by the Fund to calculate
its figures. In addition there can be no assurance that the Fund
will continue this performance as compared to such other averages.
Financial Statements
The books of the Fund will be audited at least once each year
by Tait, Weller and Baker, of Philadelphia, PA, independent public
accountants.
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:
Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt-edge." Interest payments are
protected by a large or by an exceptionally stable margin, and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1,2 and 3 in the Aa and A
rating categories. The modifier 1 indicates that the security
ranks at a higher end of the rating category, modified 2 indicated
a mid-range rating, and the modifier 3 indicates that the issue
ranks at the lower end of the rating category.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements, their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds
in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
MOODY'S SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity
are excluded unless explicitly rated. Moody's employs the
following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
Prime-1 - Issuers rated Prime-1 (or supporting institutions) have
a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics, lending market positions in
well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate
reliance on debt and ample asset protection; broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and well established access to range of financial
markets and assured sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (or supporting institutions) have
a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Prime 3 - Issuers rated Prime-3 (or supporting institutions) have
an acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA - Bonds rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation indicate an extremely strong
capacity to pay principal and interest.
AA - Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from highest rated issues only to a
small degree.
Plus(+) or Minus(-) - The ratings from AA to CCC may be
modified by the addition of a plus or a minus sign, which
shows relative standing within the major rating categories.
A - Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than bonds in the higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in categories
than for debt in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC, and CC is regarded, on
balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation which indicates BB the lowest degree of speculation
and CC the highest degree of speculation. While such debt will
have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no
interest is being paid.
D - Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
<PAGE>
Investment Advisor: Vontobel USA Inc.
450 Park Ave.
New York, N.Y. 10022
Distributor: First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Fund and
Marketing Services, call the Advisor at
(800) 445-8872 Toll Free.
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260
(800) 628-4077 Toll Free
More Information: For 24 hour, 7 days a week price
information call 1-8000-527-9500.
For information on any series of TWF,
investment plans, or other shareholder
services, call TWF at 1-800-527-9500
during normal business hours, or write
TWF at 150 Forest Avenue, Suite 223,
Richmond, VA 23229
NASDAQ SYMBOL: VIBDX
THE WORLD FUNDS, INC.
SAND HILL PORTFOLIO MANAGER FUND
Statement of Additional Information Dated May 2, 1996
The World Funds, Inc. ("TWF") is an open-end management
investment company commonly known as a "mutual fund." This
Statement of Additional Information is not a Prospectus but
supplements the information contained in the Prospectus of the Sand
Hill Portfolio Manager Fund (the "Fund"), dated May 2, 1996. It
should be read in conjunction with the Prospectus and has been
designed to provide you with further information which is not
contained in the Prospectus. A Prospectus of the Fund may be
obtained at no charge upon request to the Fund. Please retain this
Statement of Additional Information for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
STATEMENT OF ADDITIONAL INFORMATION. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
Investment Objective and Policies 1
Special Investment Considerations 1
Investment Techniques
Asset Allocation Categories 2
Zero Coupon Securities 3
Investment Companies 3
Depositary Receipts 4
Warrants 4
Mortgage-Backed and Asset-Backed Securities 4
Strategic Transactions 4
Convertible Securities 8
Repurchase Agreements 9
Illiquid Securities 10
Restricted Securities 10
Indexed Securities 10
Investment Restrictions 10
Other Investment Policies 11
Taxes 13
Dividends and Distributions 16
Portfolio Transactions 16
Net Asset Value 18
Directors and Officers 20
Investment Advisor 21
Transfer Agent 22
Administrator 22
Distribution 22
Expenses of the Fund 23
Special Shareholder Services 23
General Information and History 24
Performance 25
Financial Statements 28
Appendix - Bond Ratings 29
<PAGE>
THE WORLD FUNDS, INC.
SAND HILL PORTFOLIO MANAGER FUND
Statement of Additional Information
The Fund is a series of TWF, a Maryland corporation which is
an open-end, management investment company, commonly known as a
"mutual fund." The Fund is a no-load diversified series of TWF.
Investment Objective and Policies
The Fund's investment objective is to seek to maximize total
return (consisting of realized and unrealized appreciation plus
income) consistent with allocating its investments among equity
securities (i.e., stocks), debt securities (i.e., bonds) and short
term investments.
The asset allocation and investment policies of the Fund are
described in the Fund's Prospectus. The following discussion
supplements the information in the Fund's Prospectus with respect
to the types of securities in which the Fund may invest and the
investment techniques it may use in pursuit of its investment
objective.
Special Investment Considerations
Investors should recognize that the Fund may invest in both
domestic and foreign securities. Investing in foreign securities
involves certain special considerations, including those set forth
below, which are not typically associated with investing in United
States securities and which may favorably or unfavorably affect the
performance of the Fund. As foreign companies are not generally
subject to the same uniform standards, practices and requirements
with respect to accounting, auditing and financial reporting as are
domestic companies, there may be less publicly available
information about a foreign company than about a domestic company.
Many foreign securities markets, while growing in volume of trading
activity, have substantially less volume than the U.S. market, and
securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume
and liquidity in most foreign bond markets is less than in the
United States and, at times, volatility of price can be greater
than in the United States. Further, foreign markets have different
clearance and settlement procedures and in certain markets there
have been times when settlements have been unable to keep pace with
the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in
temporary periods when assets of a fund are uninvested and no
return is earned thereon. Inability to dispose of portfolio
securities due to settlement problems either could result in losses
to a fund due to subsequent declines in value of the portfolio
security or, if a fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Fixed commissions on some foreign securities exchanges and bid-to-
asked spreads in foreign bond markets are generally higher than
negotiated commissions on U.S. exchanges and bid-to-asked spreads
in the U.S. bond market, although the Fund will endeavor to achieve
the most favorable net results on its portfolio transactions.
Further, a fund may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. There is
generally less government supervision and regulation of business
and industry practices, securities exchanges, brokers and listed
companies than in the United States. Communications between the
United States and foreign countries may be less reliable than
within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for
portfolio securities. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or
diplomatic developments which could affect United States
investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the United
States economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Sand Hill
Advisors, Inc. (The "Investment Advisor") seeks to mitigate the
risks associated with the foregoing considerations through
continuous professional management.
Investments in foreign securities usually will involve
currencies of foreign countries. Because of the considerations
discussed above, the value of the assets of the Fund, as measured
in U.S. dollars, may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with
conversions between various currencies. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to a fund at one rate,
while offering a lesser rate of exchange should the fund desire to
resell that currency to the dealer. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to
purchase or sell foreign currencies. The Fund may, for hedging
purposes, purchase foreign currencies in the form of bank deposits.
Because the Fund may be invested in both U.S. and foreign
securities markets, changes in its share price may have a low
correlation with movements in the U.S. markets. The Fund's share
price will reflect the movements of the markets in which it is
invested and of the currencies in which the investments are
denominated; the strength or weakness of the U.S. dollar against
foreign currencies may account for part of the Fund's investment
performance. Foreign securities such as those purchased by the
Fund may be subject to foreign government taxes which could reduce
the yield on such securities, although a shareholder of the Fund
may, subject to certain limitations, be entitled to claim a credit
or deduction for U.S. federal income tax purposes for his or her
proportionate share of such foreign taxes paid by the Fund (see
"Taxes"). U.S. and foreign securities markets do not always move
in step with each other and the total returns from different
markets may vary significantly.
The Fund cannot guarantee a gain or eliminate the risk of
loss. The Fund's net asset value per share will increase or
decrease with changes in the market price of the Fund's
investments, and there is no assurance that the Fund's investment
objective will be achieved.
Investment Techniques
Asset Allocation Categories. The Fund invests in three major
categories of investments: equity securities, debt securities and
short-term investments. Each of these categories may include
securities of domestic or foreign issuers.
Equity securities consist of common stocks, securities which
are convertible into common stocks, such as convertible bonds,
preferred stocks, depositary receipts, securities of investment
companies, rights and warrants. The Investment Advisor allocates
the Fund's equity investments to industries it believes will
benefit from major trends and to individual stocks which exhibit
superior prospects for enhancing the Fund's total return.
Debt securities consist of bonds, notes, convertible bonds,
asset-backed and mortgage-backed securities, government and
government agency securities, zero coupon securities, and other
debt securities whose purchase is consistent with the Fund's
investment objective. The Fund's investments may include
international bonds that are denominated in foreign currencies,
including the European Currency Unit. International bonds are
defined as bonds issued in countries other than the United States.
The Fund's investments may include debt securities issued or
guaranteed by supranational organizations, corporate debt
securities, bank or holding company debt securities.
The Fund may purchase "investment-grade" bonds, which are
those rated Baa or higher by Moody's or BBB or higher by S&P, or
unrated securities which the Investment Advisor believes are of
comparable quality. The Fund may also invest up to 10% of its
assets in lower rated securities or securities which are unrated
but are of comparable quality as determined by the Investment
Advisor. Bonds rated Baa or BBB may have speculative elements as
well as investment-grade characteristics. The Fund may invest in
debt securities which are rated as low as C by Moody's or D by S&P.
Securities rated D may be in default with respect to payment of
principal or interest. See the Appendix for a description of bond
ratings.
Short-term investments are debt obligations. For purposes of
the Fund's asset allocation policies, short-term investments are
differentiated from debt securities. Short-term investments are
generally used to protect the Fund against adverse movements of
interest rates or currency exchange rates or to provide the Fund
with liquidity. Debt securities, on the other hand, are generally
used to seek superior total return by taking advantage of yield
differentials between different securities.
