SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Post-Effective Amendment No. 11 X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 11 X
SCOTTISH WIDOWS INTERNATIONAL FUND FILE NO. 33-35081
(Exact Name if registrant as specified in charter)
2650 Westview drive, Wyomissing, PA 19610
(Address of principal executive offices)
610.670.1031
(Registrant's telephone number)
Dennis J. Westley, 2650 Westview Drive, Wyomissing, PA 19610
(name and address of agent for service)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragaph
(b) of rule 485
CROSS REFERENCE SHEET
N-1A Item No. Location
Part A
Item 1 Cover Page Cover Page
Item 2 Synopsis Prospectus Summary
Item 3 Condensed Financial Information Financial Highlights
Item 4 General Description of Registrant Fund Organization,
Investment Objectives
Item 5 Management of the Fund Mangement of the Fund
Item 6 Capital Stock & Other Securities Fund Organization
Item 7 Purchase of Securities Being How to Buy Shares
Offered
Item 8 Redemption or Repurchase How to Redeem Shares
Item 9 Pending Legal Proceedings General Information
PART B
Item 10 Cover Page Cover Page
Item 11 Table of Contents Table of Contents
Item 12 General Information and History Description of the Fund
Item 13 Investment Objectives & Policies Investment Policies,
Investment Restrictions
Item 14 Management of the Fund Trustees of the Fund,
Investment Advisor and
Sub-Advisor
Item 15 Control Persons and Principal
Holders of Securities Not applicable
Item 16 Investment Advisory and Other Investment Advisor, Sub-
Services Advisor, Transfer Agent
Item 17 Brokerage Allocation Portfolio Transactions
Item 18 Capital Stock & Other Securities Description of the
Fund
Item 19 Purchase, Redemption and Pricing Redemption of Shares
of Securities being Offered Net Asset Value
Item 20 Tax Status Taxation
Item 21 Underwriters Distribution Plan
Item 22 Calculation of Performance Data Performance Information
Item 23 Financial Statements Independent Auditors and
Financial Statements
SCOTTISH WIDOWS INTERNATIONAL FUND
Prospectus
The Board of Trustees of Scottish Widows International Fund has approved
an Agreement and Plan of Reorganization for the Fund pursuant to which
the Fund's assets will be acquired by a similar Federated Fund, and the
Scottish Widows shareholders will receive the equivalent value of their
Scottish Widows shares in Federated International Equity Fund shares.
The Reorganization will be a tax-free exchange whereby Scottish Widows
shareholders will become Federated shareholders, and after which
Scottish
Widows International Fund will terminate. Scottish Widows shareholders
will be asked to approve the Reorganization at a shareholders' meeting
scheduled to be held on May 29, 1997. Shareholders have received a
complete proxy statement describing the transaction. The Board of
Trustees has recommended that Scottish Widows shareholders vote in favor
of the Reorganization.
Federated Investors is a mutual fund group formed in 1955 and based in
Pittsburgh, Pennsylvania. Federated serves as manager or administrator
for mutual funds with an aggregate $110 billion in portfolio assets.
Federated has a reputation for excellent customer service, and has
invested in state-of-the-art technology to provide fund shareholders
with comprehensive information. Scottish Widows shareholders who become
Federated shareholders through the Reorganization will have access to
all funds in the Federated Family of Funds.
Scottish Widows International Fund (the "Fund") is an
open-end diversified management investment company. The
Fund's investment objective is long-term capital
appreciation. The Fund seeks its objective by investing
primarily (under normal conditions, at least 65% of its
total assets) in equity securities (common and
preferred stocks) of issuers in countries outside the
United States. There is no assurance that the Fund will
achieve its objective.
This Prospectus sets forth concisely information about
the Fund that a prospective investor should know before
investing. Additional information about the Fund has
been filed with the Securities and Exchange Commission
and is available upon request without charge. You may
request the Statement of Additional Information, which
is incorporated by reference into this Prospectus, by
writing directly to the Fund or by calling the
telephone numbers listed on the cover.
The date of this Prospectus and the Statement of
Additional Information is April 30, 1997.