Zero Coupon Securities. The Fund may invest in zero coupon
securities as described in the Prospectus. Zero coupon securities
which are convertible into common stock offer the opportunity for
capital appreciation as increases (or decreases) in market value of
such securities closely follows the movements in the market value
of the underlying common stock. Zero coupon convertible securities
generally are expected to be less volatile than the underlying
common stocks as they usually are issued with short maturities (15
years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the
holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by
the U.S. Treasury, and U.S. Treasury bonds or notes and their
unmatured interest coupons and receipts for their underlying
principal ("coupons") which have been separated by their holder,
typically a custodian bank or investment brokerage firm. A holder
will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of
securities firms and banks have stripped the interest coupons and
receipts and then resold them in custodial receipt programs with a
number of different names, including Treasury Income Growth
Receipts (TIGRS-TM) and Certificate of Accrual on Treasuries
(CATS-TM). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are
owned ostensibly by the bearer or holder thereof), in trust on
behalf of the owners thereof. Counsel to the underwriters of these
certificates, or other evidences of ownership of the U.S. Treasury
securities, has stated that for federal tax and securities
purposes, in their opinion purchasers of such certificates, such as
the Fund, most likely will be deemed the beneficial holder of the
underlying U.S. Government securities. The Fund understands that
the staff of the Division of Investment Management of the SEC no
longer considers such privately stripped obligations to be U.S.
Government securities, as defined in the 1940 Act; therefore, the
Fund intends to adhere to this staff position and will not treat
such privately stripped obligations to be U.S. Government
securities for the purpose of determining the Fund's
"diversification."
When U.S. Treasury obligations have been stripped of their
unmatured interest coupons by the holder, the principal or corpus
is sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does
not receive any rights to periodic interest (cash) payments. Once
stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped
with other coupons with like maturity dates and sold bundled in
such form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero
coupon securities that the Treasury sells itself (see "Taxes").
Investment Companies. The Fund may invest up to 10% of its
assets in shares of closed-end investment companies. Investments
in such investment companies are subject to limitations under the
Investment Company Act of 1940 (the "1940 Act"). Investment in
closed-end funds is subject to the willingness of investors to sell
their shares in the open market and the Fund may have to pay a
substantial premium to acquire shares of closed-end funds in the
open market. The yield of such securities will be reduced by the
operating expenses of such companies. Under the 1940 Act
limitations, the Fund may not own more than 3% of the total
outstanding voting stock of any other investment company nor may it
invest more than 5% of its assets in any one investment company or
invest more than 10% of its assets in securities of all investment
companies combined. An investor in the Fund should recognize that
he may invest directly in other investment companies and that, by
investing in investment companies indirectly through the Fund, he
will bear not only his proportionate share of the Fund's expenses
(including operating costs and investment advisory and
administrative fees) but also, indirectly, similar expenses of the
underlying investment company. Finally, an investor should
recognize that, as a result of the Fund's policies of investing in
other investment companies, he may receive taxable capital gains
distributions to a greater extent than would be the case if he
invested directly in the underlying investment companies.
Depositary Receipts. The Fund may utilize depositary
receipts, as described in the Prospectus. For purposes of
determining the country of origin, depositary receipts and closed-
end investment companies which invest primarily in foreign
securities will be deemed to be foreign securities.
Warrants. The Fund may invest up to 5% of its net assets in
warrants, provided that no more than 2% of its net assets may be
invested in warrants that are not listed on the New York Stock
Exchange or the American Stock Exchange. A warrant is a long-term
option issued by a corporation that generally gives the investor
the right of buying a specified number of shares of the underlying
common stock of the issuer at a specified exercise price at any
time on or before an expiration date. If the Fund does not
exercise or dispose of a warrant prior to its expiration, it will
expire worthless.
Mortgage-Backed and Asset-Backed Securities. Mortgage-backed
securities include, but are not limited to, securities issued by
the Government National Mortgage Association and The Federal Home
Loan Mortgage Association. Mortgage-backed securities represent
ownership in specific pools of mortgage loans. Unlike traditional
bonds which pay principal only at maturity, mortgage-backed
securities make unscheduled principal payments to the investor as
principal payments are made on the underlying loans in each pool.
Like other fixed-income securities, when interest rates rise, the
value of a mortgage-backed security will decline. However, when
interest rates decline, the value of a mortgage-backed security
with prepayment features may not increase as much as other fixed-
income securities.
Asset-backed securities participate in, or are secured by and
payable from, a stream of payments generated by particular assets,
such as credit card, motor vehicle or trade receivables. They may
be pass-through certificates which are similar to mortgage-backed
commercial paper, which is issued by an entity organized for the
sole purpose of issuing the commercial paper and purchasing the
underlying assets. The credit quality of asset-backed securities
depends primarily on the quality of the underlying assets and the
level of any credit support provided. The weighted average lives
of mortgage-backed and asset-backed securities are likely to be
substantially shorter than their stated final maturity dates would
imply because of the effect of scheduled and unscheduled principal
prepayments. Pay-downs of mortgage-backed and asset-backed
securities may result in income or loss being realized earlier than
anticipated for tax and accounting purposes.
Strategic Transactions. The Fund may, but is not required to,
utilize various other investment strategies described below which
use derivative investments to hedge various market risks (such as
changes in interest rates, currency exchange rates, and securities
prices) or to enhance potential gain.
In the course of pursuing these investment strategies, the
Fund may purchase and sell exchange-listed put and call options on
securities or securities indices, and enter into various currency
transactions such as currency forward contracts, or options on
currencies (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities
held in, or to be purchased for, the Fund's portfolio resulting
from securities markets or currency exchange rate fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for
investment purposes, or to establish a position in the options
markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques
may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the
Advisor's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory
requirements when implementing these strategies, techniques and
instruments.
Strategic Transactions have risks associated with them
including possible default by the other party to the transaction,
illiquidity and, to the extent the Investment Advisor's view as to
certain market movements is incorrect, the risk that the use of
such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in
losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the
case of put options) or lower than (in the case of call options)
current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security
it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified
currency. Although the use of options transactions for hedging
should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it tends to limit
any potential gain which might result from an increase in value of
such position. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call
options typically have similar structural characteristics and
operational mechanics regardless of the underlying instrument on
which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of the Fund's
assets in special accounts, as described below under "Use of
Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment
of a premium, the right to sell, and the writer the obligation to
buy, the underlying security, currency or other instrument at the
exercise price. For instance, the Fund's purchase of a put option
on a security might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the
Fund the right to sell such instrument at the option exercise
price. 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: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying
securities including reaching daily price limits; (iv) interruption
of the normal operations of the OCC or an exchange; (v) inadequacy
of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue
the trading of options (or a particular class or series of
options), in which event the relevant market for that option on
that exchange would cease to exist, although outstanding options on
that exchange would generally continue to be exercisable in
accordance with their terms.
The hours of trading for listed options may not coincide with
the hours during which the underlying financial instruments are
traded. To the extent that the option markets close before the
markets for the underlying financial instruments, significant price
and rate movements can take place in the underlying markets that
cannot be reflected in the option markets.
If the Fund sells a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium,
against a decrease in the value of the underlying securities or
instruments in its portfolio or will increase the Fund's income.
The sale of put options can also provide income.
The Fund may purchase and sell exchange-listed call options on
securities that are traded in U.S. and foreign securities exchanges
and on securities indices and currencies. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities
subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund
during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security
or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell exchange-listed put options on
securities (whether or not it holds the above securities in its
portfolio), and on securities indices and currencies. The Fund
will not sell put options if, as a result, more than 25% of the
Fund's assets would be required to be segregated to cover its
potential obligations under such put options. In selling put
options, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price above the market
price. For tax purposes, the purchase of a put is treated as a
short sale which may cut off the holding period for the security so
it is treated as generating gain on securities held less than three
months.
Options on Securities Indices and Other Financial Indices.
The Fund may also purchase and sell call and put options on
securities indices and other financial indices and in so doing can
achieve many of the same objectives it would achieve through the
sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial
indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement, i.e., an
option on an index gives the holder the right to receive, upon
exercise of the option an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a
call or is less than, in the case of a put, the exercise price of
the option. This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make
delivery of this amount. The gain or loss on an option on an index
depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying
index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.
Currency Transactions. The Fund may engage in currency
transactions with counterparties in order to hedge the value of
portfolio holdings denominated in particular currencies against
fluctuations in relative value. The Fund's currency transactions
may include forward currency contracts and exchange listed options
on currencies. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract.
The Fund's dealings in forward currency contracts will be
limited to hedging involving either specific transactions or
portfolio positions. Specific transaction hedging is entering into
a currency transaction with respect to specific assets or
liabilities of the Fund, which will generally arise in connection
with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a
currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the
aggregate market value (at the time of entering into the
transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into
such currency, other than with respect to proxy hedging as
described below.
The Fund may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are
expected to decline in value relative to other currencies to which
the Fund has or in which the Fund expects to have portfolio
exposure.
To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the Fund
may also engage in proxy hedging. Proxy hedging is often used when
the currency to which a fund's portfolio is exposed is difficult to
hedge or to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency whose changes
in value are generally considered to be linked to a currency or
currencies in which some or all of the fund's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars.
The amount of the contract would not exceed the value of the Fund's
securities denominated in linked currencies. For example, if the
Investment Advisor considers that the Austrian schilling is linked
to the German deutschemark (the "D-mark"), the Fund holds
securities denominated in schillings and the Investment Advisor
believes that the value of schillings will decline against the U.S.
dollar, the Investment Advisor may enter into a contract to sell
D-marks and buy dollars. Currency hedging involves some of the
same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to a fund
if the currency being hedged fluctuates in value to a degree or in
a direction that is not anticipated. Further, there is the risk
that the perceived linkage between various currencies may not be
present or may not be present during the particular time that a
fund is engaging in proxy hedging. If the Fund enters into a
currency hedging transaction, it will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are
subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages,
and manipulations or exchange restrictions imposed by governments.
These can result in losses to a fund if it is unable to deliver or
receive currency or funds in settlement of obligations and could
also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring
transaction costs. Currency exchange rates may fluctuate based on
factors extrinsic to that country's economy.
Risks of Strategic Transactions Outside the United States.
When conducted outside the United States, Strategic Transactions
may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and are
subject to the risk of governmental actions affecting trading in,
or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in
a fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the United States, (iv) the
imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and
(v) lower trading volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic
Transactions, in addition to other requirements, require that a
fund segregate liquid high grade assets with its custodian to the
extent fund obligations are not otherwise "covered" through the
ownership of the underlying security, financial instruments or
currency. In general, either the full amount of any obligation by
a fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of
cash or liquid high grade securities at least equal to the current
amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer
necessary to segregate them. For example, a call option written by
a fund will require the fund to hold the securities subject to the
call (or securities convertible into the needed securities without
additional consideration) or to segregate liquid high-grade
securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a fund on an index will
require the fund to own portfolio securities which correlate with
the index or segregate liquid high grade assets equal to the excess
of the index value over the exercise price on a current basis. A
put option written by a fund requires the fund to segregate liquid,
high grade assets equal to the exercise price.
Except when a fund enters into a forward contract for the
purchase or sale of a security denominated in a particular
currency, which requires no segregation, a currency contract which
obligates a fund to buy or sell currency will generally require the
fund to hold an amount of that currency or liquid securities
denominated in that currency equal to the fund's obligations or to
segregate liquid high grade assets equal to the amount of the
fund's obligation.
OCC issued and exchange listed index options will generally
provide for cash settlement. As a result, when the Fund sells
these instruments it will only segregate an amount of assets equal
to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These
amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold
by the Fund, or the in-the-money amount plus any sell-back formula
amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. OCC issued and exchange
listed options sold by the Fund other than those generally settle
with physical delivery, and the Fund will segregate an amount of
assets equal to the full value of the option.
Strategic Transactions may be covered by other means when
consistent with applicable regulatory policies. The Fund may also
enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding
obligation in related options and Strategic Transactions. For
example, the Fund could purchase a put option if the strike price
of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets
if the Fund held a forward contract, it could purchase a put option
on the same forward contract with a strike price as high or higher
than the price of the contract held. Other Strategic Transactions
may also be offered in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction no
segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be
segregated.
The Fund's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue
Code for qualification as a regulated investment company. (See
"Taxes.")
Convertible Securities. The Fund may invest in convertible
securities, that is, bonds, notes, debentures, preferred stocks and
other securities which are convertible into common stock.
Investments in convertible securities can provide an opportunity
for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange
features. The Fund will limit its purchases of convertible
securities to debt securities convertible into common stocks.
The convertible securities in which the Fund may invest are
either fixed income or zero coupon debt securities which may be
converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. The exchange ratio for any
particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate
distributions or scheduled changes in the exchange ratio.
Convertible debt securities and convertible preferred stocks, until
converted, have general characteristics similar to both debt and
equity securities. Although to a lesser extent than with debt
securities generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends
to increase as interest rates decline. In addition, because of the
conversion or exchange feature, the market value of convertible
securities typically changes as the market value of the underlying
common stocks changes, and, therefore, also tends to follow
movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of
the underlying common stock declines, convertible securities tend
to trade increasingly on a yield basis, and so may not experience
market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as
a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no
securities investments are without risk, investments in convertible
securities generally entail less risk than investments in common
stock of the same issuer.
As debt securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon
securities, accretion of income) with generally higher yields than
common stocks. Of course, like all debt securities, there can be
no assurance of income or principal payments because the issuers of
the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their
conversion or exchange features.
Convertible securities generally are subordinated to other
similar but non-convertible securities of same issuer, although
convertible bonds, as corporate debt obligations, enjoy seniority
in right of payment on all equity securities, and convertible
preferred stock is senior to common stock, of the same issuer.
However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than
similar non-convertible securities. Convertible securities may be
issued as fixed income obligations that pay current income or as
zero coupon notes and bonds, including Liquid Yield Option Notes
("LYONs").
Repurchase Agreements. The Fund may enter into repurchase
agreements (which enables it to employ its assets pending
investment) during very short periods of time. Ordinarily these
agreements permit the Fund to maintain liquidity and earn higher
rates of return than would normally be available from other short-
term money-market instruments.
Under a repurchase agreement, a fund buys a money-market
instrument and obtains a simultaneous commitment from the seller to
repurchase the investment at a specified time and at an agreed upon
yield to the fund. The seller is required to pledge cash and/or
collateral which is equal to at least 100 percent of the value of
the commitment to repurchase. The collateral is held by the fund's
custodian. The Fund will only enter into repurchase agreements
involving U.S. Government securities in which it may otherwise
invest.
The term "U.S. Government securities" refers to a variety of
securities which are issued or guaranteed by the United States
Treasury, by various agencies of the United States Government, and
by various instrumentalities which have been established or
sponsored by the United States Government. U.S. Treasury
securities are backed by the "full faith and credit" of the United
States. Securities issued or guaranteed by Federal agencies and
U.S. Government sponsored instrumentalities may or may not be
backed by the full faith and credit of the United States. In the
case of securities not backed by the full faith and credit of the
United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not
meet its commitment. An instrumentality of the U.S. Government is
a government agency organized under Federal charter with government
supervision.
It is the Fund's practice to enter into repurchase agreements
with selected banks and securities dealers, depending upon the
availability of the most favorable yields. The Fund will always
seek to perfect its security interest in the collateral. If the
seller of a repurchase agreement defaults, the Fund may incur a
loss if the value of the collateral securing the repurchase
agreement declines. The Investment Advisor monitors the value of
the collateral to ensure that its value always equals or exceeds
the repurchase price and also monitors the financial condition of
the issuer of the repurchase agreement. If the seller defaults,
the Fund may incur disposition costs in connection with liquidating
the collateral of that seller. If bankruptcy proceedings are
commenced with respect to the seller, realization upon the
collateral by the Fund may be delayed or limited.
Illiquid Securities. Normally, the Fund will not invest more
than 5% of its net assets in securities which are illiquid or not
readily marketable; however, the Fund is permitted to invest up to
15% of its net assets in such securities. Illiquid securities are
securities that cannot be sold in the ordinary course of business
at approximately the prices at which they are carried on the Fund's
books. The Fund will treat as illiquid repurchase agreements with
maturities in excess of seven days. Illiquid securities do not
include those securities that meet the requirements of Rule 144A
under the Securities Act of 1933, and that have been determined to
be liquid by the Investment Advisor under the supervision of the
Fund's Board of Directors.
In determining the liquidity of the Fund's portfolio
securities, the Investment Advisor will consider all appropriate
factors, such as: the frequency of trading in the security; the
number of dealers in, and potential purchasers of, the security;
dealer undertakings to maintain a market in the security; whether
the security is subject to demand or tender features which enhance
its marketability; and the nature of the marketplace for trading.
If market quotations are not available, illiquid securities are
valued at fair value as determined in good faith by the Fund's
Board of Directors or a committee thereof.
Restricted Securities. The Fund may invest in restricted
securities. Generally, "restricted securities" are securities
which have legal or contractual restrictions on their resale. In
some cases, these legal or contractual restrictions may impair the
liquidity of a restricted security; in others, the legal or
contractual restrictions may not have a negative effect on the
liquidity of the security. Restricted securities which are deemed
by the Investment Advisor to be illiquid will be included in the
Fund's policy which limits investments in illiquid securities.
Indexed Securities. The Fund may purchase securities whose
prices are indexed to the prices of other securities, securities
indices, currencies, or other financial indicators. Indexed
securities, or structured notes, are usually debt securities whose
value at maturity or coupon rate is determined by reference to a
specific instrument or index. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the
price of gold, resulting in a security whose price tends to rise
and fall together with gold prices.
The performance of indexed securities depends to a great
extent on the performance of the security, index, currency or other
instrument to which they are indexed, and may also be influenced by
changes in interest rates. Indexed securities are subject to the
credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's credit-worthiness
deteriorates. Recent issuers of indexed securities have included
banks, corporations, and certain U.S. government agencies. Indexed
securities may be more volatile than their underlying instruments.
Investment Restrictions
The policies set forth below are fundamental policies of the
Fund and may not be changed without approval of a majority of the
outstanding voting securities of the Fund. As used in this
Statement of Additional Information a "majority of the outstanding
voting securities of the Fund" means the lesser of (1) 67% or more
of the voting securities present at such meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (2) more than 50% of the
outstanding voting securities of the Fund.