Table of Contents
Section Page
Financial Highlights 2
Fund Expenses 3
Fund Organization 3
Investment Objectives and Policies 4
Management of the Fund 7
Performance Information 10
Risk Factors 11
Dividends, Capital Gains
Distributions and Taxes 12
Shareholder Inquiries 12
How to Buy Shares 13
How to Transfer Shares 16
How to Redeem Shares 17
Shareholder Services 18
General Information 20
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS ANY COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Financial Highlights
The information for 1996 and 1995 have been audited by
Ernst & Young LLP, independent auditors, whose
report thereon is included in the Fund's
Annual Report to shareholders for the year ended
December 31, 1996 and is incorporated by reference into
the Statement of Additional Information. The financial
highlights for the periods ended December 31, 1990
through 1994, were audited by Price Waterhouse LLP
whose report, dated February 17, 1995, expressed an
unqualified opinion.
The following information should be read in conjunction with the
other financial statements and notes thereto included
in the Annual Report.
PER SHARE INCOME AND CAPITAL CHANGES
(for a share outstanding throughout the period)
Class C Class A*
Year Ended December 31
1996 1995(5) 1996 1995 1994 1993 1992 1991 1990(2)
Net Asset Value:
Beginning of period
$12.90 $12.84 $12.91 $11.93 $14.28 $11.03 $11.96 $11.21 $11.34
Investment Operations:
Net investment income (loss)
(0.10) - - (0.01) (0.07) (0.02) 0.06 0.12 0.10
Net realized and unrealized gain (loss)
1.08 0.11 1.08 1.04 (0.10) 3.72 (0.86) 0.73 (0.07)
Total from Investment Operations
0.98 0.11 1.08 1.03 (0.17) 3.70 (0.80) 0.85 0.03
Distributions:
Dividends from net investment income
- - - - - - (0.08) (0.10) (0.10)
Distributions from realized capital gains
(1.71) (0.05) (1.71) (0.05) (2.16) (0.45) (0.05) - (0.06)
Distribution from paid-in capital
(0.09) - (0.09) - - - - - -
Distributions in excess of accumulated net gains
- - - - (0.02) - - - -
Total Distributions
(1.08) (0.05) (1.80) (0.05) (2.18) (0.45) (0.13) (0.10) (0.16)
Net Asset Value: End of period
$12.08 $12.90 $12.19 $12.91 $11.93 $14.28 $11.03 $11.96 $11.21
Total Return(1)
7.9% n/a(3) 8.8% 8.7% (1.4%) 33.6% (6.7%) 7.6% 0.3%
Net assets, end of period ($thousands)
231 41 22282 27716 35497 40587 33973 45623 39316
Ratio of operating expenses to average net assets
2.58% n/a(3) 1.74% 1.69% 1.92% 2.09% 2.07% 2.11% 2.31%(2)
Ratio of net investment income (loss) to average net assets
(0.9%) n/a(3) -0- (0.07%) (0.5%) (0.2%) 0.5% 1.0% 3.6%(2)
Portfolio turnover rate(4)
58.9% 99.4% 58.9% 99.4% 107.0% 91.7% 84.6% 38.4% 0.0%
Average commission per share(4)
$.0240 n/a $.0240 n/a n/a n/a n/a n/a n/a
*Effective November 15, 1995, the Fund commenced
offering Class C shares. All capital shares issued and
outstanding as of November 15, 1995 were reclassified
as Class A shares.
(1) Total return does not include the maximum sales
load of 4.75% for class A shares.
Total return for 1990 represents actual, not annualized percentage.
(2) Period from 9/28/90 to 12/31/90. Ratios are annualized.
(3) Ratios not meaningful due to short period of operation of Class C
shares.
(4) Portfolio turnover and average commission per share are calculated
on the basis of the Fund as a whole without distinguishing between
the classes of shares issued. Average commission per share
disclosure is required for fiscal years beginning after 9/1/95.
(5) Period from November 15, 1995 to December 31, 1995.
Fund Expenses
The following table illustrates all expenses and fees
that a shareholder of the Fund will incur and is
intended to assist you in understanding the various
costs and expenses that an investor in the Fund will
bear directly or indirectly. The expenses and fees set
forth in the table are based on the year ended December
31, 1996 for Class A and C shares.
Percentage of
Average Net Assets
Shareholder Transaction Expenses Annual Fund Operating
Expenses
Class Class Class Class
A C A C
Maximum Sales Load
Imposed on Purchases 4.75% None Management Fee 0.675% 0.675%
Sales Load Imposed
on Reinvested
Dividends None None Distribution
Fees (12b-1) 0.160 1.000
Deferred Sales Load None None Other Expenses 0.905 0.905
Redemption Fee None 1.0%(1)
Exchange Fee None None Total Fund
Operating
Expenses 1.74% 2.580%
(1) Only if shares are redeemed within 12 months of purchase. See "How
to Buy Shares."
EXAMPLE:
The following example illustrates the expenses that a shareholder would
pay on a $1,000 investment after one year and over a period of three,
five and ten years utilizing the expenses from the chart above and
assuming a 5% annual rate of return and redemption at the end of each
period.
Class Class
A C
1 year $ 64 $ 26
3 years 100 80
5 years 137 137
10 years 243 291
This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those above.
Fund Organization
The Fund was established as an unincorporated business
trust under the laws of The Commonwealth of
Massachusetts on May 23, 1990.
The Trustees of the Fund have authority to issue an
unlimited number of shares of beneficial interest
without par value. When issued, each share will be
fully paid and non assessable by the Fund. Shareholders
do not have preemptive or conversion rights. All shares
have equal rights with regard to voting, redemption,
dividends, distributions and liquidation. Each share of
the Fund is entitled to one vote. Shares of the Fund do not have
cumulative voting rights. Fractional shares have
proportional voting rights and participate
in any distributions and dividends. The Trustees of the
Fund have the authority in the future to create
additional series of shares representing interests in
separate portfolios of assets.
The Fund is not required to hold annual meetings of
shareholders. However, special meetings of shareholders
may be called for purposes such as electing or removing
Trustees, changing a fundamental investment
restriction, and approving an investment advisory or
sub-advisory agreement or a Rule 12(b)1 distribution
plan. In addition, a special meeting of shareholders of
the Fund will be held if, at any time, less than a
majority of the Trustees then in office have been
elected by shareholders of the Fund.
Shareholders of the Fund have the right to communicate
with other shareholders of the Fund in the manner and
for the purposes described in Section 16(c) of the
Investment Company Act of 1940.
Inquiries concerning the Fund should be made by writing
to the Fund at 2650 Westview Drive, Wyomissing,
Pennsylvania 19610.
Investment Objectives and Portfolio Management Policies
The following is a brief summary description of the
investment objective and policies of the Fund. Certain
instruments and techniques discussed in this summary
are described in greater detail in the Statement of
Additional Information.
The Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective
by investing primarily in equity securities (common and
preferred stock) of issuers organized under the laws
of, or headquartered in, countries outside the United
States ("foreign equities"). Under normal conditions,
the Fund will invest at least 65% of its total assets
in foreign equities. The Fund may invest in equity
securities of issuers in Argentina, Australia, Austria,
Belgium, Brazil, Canada, Chile, Denmark, Finland,
France, Germany, Greece, Hong Kong, India, Indonesia,
Ireland, Italy, Japan, Korea, Luxembourg, Malaysia,
Mexico, the Netherlands, New Zealand, Norway, the
Philippines, Poland, Portugal, Singapore, Spain,
Sweden, Switzerland, Taiwan, Thailand, Turkey and the
United Kingdom. The Fund will not necessarily invest in
all of these countries, and may invest in other
countries in the future if Scottish Widows Investment
Management Ltd. (Scottish Widows) and Penn Square
Management Corporation (PSMC) believe that appropriate
investment opportunities exist in such other countries.
Under normal market conditions, the Fund's assets will
be invested in securities of issuers in at least three
different foreign countries. In selecting investments
for the Fund, emphasis will be placed on companies
whose potential future value, in Scottish Widows' or
PSMC's opinion, is greater than their then-current
market price. There can be no assurance that the Fund
will achieve its investment objective.