As a matter of fundamental policy, the Fund may not:
1. as to 75% of its assets, purchase the securities of any issuer
(other than obligations issued or guaranteed as to principal
and interest by the Government of the United States or any
agency or instrumentality thereof) if, as a result of such
purchase, more than 5% of its total assets would be invested
in the securities of such issuer;
2. purchase stock or securities of an issuer (other than
obligations issued or guaranteed as to principal and interest
by the Government of the United States or any agency or
instrumentality thereof) if such purchase would cause the Fund
to own more than 10% of any class of the outstanding stock or
securities or more than 10% of any class of voting securities
of such issuer;
3. borrow money, except through reverse repurchase agreements or
from banks for temporary or emergency purposes, and then only
in an amount not in excess of 20% of the value of the Fund's
net assets at the time the borrowing is made (borrowings in
excess of 5% will be subject to 300% asset coverage
requirements of the Investment Company Act of 1940), provided
that the Fund will not purchase portfolio securities when its
borrowings exceed 5% of its total assets;
4. purchase the securities of any issuer (other than obligations
issued or guaranteed by the Government of the United States or
any agency or instrumentality thereof) if, as a result of such
purchase, more than 25% of the Fund's total assets would be
invested in any one industry;
5. act as an underwriter of securities issued by others, except
to the extent that it may be deemed an underwriter in
connection with the disposition of portfolio securities of the
Fund;
6. make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent that the entry into
repurchase agreements and the purchase of debt securities in
accordance with its investment objective and investment
policies may be deemed to be loans;
7. issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for
shares of the separate classes or series of the corporation
of which the Fund is a series; provided that the segregation
of assets or other collateral arrangements with respect to
currency-related contracts, futures contracts, options or
other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction, and
obligations for which the Fund segregates assets in accordance
with securities regulatory requirements will not be deemed to
be senior securities;
8. purchase or sell real estate (except that the Fund may invest
in (i) securities of companies which deal in real estate, or
mortgages, and (ii) securities secured by real estate or
interests therein, and that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of
the Fund's ownership of securities) or purchase or sell
physical commodities or contracts relating to physical
commodities.
Other Investment Policies
The Fund has voluntarily adopted certain policies and
restrictions which are observed in the conduct of its affairs.
These represent intentions of the Directors based upon current
circumstances. They differ from fundamental investment policies in
that they may be changed or amended by action of the Directors
without requiring prior notice to or approval of shareholders.
The following policies are not fundamental policies and may be
changed without shareholder approval. The Fund does not currently
intend to:
(a) purchase or sell futures contracts or options thereon;
(b) make short sales of securities;
(c) make loans of portfolio securities;
(d) purchase or sell real estate limited partnership
interests;
(e) purchase or retain securities of any open-end investment
company; purchase securities of closed-end investment
companies except by purchase in the open market where no
commission or profit to a sponsor or dealer results from
such purchase; however, the Fund may acquire investment
company securities in connection with a plan of merger,
consolidation, reorganization or acquisition of assets;
in any event, the Fund may not purchase more than 3% of
the outstanding voting securities of another investment
company, may not invest more than 5% of its assets in
another investment company, and may not invest more than
10% of its assets in other investment companies;
(f) borrow, pledge, mortgage or hypothecate its assets in
excess, together with permitted borrowings, of 1/3 of its
total assets;
(g) purchase securities on margin, except that the Fund may
obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin
payments in connection with futures contracts and options
on futures contracts, if any, shall not constitute
purchasing securities on margin.
(h) invest more than 15% of its net assets in securities
which are illiquid or not readily marketable, including
repurchase agreements which are not terminable within 7
days (normally, no more than 5% of the Fund's net assets
will be invested in such securities).
*(i) purchase put options or write covered call options
if, as a result, more than 25% of the Fund's total
assets would be hedged with options;
*(j) write put options if, as a result, the Fund's total
obligations upon exercise of written put options
would exceed 25% of the Fund's total assets;
*(k) purchase call options if, as a result, the current
value of options premiums for call options
purchased by the Fund would exceed 5% of the Fund's
total assets;
(l) purchase warrants, valued at the lower of cost or market,
in excess of 5% of the value of the Fund's net assets;
provided that no more than 2% of the Fund's net assets
may be warrants that are not listed on the New York Stock
Exchange or the American Stock Exchange.
*NOTE: items (i), (j) and (k) above do not apply to
options attached to, or purchased as a part of,
their underlying securities.
If a percentage restriction on investment or utilization of
assets as set forth under "Investment Restrictions" and "Other
Investment Policies" above is adhered to at the time an investment
is made, a later change in percentage resulting from changes in the
value or the total cost of the Fund's assets will not be considered
a violation of the restriction.
In order to satisfy certain state regulatory requirements the
Fund has agreed that, so long as its shares are offered for sale in
such state(s), it will not:
1. invest in interests in oil, gas, or other mineral
exploration or development programs;
2. invest more than 5% of its total assets in the securities
of any issuers which have (together with their
predecessors) a record of less than three years
continuous operations;
3. purchase or retain any securities if (i) one or more
officers or directors of the Fund or its investment
advisor individually own or would own, directly or
beneficially, more than 1/2 of 1 per cent of the
securities of such issuer, and (ii) in the aggregate such
persons own or would own more than 5% of such
securities.
Taxes
The Fund will seek to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve
governmental supervision or management of investment practices or
policy.
A regulated investment company qualifying under Subchapter M
of the Code is required to distribute to its shareholders at least
90% of its investment company taxable income (including net
short-term capital gain) and generally is not subject to federal
income tax (assuming the Fund meets the 90% and 30% of gross income
tests and the tax diversification test of Subchapter M) to the
extent that it distributes annually its investment company taxable
income and net realized capital gains in the manner required under
the Code. The Fund intends to distribute at least annually all of
its investment company taxable income and net realized capital
gains and therefore generally does not expect to pay federal income
taxes.
The Fund is subject to a 4% nondeductible excise tax on
amounts required to be but which are not distributed under a
prescribed formula. The formula requires payment to shareholders
during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98%
of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses prescribed by the Code) realized during
the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not
previously distributed.
Investment company taxable income generally includes
dividends, interest, net short-term capital gains in excess of net
long-term capital losses, and net foreign currency gains, if any,
less expenses. Realized net capital gains for a fiscal year are
computed by taking into account any capital loss carryforward of
the Fund.
If any net realized long-term capital gains in excess of net
realized short-term capital losses are retained by the Fund for
reinvestment, requiring federal income taxes to be paid thereon by
the Fund, the Fund intends to elect to treat such capital gains as
having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital
gains, will be able to claim his/her share of federal income taxes
paid by the Fund on such gains as a credit against his/her own
federal income tax liability, and will be entitled to increase the
adjusted tax basis of his/her Fund shares by the difference between
his/her pro rata share of such gains and his/her tax credit.
Distributions of investment company taxable income are taxable
to shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over
net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares
of the Fund have been held by such shareholders. Such
distributions are not eligible for a dividends-received deduction
for corporate investors.
Distributions of investment company taxable income and net
realized capital gains will be taxable as described above, whether
received in shares or in cash. Shareholders electing to receive
distributions in the form of additional shares will have a cost
basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and
realized net capital gain, whether received in shares or in cash,
must be reported by each shareholder on his or her federal income
tax return. Dividends and capital gains distributions declared in
October, November or December and payable to shareholders of record
in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following
year. Redemptions of shares, including exchanges for shares of
another fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to information reporting
requirements.
An individual may make a deductible IRA contribution of up to
$2,000 or, if less, the amount of the individual's earned income
for any taxable year if (i) neither the individual nor his or her
spouse (unless filing separate returns) is an active participant in
an employer's retirement plan, or (ii) the individual (and his or
her spouse, if applicable) has an adjusted gross income below a
certain level ($40,000 for married individuals filing a joint
return, with a phase-out of the deduction for adjusted gross income
between $40,000 and $50,000; $25,000 for a single individual, with
a phase-out for adjusted gross income between $25,000 and $35,000).
However, an individual not permitted to make a deductible
contribution to an IRA for any such taxable year may nonetheless
make nondeductible contributions up to $2,000, or 100% of taxable
compensation if less, to an IRA (up to $2,250 to IRAs for an
individual and his or her nonearning spouse) for that year. There
are special rules for determining how withdrawals are to be taxed
if an IRA contains both deductible and nondeductible amounts. In
general, a proportionate amount of each withdrawal will be deemed
to be made from nondeductible contributions; amounts treated as a
return of nondeductible contributions will not be taxable. Also,
annual contributions may be made to a spousal IRA even if the
spouse has earnings in a given year if the spouse elects to be
treated as having no earnings (for IRA contribution purposes) for
the year.
Distributions by the Fund result in a reduction in the net
asset value of its shares. Should a distribution reduce the net
asset value below a shareholder's cost basis, such distribution
would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though it may constitute
a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a
distribution. The price of shares purchased at that time includes
the amount of the forthcoming distribution. Those purchasing just
prior to a distribution will then receive a partial return of their
invested capital upon the distribution, which will nevertheless be
taxable to them.
The Fund intends to qualify for and may make the election
permitted under Section 853 of the Code so that shareholders may
(subject to limitations) be able to claim a credit or deduction on
their federal income tax returns for, and may be required to treat
as part of the amounts distributed to them, their pro rata portion
of qualified taxes paid by the Fund to foreign countries (which
taxes relate primarily to investment income). The Fund may make an
election under Section 853 of the Code, provided that more than 50%
of the value of the total assets of the Fund at the close of the
taxable year consists of securities in foreign corporations. The
foreign tax credit available to shareholders is subject to certain
limitations imposed by the Code.