The Fund may also invest in fixed income securities
that are rated investment-grade or that PSMC or
Scottish Widows determines are comparable thereto.
These include convertible bonds and other corporate
debt obligations, U.S. and foreign government
securities, and U.S. and foreign money market
securities. Money market securities will generally be
held by the Fund only for temporary or defensive
purposes. It is not expected that the income yield of
the Fund will be significant.
The Fund may purchase foreign securities directly in
foreign markets, or may purchase American Depository
Receipts ("ADRs"), which are dollar-denominated
receipts issued generally by domestic banks and
representing the deposit with the bank of a security of
a foreign issuer. ADRs are publicly traded on exchanges
or over-the-counter in the United States. The Fund also
may purchase European Depository Receipts ("EDRs"),
which are receipts similar to ADRs but issued and
traded in Europe. With respect to certain countries,
investments by the Fund may currently be made only by
acquiring shares of other investment companies which
have local governmental authority to invest in those
countries. The Fund's investments in other investment
companies are subject to certain limitations set forth
in the Statement of Additional Information.
The Fund may hold cash in U.S. dollars to meet
redemption requests and other expenses and cash in
other currencies to meet settlement requirements for
foreign securities. The Fund may engage in currency
exchange transactions in order to protect against
uncertainty in the level of future exchange rates
between a particular foreign currency and the U.S.
dollar or between foreign currencies in which the
Fund's securities are or may be denominated. The Fund
may conduct its currency exchange transactions either
on a "spot" (i.e. cash) basis at the rate then
prevailing in the currency exchange market or through
entering into futures, forward or option contracts to
purchase or sell currencies at a specified rate at a
specified future time. The Fund's dealings in foreign
currency exchange contracts will be limited to hedging
involving either specific transactions or aggregate
portfolio positions.
As matters of fundamental policy, the Fund may borrow
money from banks as a temporary measure for emergency
or extraordinary purposes in an amount not exceeding
20% of the value of its total assets, and may invest no
more than 10% of its net assets in illiquid securities.
When the Fund has outstanding borrowing in excess of
5% of the value of its total assets, the Fund will not
make further investments.
In order to obtain additional return on its
investments, the Fund may lend portfolio securities to
brokers, dealers and other financial institutions in
amounts up to one-third of the value of its total
assets. Loans of portfolio securities will always be
fully collateralized and will be made only to borrowers
considered by Scottish Widows or PSMC to be
credit worthy under guidelines adopted by the Trustees
of the Fund. Lending portfolio securities involves risk
of delay in the recovery of the loaned securities and
in some cases the loss of rights in the collateral
should the borrower fail financially.
Except for the investment restrictions that are
expressly identified as "fundamental," the Fund's
investment objective and policies described in this
Prospectus may be changed by the Fund's Trustees
without a vote of the shareholders.
The Fund may invest in repurchase agreements either for
temporary defensive purposes due to adverse market
conditions or to generate income from its cash
balances. Repurchase agreements maturing more than
seven days in the future are considered illiquid, and
the Fund will invest no more than 10% of its net assets
in such repurchase agreements and other illiquid assets
at any time.
Investment Restrictions: The Fund has adopted certain
fundamental investment restrictions which may not be
changed without approval of the Fund's shareholders.
These restrictions provide, among other things, that
the Fund may not: (i) borrow in excess of 20% of the
market or other fair value of its total assets, or
pledge its assets to an extent greater than one-third
of the market or other fair value of its total assets
(any such borrowing shall be from banks and shall be
undertaken only as a temporary measure for
extraordinary or emergency purposes, and deposits in
connection with the purchase or sale of financial
futures contracts and related options are not deemed to
be a pledge or other encumbrance); (ii) invest more
than 5% of its total assets in the securities of any
one issuer (other than the U.S. Government and its
agencies, authorities or instrumentalities) treating
each foreign government as a single issuer, or purchase
more than 10% of the outstanding voting securities of
any one issuer; (iii) purchase an illiquid security, if
as a result of such purchase more than 10% of the
Fund's net assets would be invested in such securities;
and (iv) invest in the aggregate more than 5% of its
total assets in the securities of any issuers which
have (with predecessors) a record of less than three
years of continuous operation.