If the Fund invests in stock of certain foreign investment
companies, the Fund may be subject to U.S. federal income taxation
on a portion of any "excess distribution" with respect to, or gain
from the disposition of, such stock. The tax would be determined
by allocating such distribution or gain ratably to each day of the
Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable
year of the excess distribution or disposition, would be taxed to
the Fund at the highest ordinary income rate in effect for such
year, and the tax would be further increased by an interest charge
to reflect the value of the tax deferral deemed to have resulted
from the ownership of the foreign company's stock. Any amount of
distribution or gain allocated to the taxable year of the
distribution or disposition would be included in the Fund's
investment company taxable income and, accordingly, would not be
taxable to the Fund to the extent distributed by the Fund as a
dividend to its shareholders.
The Fund may be able to make an election, in lieu of being
taxable in the manner described above, to include annually in
income its pro rata share of the ordinary earnings and net capital
gain of the foreign investment company, regardless of whether it
actually received any distributions from the foreign company.
These amounts would be included in the Fund's investment company
taxable income and net capital gain which, to the extent
distributed by the Fund as ordinary or capital gain dividends, as
the case may be, would not be taxable to the Fund. In order to
make this election, the Fund would be required to obtain certain
annual information from the foreign investment companies in which
it invests, which in many cases may be difficult to obtain. The
Fund may make an election with respect to those foreign investment
companies which provide the Fund with the required information.
Certain forward foreign currency contracts, and all listed
nonequity options written or purchased by the Fund (including
options on debt securities, options on securities indices and
options on broad-based stock indices) will be governed by Section
1256 of the Code. Absent a tax election to the contrary, gain or
loss attributable to the lapse, exercise or closing out of any such
position generally will be treated as 60% long-term and 40%
short-term capital gain or loss, and on the last trading day of the
Fund's fiscal year, all outstanding Section 1256 positions will be
marked to market (i.e., treated as if such positions were closed
out at their closing price on such day), with any resulting gain or
loss recognized as 60% long-term and 40% short-term capital gain or
loss. Under Section 988 of the Code, discussed below, foreign
currency gains or loss from foreign currency related forward
contracts and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income or loss.
Subchapter M requires that the Fund realize less than 30% of
its annual gross income from the sale or other disposition of
stock, securities and certain options, and forward contracts held
for less than three months. The Fund's options and forward
transactions may increase the amount of gains realized by the Fund
that are subject to this 30% limitation. Accordingly, the amount
of such transactions that the Fund may undertake may be limited.
Positions of the Fund which consist of at least one stock and
at least one stock option or other position with respect to a
related security which substantially diminishes a Fund's risk of
loss with respect to such stock could be treated as a "straddle"
which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital
losses into long-term capital losses. An exception to these
straddle rules exists for any "qualified covered call options" on
stock written by the Fund.
Positions of the Fund which consist of at least one position
not governed by Section 1256 and at least one forward contract or
nonequity option governed by Section 1256 which substantially
diminishes the Fund's risk of loss with respect to such other
position will be treated as a "mixed straddle." Although mixed
straddles are subject to the straddle rules of Section 1092 of the
Code, certain tax elections exist for them which reduce or
eliminate the operation of these rules. The Fund will monitor its
transactions in options and may make certain tax elections in
connection with these investments.
Under the Code, gains or losses attributable to fluctuations
in exchange rates which occur between the time the Fund accrues
interest or other receivables, or accrues expenses or other
liabilities, denominated in a foreign currency and the time the
Fund actually collects such receivables, or pays such liabilities,
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain forward contracts,
gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or
contract and the date of disposition are also treated as ordinary
gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount
of the Fund's investment company taxable income to be distributed
to its shareholders as ordinary income.
A portion of the difference between the issue price of zero
coupon securities and their face value ("original issue discount")
is considered to be income to the Fund each year, even though the
Fund will not receive cash interest payments from these securities.
The original issue discount imputed income will comprise a part of
the Fund's investment company taxable income which must be
distributed to shareholders in order to maintain the Fund's
qualification as a regulated investment company and to avoid
federal income tax.
The Fund will be required to report to the IRS all
distributions of investment company taxable income and capital
gains as well as gross proceeds from the redemption or exchange of
Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the
Code, distributions of investment company taxable income and
capital gains and proceeds from the redemption or exchange of the
shares of a regulated investment company may be subject to
withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company
with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax
law. Withholding may also be required if the Fund is notified by
the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder
has previously failed to report interest or dividend income. If
the withholding provisions are applicable, any such distributions
and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Amounts withheld are applied against the shareholder's tax
liability and a refund may be obtained from the Internal Revenue
Service, if withholding results in overpayment of taxes. A
shareholder should contact the Fund or the Transfer Agent if the
shareholder is uncertain whether a proper Taxpayer Identification
Number is on file with the series.
Shareholders of the Fund may be subject to state and local
taxes on distributions received from the Fund and on redemptions of
the Fund's shares.
In January of each year TWF's Transfer Agent issues to each
shareholder a statement of the federal income tax status of all
distributions.
The foregoing discussion of U.S. federal income tax law
relates solely to the application of that law to U.S. persons,
i.e., U.S. citizens and residents and U.S. corporations,
partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences
of ownership of Fund shares, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of
30% (or at a lower rate under an applicable income tax treaty) on
amounts constituting ordinary income received by him or her, where
such amounts are treated as income from U.S. sources under the
Code.
Shareholders should consult their tax advisers about the
application of the provisions of the tax law described in this
Statement of Additional Information in light of their particular
tax situations.
Dividends and Distributions
As stated previously, it is the policy of the Fund to
distribute substantially all of its net investment income and net
realized capital gains, if any, shortly before the close of the
fiscal year (December 31st).
All dividend and capital gains distributions, if any, will be
reinvested in full and fractional shares based on net asset value
(without a sales charge) as determined on the ex-dividend date for
such distributions. Shareholders may, however, elect to receive
all such payments, or the dividend or distribution portion thereof,
in cash, by sending written notice to this effect to the Transfer
Agent. This written notice will be effective as to any subsequent
payment if received by the Transfer Agent prior to the record date
used for determining the shareholders' entitlement to such payment.
Such an election will remain in effect unless or until the Transfer
Agent is notified by the shareholder in writing to the contrary.
Portfolio Transactions
It is the policy of the Investment Advisor, in placing orders
for the purchase and sale of the Fund's securities, to seek to
obtain the best possible price and execution for its securities
transactions taking into account such factors as price, commission,
where applicable (which is negotiable in the case of U.S. national
securities exchange transactions but which is generally fixed in
the case of foreign exchange transactions), size of order,
difficulty of execution and skill required of the executing
broker/dealer. After a purchase or sale decision is made by the
Investment Advisor, the Investment Advisor then arranges for
execution of the transaction in a manner deemed to provide the best
result for the Fund.
While there is no formula, agreement or undertaking to do so,
and when it can be done consistently with the policy of obtaining
the most favorable net results, the Investment Advisor may allocate
a portion of its brokerage commissions to persons or firms
providing the Investment Advisor with investment recommendations,
statistical, research or similar services useful to the daily
operation of the Fund or other clients of these persons. The term
"investment recommendations, statistical, research or similar
services" means advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and
the availability of securities or purchasers or sellers of
securities, and furnishing analysis and reports concerning issuers,
industries, securities, economic factors and trends, and portfolio
strategy. Such services are one of the many ways the Fund's
Investment Advisor can keep abreast of the information generally
circulated among institutional investors by broker-dealers. While
this information is useful in varying degrees, its value is
indeterminable. Such services received on the basis of
transactions for the Fund may be used by the Investment Advisor for
the benefit of other clients, and the Fund may benefit from such
transactions effected for the benefit of other clients. Subject to
obtaining best price and execution the Fund may consider sales of
its shares as a factor in the selection of brokers to execute
portfolio transactions. The Investment Advisor generally does not,
when placing portfolio transactions for the Fund, pay a brokerage
commission in excess of that which another broker might have
charged for executing the same transaction on account of the
receipt of research, market or statistical information. The
Investment Advisor does not place orders with brokers or dealers on
the basis that the broker or dealer has sold Fund shares, although
transactions may be placed with such brokers. Except for
implementing the policy stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or
groups thereof.
When two or more accounts managed by the Investment Advisor
are simultaneously engaged in the purchase or sale of the same
security, the transactions are allocated in a manner deemed
equitable to each account. It is recognized that in some cases the
procedure could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to participate
in volume transactions will be beneficial for the Fund. It is the
opinion of the Board of Directors of TWF that these advantages,
when combined with the other benefits available because of the
Investment Advisor's organization, outweigh the disadvantages that
may be said to exist from exposure to simultaneous transactions.
Exchange-listed securities are generally traded on their
principal exchange unless another market offers a better result.
Securities traded only in the over-the-counter market may be
executed on a principal basis with primary market makers in such
securities except for fixed price offerings and except where the
Fund may obtain better prices or executions on a commission basis
or by dealing with other than a primary market maker.
Average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the
portfolio securities owned during the year, excluding from both the
numerator and the denominator all securities with maturities at the
time of acquisition of one year or less. A higher rate involves
greater transaction expenses to a fund and may result in the
realization of net capital gains, which would be taxable to
shareholders when distributed. Purchases and sales are made for
the Fund's portfolio whenever necessary, in the Investment
Advisor's opinion, to meet the Fund's objective. The Investment
Advisor anticipates that the Fund's average annual portfolio rate
will be less than 100%.
Net Asset Value
The Fund's Net Asset Value ("NAV") per share is calculated
daily each business day from Monday through Friday. The New York
Stock Exchange (the "Exchange") is currently closed on weekends and
on the following holidays: New Years Day, Washington's Birthday,
Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving Day
and Christmas Day, and the NAV is not computed those days. The
Fund's NAV is calculated at the time set by the Board of Directors
based upon a determination of the most appropriate time to price
the Fund's securities.
The Board of Directors has determined that the Fund's NAV be
calculated as of the close of trading of the Exchange (currently
4:00 P.M., Eastern Time) on each business day from Monday to Friday
or on each day (other than a day during which no security was
tendered for redemption and no order to purchase or sell such
security was received by the Fund) in which there is a sufficient
degree of trading in the Fund's portfolio securities that the
current NAV of the Fund's shares might be materially affected by
changes in the value of such portfolio security.
NAV per share is determined by dividing the total value of the
Fund's securities and other assets, less liabilities (including
proper accruals of taxes and other expenses), by the total number
of shares then outstanding, and the result, rounded to the nearer
cent, is the NAV per share. Generally, securities owned by the
Fund are valued at market value.
The Fund may compute its NAV per share more frequently if
necessary to protect shareholders' interests.
In valuing the Fund's assets, a security listed on the
Exchange will be valued at its last sale price prior to the close
of regular trading on the Exchange. Lacking any sales, the
security will be valued at the last bid price prior to the close of
regular trading on the Exchange. Securities listed on other
exchanges will be similarly valued, using quotations on the
exchange on which the security is traded most extensively.
Unlisted securities which are quoted on the NASD's National
Market System, for which there have been sales of such securities,
shall be valued at the last sale price reported on such system. If
there are no such sales, the value shall be the high or "inside"
bid, which is the bid supplied by the NASD on its NASDAQ Screen for
such securities in the over-the-counter market. The value of such
securities quoted on the NASDAQ System, but not listed on the
National Market System, shall be valued at the high or "inside"
bid. Unlisted securities which are not quoted on the NASDAQ System
and for which the over-the-counter market quotations are readily
available will be valued at the current bid prices for such
securities in the over-the-counter market. Other unlisted
securities (and listed securities subject to restriction on sale)
may be valued at their fair value as determined in good faith by
the Board of Directors.
The value of a security traded or dealt in upon an exchange
may be valued at what TWF's pricing agent determines is fair market
value on the basis of all available information, including the last
determined value, if the pricing agent determines that the last bid
does not represent the value of the security, or if such
information is not available. For example, the pricing agent may
determine that the price of a security listed on a foreign stock
exchange that was fixed by reason of a limit on the daily price
change does not represent the fair market value of the security.
Similarly, the value of a security not traded or dealt in upon an
exchange may be valued at what the pricing agent determines is fair
market value if the pricing agent determines that the last sale, or
inside bid does not represent the value of the security, provided
that such amount is not higher than the current bid price.
Notwithstanding the foregoing, money market investments with
a remaining maturity of less than sixty days shall be valued by the
amortized cost method described below; debt securities are valued
by appraising them at prices supplied by a pricing agent approved
by the Fund, which prices may reflect broker-dealer supplied
valuations and electronic data processing techniques and are
representative of market values at the close of the Exchange;
options on securities listed or admitted to trading on a national
exchange shall be valued at their last sale on such exchange prior
to the time of determining net asset value; or if no sales are
reported on such exchange on that day, at the mean between the most
recent bid and asked price; and forward contracts shall be valued
at their last sale as reported by the Fund's pricing service, or
lacking a report by the service, at the value of the underlying
currencies at the prevailing currency rates.
The value of an illiquid security which is subject to legal or
contractual delays in or restrictions on resale by the Fund shall
be taken to be the fair value thereof as determined in accordance
with procedures established by the Fund's Board, on the basis of
such relevant factors as the following: the cost of such security
to the Fund, the market price of unrestricted securities of the
same class at the time of purchase and subsequent changes in such
market price, potential expiration or release of the restrictions
affecting such security, the existence of any registration rights,
the fact that the Fund may have to bear part or all of the expense
of registering such security, and any potential sale of such
security to another investor. The value of other property owned by
the Fund shall be determined in a manner which, in the discretion
of the pricing agent of the Fund, most fairly reflects fair market
value of the property on such date.
Following the calculation of security values in terms of
currency in which the market quotation used is expressed ("local
currency"), the pricing agent shall calculate these values in terms
of United States dollars on the basis of the conversion of the
local currencies (if other than U.S. dollars) into United States
dollars at the rates of exchange prevailing at the value time as
determined by the pricing agent.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well
before the close of business on each business day in New York
(i.e., a day on which the New York Stock Exchange is open). In
addition, European or Far Eastern securities trading generally or
in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign
markets on days which are not business days in New York and on
which the Fund's net asset value is not calculated. The Fund
calculates net asset value per share, and therefore, effects sales,
redemptions and repurchases of its shares, as of the close of the
Exchange once on each day on which that Exchange is open. Such
calculation does not take place contemporaneously with the
determination of the prices of all of the portfolio securities used
in such calculation. If events materially affecting the value of
a portfolio security occur between the time when its closing price
is determined and the time when the Fund's net asset value is
calculated, such a security will be valued at fair value as
determined in good faith by the Board of Directors.
In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated in
accordance with procedures approved by the Board of Directors of
the Fund as the primary market.
U.S. Treasury bills, and other short-term obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities, with original or remaining maturities in excess
of 60 days are valued at the mean of representative quoted bid and
asked prices for such securities or, if such prices are not
available, are valued at the mean of representative quoted bid and
asked prices for securities of comparable maturity, quality and
type. Short-term securities, with 60 days or less to maturity, are
amortized to maturity based on their cost if acquired within 60
days of maturity or, if already held, on the 60th day, based on the
value determined on the 61st day.
Any purchase order may be rejected by the Distributor or by
the Fund.
TWF has reserved the right to redeem in-kind but does not
intend to do so under normal circumstances.
Directors and Officers
The following is a list of TWF's Directors and Officers and a
brief statement of their present positions and principal
occupations during the past five years.
*John Pasco, III;
Chairman, Director, and Treasurer
1500 Forest Ave, Suite 223; Richmond, VA 23229
Mr. Pasco is Treasurer and Director of Commonwealth
Shareholder Services, Inc., TWF's Administrator, since 1985.
Director, President and Treasurer of Commonwealth Capital
Management, Inc. (a registered Investment Advisor) since 1983.
Director and Shareholder of Fund Services, Inc., TWF's
Transfer and Disbursing Agent, since 1987. Mr. Pasco is also
a certified public accountant.
Samuel Boyd, Jr.
Director
10808 Hob Nail Court, Potomac, MD 20854
Mr. Boyd is presently the Manager of the Customer Services
Operations and Accounting Division of the Potomac Electric
Power Company. Mr. Boyd is also a certified public
accountant.
William E. Poist
Director
5272 River Road, Bethesda, MD 20816
Mr. Poist is a financial and tax consultant through his firm
Management Consulting for Professionals. Mr. Poist is also a
certified public accountant.
Paul M. Dickinson
Director
8704 Berwickshire Drive, Richmond, VA 23229
Mr. Dickinson is presently the President of Alfred J.
Dickinson, Inc., Realtors.
*Jane H. Williams
Vice President of TWF and President of the Sand Hill Portfolio
Manager Fund
3000 Sand Hill Road, Building Three, Suite 150, Menlo Park,
California 94025
Director and Executive Vice President (since March 1982) and
Portfolio Manager (since September 1982), Sand Hill Advisors,
Inc. From November 1982 to April 1994, Ms. Williams was a
Director of the Wood Island Total Return Fund, and from
February 1984 to April 1994, she was a Director of the Wood
Island Growth Fund.
*Edwin D. Walczak
Vice President of TWF and President of the Vontobel U.S. Value
Fund
450 Park Avenue, New York, N.Y. 10022
First Vice President and Chief Investment Officer of Vontobel
USA Inc., a registered investment advisor, since 1988. From
1984 to 1988 Mr. Walczak was an institutional portfolio
manager at Lazard Freres Asset Management, New York.
*Sven Rump
Vice President of TWF and President of the Vontobel
International Bond Fund
450 Park Avenue, New York, N.Y. 10022
Vice President of Vontobel USA Inc. since 1993. Mr. Rump is
currently (since October 1991) a Vice President of Vontobel
Asset Management, Switzerland, and is responsible for managing
fixed income mutual funds. From October 1990 to October 1991
Mr. Rump was a Vice President of Bank Vontobel (Switzerland)
and a fixed income specialist for the private banking group.
From September 1988 to October 1990 Mr. Rump was an Associate
with J.P. Morgan Securities (Switzerland) Ltd. in the Fixed
Income Department. Mr. Rump is also a Chartered Financial
Analyst.
*Fabrizio Pierallini
Vice President of TWF and President of the Vontobel
EuroPacific Fund
450 Park Avenue, New York, N.Y. 10022
Vice President and Portfolio Manager (International Equities),
Vontobel USA Inc. since April 1994. From 1991 to 1994 Mr.