Portfolio Transactions and Brokerage: Decisions to buy
and sell securities for the Fund are made by PSMC
pursuant to recommendations by Scottish Widows.
Scottish Widows may select broker/dealers that provide
it with research services which may cause the Fund to
pay such broker/dealers commissions that exceed those
other broker/dealers may have charged, if in its view
the commissions are reasonable in relation to the value
of the brokerage and/or research services.
The Fund will not normally engage in the trading of
securities for the purpose of realizing short-term
profits, but will adjust its portfolio as considered
advisable in view of prevailing or anticipated market
conditions. While it is not possible to predict future
market conditions or portfolio turnover rates with
certainty, Scottish Widows and PSMC anticipate that,
under normal market conditions, the annual portfolio
turnover rate for the Fund will not exceed 100%.
Management Of The Fund
The Fund's affairs are subject to the overall
supervision of its Board of Trustees. The Fund's
advisor and administrator is Penn Square Management
Corporation (PSMC). PSMC has entered into a
sub-advisory agreement with Scottish Widows Investment
Management Limited ("Scottish Widows").
Scottish Widows provides investment advice regarding
the Fund's portfolio. Scottish Widows, located at 15
Dalkeith Road, Edinburgh, Scotland, United Kingdom EH16
5BU, is a wholly owned subsidiary of Scottish Widows'
Fund and Life Assurance Society ("Scottish Widows
Group"), a mutual company chartered in 1815 and later
formalized by a Private Act of the British Parliament.
Scottish Widows Group is completely independent of all
other organizations and has assets under management of
over $34 billion as of December 31, 1996.
Scottish Widows Group has been managing equity
investments since the turn of the century. Initially,
these investments were principally in the United
Kingdom, but have included substantial equity positions
in the United States and in British commonwealth
countries since the 1930s, and substantial equity
positions in markets throughout the world since the
early 1950s.
Scottish Widows' team of 45 investment professionals is
responsible for all the investment activities of
Scottish Widows Group. Fundamental research and direct
contact with portfolio companies are important elements
of Scottish Widows' investment approach. Specialist
teams of analysts monitor and assess markets and
individual stocks on a global basis. In a normal
12-month period, Scottish Widows' portfolio managers
and analysts visit hundreds of companies in over 35
countries around the world.
Scottish Widows currently manages twelve unit trusts
(mutual funds for investors in the United Kingdom).
These include, among others, funds specializing in
European investments, Far East and Pacific investments,
North American investments, equity income investments
and international growth stocks. Scottish Widows is
also one of the largest pension fund managers in the
United Kingdom, managing investments for over 1,200
pension plans covering more than one million people.
The Fund is the first mutual fund advised by Scottish
Widows to be offered to U.S. investors.
The principal officers of Scottish Widows responsible
for the Fund's investment program are:
Allan McKenzie Bcom CA
An Investment Director of Scottish Widows, Mr. McKenzie
qualified as a Chartered Accountant after graduating
from Edinburgh University. He joined Scottish Group in
1972 and, after initial experience in United Kingdom
equities, he specialized in European equity markets
before taking charge of the Far Eastern investments
team in 1979. He is also a Director of the Thai
International Fund.
David C. Ritchie, Bsc FFA
The Executive Chairman and Chief Investment Officer of
Scottish Widows Investment Management, Mr. Ritchie
joined the investment team in 1968 and has headed the
investment company since 1978. He qualified as a Fellow
of the Faculty of Actuaries in 1970 following
graduation from Edinburgh University with first class
honors in Mathematics. He is the non-executive Chairman
of Baille Gifford Shin Nippon, a director of the
Fleming Japanese Investment Trust, and a member of the
investment committee of the Carnegie Trust for the
universities of Scotland.
Kenneth A. Anderson, BA MPhil
An Investment