Pierallini was Associate-Director/Portfolio Manager with Swiss
Bank Corporation in New York; from 1988 to 1991 he was a Vice-
President/Portfolio Manager with SBC Portfolio Management Ltd.
in Zurich, Switzerland; and from 1986 to 1988 he was an
Associate/Institutional Consultant with Bank Julius Baer in
Zurich, Switzerland.
*Arpad Pongracz
Vice President of TWF and President of the Vontobel Eastern
European Equity Fund.
450 Park Avenue, New York, N.Y. 10022
Vice President of Vontobel USA Inc. since January 1966. Mr.
Pongracz joined Vontobel Asset Management, Switzerland, in
1990 as an equity analyst. He was subsequently appointed
portfolio manager for all European equity institutional
accounts and mutual funds. Since 1995 he has been head of
Vontobel Asset Management's international equities team.
Prior to joining the Vontobel group, he worked at Union Bank
of Switzerland in Canada and in Switzerland as an equity
analyst. Mr. Pongracz is a Chartered Financial Analyst.
*F. Byron Parker, Jr.
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since
1986. Partner in the Law Firm Mustian & Parker.
* Persons deemed to be "interested" persons of TWF, Sand Hill
Advisors, Inc., Vontobel USA Inc. or First Dominion Capital Corp.
under the Investment Company Act of 1940.
The directors and officers of TWF, as a group, do not own 1%
or more of the Fund.
Investment Advisor
Sand Hill Advisors, Inc. (the "Investment Advisor") manages
the investment of the assets of the Fund pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). The Advisory
Agreement is effective for a period of two years from December 29,
1994, and will be renewed thereafter only so long as such renewal
and continuance is specifically approved at least annually by TWF's
Board of Directors or by vote of a majority of the outstanding
voting securities of the Fund, provided the continuance is also
approved by a majority of the Directors who are not "interested
persons" of TWF or the Investment Advisor by vote cast in person at
a meeting called for the purpose of voting on such approval. The
Advisory Agreement is terminable without penalty on sixty days
notice by TWF's Board of Directors or by the Investment Advisor.
The Advisory Agreement provides that it will terminate
automatically in the event of its assignment.
TWF has designated Jane H. Williams, Executive Vice President
and a Director of the Investment Advisor, as a Vice President of
TWF and President of the Fund.
Under the Advisory Agreement the monthly compensation paid to
the Investment Advisor is accrued daily at a rate equal to a fee at
the annual rate of 1% of the net assets of the Fund. If the assets
of the Fund exceed $100,000,000, the fee for such assets will be
computed at the annual rate of .75 of 1% on such excess. The fee
is paid monthly within five (5) business days after the end of the
month. This fee is subject to reduction in accordance with state
expense limitation provisions. The Investment Advisor has
undertaken to the Fund that it will reduce its fee and, if
necessary, make additional payments to the Fund, to the extent
required in order to assure that the expense ratio of the Fund does
not exceed 1.90% during the first three years of the Investment
Advisory Agreement. In 1995, the Advisor waived $27,452 of its
fee.
The Advisory Agreement contemplates the authority of the
Investment Advisor to place orders pursuant to its investment
determinations for the Fund either directly with the issuer or with
any broker or dealer. In placing orders with brokers or dealers,
the Investment Advisor will attempt to obtain the best net price
and the most favorable execution of its orders. The Investment
Advisor may purchase and sell securities to and from brokers and
dealers who provide the Fund with research advice and other
services, or who sell shares of the Fund.
The address of the Investment Advisor is 3000 Sand Hill Road,
Building Three, Suite 150, Menlo Park, California 94025.
Transfer Agent
Fund Services, Inc. ("FSI") is TWF's Transfer and Disbursing
Agent, pursuant to a Transfer Agent Agreement. The Transfer Agent
Agreement is dated May 1, 1991, and has been renewed each year by
the Board of Directors of TWF, including a majority of the
directors who are not interested persons of TWF or the Transfer
Agent.
John Pasco, III, Chairman of the Board of TWF and an officer
and shareholder of Commonwealth Shareholder Services, Inc. (the
Administrator of the Fund) owns one third of the stock of FSI,
and, therefore, FSI may be deemed to be an affiliate of TWF and
Commonwealth Shareholder Services Inc.
Pursuant to the Transfer Agent Agreement the minimum annual
fee for the Fund is $16,500. In 1995 the Fund paid FSI $12,579.
Administrator
Commonwealth Shareholder Services, Inc. is TWF's Administrator
pursuant to an Administrative Services Agreement (the "Service
Agreement"), which is dated December 29, 1994. The Service
Agreement is described in the Fund's Prospectus. This agreement
will continue in effect for a period of one year from December 29,
1994, and may be continued thereafter only if the Board of
Directors, including a majority of the directors who are not
interested persons of TWF or the Administrator, approve the
extension at least annually. In 1995, the Fund paid $28,757 in
Administrative Fees. The minimum fee has been reduced to $15,000
for 1996.
Distribution
Shares of the Fund are sold at net asset value on a continuous
basis, without a sales charge.
First Dominion Capital Corp. (the "Distributor"), 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, is TWF's principal
underwriter pursuant to a Distribution Agreement between TWF and
the Distributor. John Pasco, III, Chairman of the Board of TWF
owns 100% of the stock of the Distributor, and is its President,
Treasurer and a Director.
Expenses of the Fund
The Fund will pay its expenses not assumed by the Investment
Advisor, including, but not limited to, the following: custodian;
stock transfer and dividend disbursing fees and expenses; taxes;
expenses of the issuance and redemption of Fund shares (including
stock certificates, registration and qualification fees and
expenses); legal and auditing expenses; and the cost of stationery
and forms prepared exclusively for the Fund.
The allocation of the general expenses of the Fund is made on
a basis that TWF's Board of Directors deems fair and equitable,
which may be based on the relative net assets of the series of TWF
or the nature of the services performed and relative applicability
to each series of TWF.
Under the Advisory Agreement, the Investment Advisor has
agreed to reimburse the Fund if the annual ordinary operating
expenses of the Fund exceeds the most stringent limits prescribed
by any state in which the Fund's shares are offered for sale. This
expense limitation is calculable based on the aggregate net assets
of the Fund. Expenses which are not subject to this limitation are
interest, taxes and extraordinary expenses. Expenditures,
including costs incurred in connection with the purchase or sale of
portfolio securities, which are capitalized in accordance with
generally accepted accounting principles applicable to investment
companies, are accounted for as capital items and not as expenses.
Reimbursement, if any, will be on a monthly basis, subject to year-
end adjustment and limited to the amount of the advisory fee due
from the Fund.
Investors should understand that the Fund's expense ratio can
be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of
foreign securities paid by the Fund is higher.
Special Shareholder Services
As described briefly in the Prospectus, the Fund offers the
following shareholder services:
Regular Account: The regular account allows for voluntary
investments to be made at any time. Available to individuals,
custodians, corporations, trusts, estates, corporate retirement
plans and others, investors are free to make additions and
withdrawals to or from their account as often as they wish. Simply
use the Account Application provided with the Prospectus to open
your account.
Telephone Transactions: You may redeem shares or transfer
into another fund by telephone if you request this service at the
time you complete the initial Account Application. If you do not
elect this service at that time, you may do so at a later date by
putting your request in writing to the Transfer Agent and having
your signature guaranteed.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if
it does not, it may be liable for any losses due to unauthorized or
fraudulent transactions. As a result of this policy, a shareholder
authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which the Fund
believes to be genuine. When you request a telephone redemption or
transfer, you will be asked to respond to certain questions
designed to confirm your identity as a shareholder of record. Your
cooperation with these procedures will protect your account and the
Fund from unauthorized transactions.
Invest-A-Matic Account: Any shareholder may utilize this
feature, which provides for automatic monthly investments into your
account. Upon your request, the Transfer Agent will withdraw a
fixed amount each month from your checking account for investment
into your account. This does not require you to make a commitment
for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Invest-A-Matic Plan as desired by
notifying the Transfer Agent. This feature requires a separate
Plan application, in addition to the Account Application. To
obtain an application, or to receive more information, please call
the offices of TWF.
Individual Retirement Account (IRA) - All wage earners under
70-1/2, even those who participate in a company sponsored or
government retirement plan, may establish their own IRA. You can
contribute 100% of your earnings up to $2,000 (or $2,250 with a
spouse who is not a wage earner). A special IRA program is
available for corporate employers under which the employers may
establish IRA accounts for their employees in lieu of establishing
corporate retirement plans. Known as SEP-IRA's (Simplified
Employee Pension-IRA), they free the corporate employer of many of
the recordkeeping requirements of establishing and maintaining a
corporate retirement plan trust.
If you have received a lump sum distribution from another
qualified retirement plan, you may rollover all or part of that
distribution into your Fund IRA. Your rollover contribution is not
subject to the limits on annual IRA contributions. By acting
within applicable time limits of the distribution you can continue
to defer Federal Income Taxes on your lump sum contribution and on
any income that is earned on that contribution.
How to Establish Retirement Accounts: Please call TWF to
obtain information regarding the establishment of individual
retirement plan accounts. The plan custodian charges nominal fees
in connection with plan establishment and maintenance. These fees
are detailed in the plan documents. You may wish to consult with
your attorney or other tax advisor for specific advice concerning
your tax status and plans.
General Information and History
TWF is authorized to issue up to 500,000,000 shares of $0.01
par value common stock, of which it has presently allocated
50,000,000 shares to the Fund, 50,000,000 shares to the Vontobel
International Bond Fund series, 50,000,000 shares to the Vontobel
EuroPacific Fund Series, 50,000,000 to the Vontobel U.S. Value Fund
Series and 50,000,000 shares to the Vontobel Eastern European
Equity Fund series. The Board of Directors can allocate the
remaining authorized but unissued shares to any series of TWF, or
may create additional series and allocate shares to such series.
Each series is required to have suitable investment objectives,
policies and restrictions, to maintain a separate portfolio of
securities suitable to its purposes, and to generally operate in
the manner of a separate investment company as required by the
Investment Company Act of 1940.
If additional series were to be formed, the rights of existing
series shareholders would not change, and the objective, policies
and investments of each series would not be changed. A share of
any series would continue to have a priority in the assets of that
series in the event of a liquidation.
The shares of each series when issued will be fully paid and
non-assessable, will have no preference over other shares of the
same series as to conversion, dividends, or retirement, and will
have no preemptive rights. The shares of any series will be
redeemable from the assets of that series at any time at a
shareholder's request at the current net asset value of that series
determined in accordance with the provisions of the Investment
Company Act of 1940 and the rules thereunder. TWF's general
corporate expenses (including administrative expenses) will be
allocated among the series in proportion to net assets or as
determined in good faith by the Board.
The investment advisory fees payable to Sand Hill Advisors,
Inc. and Vontobel USA Inc. by each series and the expense
limitation guarantee formula of each series will be based upon the
separate assets of each series.
Voting and Control - Each outstanding share of TWF is entitled
to one vote for each full share of stock and a fractional share of
stock. All shareholders vote on matters which concern the
corporation as a whole. Election of Directors or ratification of
the auditor are examples of matters to be voted upon by all
shareholders. TWF is not required to hold a meeting of
shareholders each year. TWF intends to hold annual meetings when
it is required to do so by the Maryland General Corporate Law or
the Investment Company Act of 1940. Each series shall vote
separately on matters (1) when required by the General Corporation
Law of Maryland, (2) when required by the Investment Company Act of
1940 and (3) when matters affect only the interest of the
particular series. An example of a matter affecting only one
series might be a proposed change in an investment restriction of
one series. The shares will not have cumulative voting rights,
which means that the holders of more than 50% of the shares voting
for the election of directors can elect all of the directors if
they choose to do so.
Limitation on Use of Name - The Advisory Agreement for the Fund
authorizes TWF to utilize the name "Sand Hill." TWF agrees that if
the Advisory Agreement is terminated it will promptly redesignate
the name of the Sand Hill Portfolio Manager Fund to eliminate any
reference to the name "Sand Hill" or any derivation thereof unless
the Investment Advisor waives this requirement in writing.
Code of Ethics - The Fund has adopted a Code of Ethics which
imposes certain restrictions on the authority of portfolio managers
and certain other personnel of the Fund and its advisors governing
personal securities activities and investments of those persons and
has instituted procedures to its Code of Ethics to require such
investment personnel to report such activities to the compliance
officer. The Code is reviewed and updated annually.
Performance
Current yield and total return are the two primary methods of
measuring investment performance. Occasionally, however, the Fund
may include its distribution rate in sales literature. Yield, in
its simplest form, is the ratio of income per share derived from
the Fund's portfolio investments to the current maximum offering
price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. Total return,
on the other hand, is the total of all income and capital gains
paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment,
expressed as a percentage of the purchase price. The distribution
rate is the amount of distributions per share made by the Fund over
a twelve-month period divided by the current maximum offering
price.
Performance quotations by investment companies are subject to
certain rules adopted by the Securities and Exchange Commission.
These rules require the use of standardized performance quotations,
or alternatively, that every non-standardized performance quotation
furnished by the Fund be accompanied by certain standardized
performance information computed as required by the Commission.
Current yield and total return quotations used by the Fund are
based on the standardized methods of computing performance mandated
by the Commission.
As indicated below current yield is determined by dividing the
net investment income per share earned during the period by the
maximum offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the 30 day base period.
According to the new Securities and Exchange formula:
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.
The Fund's average annual total return for the period ended
December 31, 1995 is as follows:
From Inception
Fund Name to
12/31/95
Sand Hill Portfolio Manager Fund 11.60
As the following formula indicates, the average annual total
return is determined by multiplying a hypothetical initial purchase
order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation and dividends and
distributions paid and reinvested) for the stated period less any
fees charged to all shareholder accounts and annualizing the
result. The calculation assumes the maximum sales load is deducted
from the initial $1,000 purchase order and that all dividends and
distributions are reinvested at the public offering price on the
reinvestment dates during the period. The quotation assumes the
account was
completely redeemed at the end of each one, five and ten year
period and the deduction of all applicable charges and fees.
According to the Securities and Exchange Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year periods (or
fractional portion thereof).
Sales literature pertaining to the Fund may quote a
distribution rate in addition to the yield or total return. The
distribution rate is the amount of distributions per share made by
the Fund over a twelve-month period divided by the current maximum
offering price. The distribution rate differs from the yield
because it measures what the Fund paid to shareholders rather than
what the Fund earned from investments. It also differs from the
yield because it may include dividends paid from premium income
from option writing, if applicable, and short-term capital gains in
addition to dividends from investment income. Under certain
circumstances, such as when there has been a change in the amount
of dividend payout, or a fundamental change in investment policies,
it might be appropriate to annualize the distributions paid over
the period such policies were in effect, rather than using the
distributions paid during the past twelve months.
Occasionally, statistics may be used to specify the Fund's
volatility or risk. Measures of volatility or risk are generally
used to compare the Fund's net asset value or performance relative
to a market index. One measure of volatility is beta. Beta is the
volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or
total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk
undertaken in achieving performance.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
Comparisons and Advertisements
To help investors better evaluate how an investment in the
Fund might satisfy their investment objective, advertisements
regarding the Fund may discuss yield, total return, or Fund
volatility as reported by various financial publications.
Advertisements may also compare yield, total return, or volatility
(as calculated above) to yield, total return, or volatility as
reported by other investments, indices, and averages. The
following publications, indices, and averages may be used:
(a) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company stocks
(Dow Jones Utilities Average), and 20 transportation company
stocks. Comparisons of performance assume reinvestment of
dividends.
(b) Standard & Poor's 500 Stock Index or its component indices -an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices -
unmanaged indices of all industrial, utilities, transportation, and
finance stocks listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the
market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume
reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed
Income Analysis, and Lipper Mutual Fund Indices - measures total
return and average current yield for the mutual fund industry.
Ranks individual mutual fund performance over specified time
periods assuming reinvestment of all distributions, exclusive of
sales charges.
(f) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
(g) Mutual Fund Source Book and other material, published by
Morningstar, Inc. - provides proprietary ratings and analyzes
price, yield, risk, and total return for equity funds.
(h) Financial publications: Business Week, Changing Times,
Financial World, Forbes, Fortune, and Money magazines - rate fund
performance over specified time periods.
(i) Consumer Price Index (or Cost of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure of
change, over time, in the price of goods and services, in major
expenditure groups.
(j) Standard & Poor's 100 Stock Index - an unmanaged index based
on the price of 100 blue-chip stocks, including 92 industrials,
1 utility, 2 transportation companies, and 5 financial
institutions. The S&P 100 Stock Index is a smaller more flexible
index for option trading.
In assessing such comparisons of yield, total return, or
volatility, an investor should keep in mind that the composition of
the investments in the reported indices and averages in not
identical to the Fund's portfolio, that the averages are generally
unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to
calculate its figures. In addition there can be no assurance that
the Fund will continue this performance as compared to such other
averages.
Financial Statements
The books of the Fund will be audited at least once each year
by Tait, Weller and Baker, of Philadelphia, PA, independent public
accountants.
<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:
Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt-edge." Interest payments are
protected by a large or by an exceptionally stable margin, and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1,2 and 3 in the Aa and A
rating categories. The modifier 1 indicates that the security
ranks at a higher end of the rating category, modified 2 indicated
a mid-range rating, and the modifier 3 indicates that the issue
ranks at the lower end of the rating category.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements, their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds
in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
MOODY'S SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity
are excluded unless explicitly rated. Moody's employs the
following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
Prime-1 - Issuers rated Prime-1 (or supporting institutions) have
a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate
reliance on debt and ample asset protection; broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and well established access to range of financial
markets and assured sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (or supporting institutions) have
a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Prime 3 - Issuers rated Prime-3 (or supporting institutions) have
an acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA - Bonds rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation, indicating an extremely
strong capacity to pay principal and interest.
AA - Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from highest rated issues only to a
small degree.
Plus(+) or Minus(-) - The ratings from AA to CCC may be
modified by the addition of a plus or a minus sign, which
shows relative standing within the major rating categories.
A - Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than bonds in the higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC, and CC is regarded, on
balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. BB is the lowest and CC is the highest degree of
speculation. While such debt will have some quality and protective
characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no
interest is being paid.
D - Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
<PAGE>
Investment Advisor: Sand Hill Advisors, Inc.
3000 Sand Hill Road
Building Three, Suite 150
Menlo Park, California 94025
Distributor: First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
Two Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Transfer Agent: For account information, wire purchases or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260
(800) 628-4077 Toll Free
More Information: For 24 hour, 7 days a week price information
call 1-800-527-9500.
For information on any series of TWF, investment
plans, or other shareholder services, call TWF at
1-800-527-9500 during normal business hours, or
write TWF at 1500 Forest Avenue, Suite 223,
Richmond, VA 23229
<PAGE>
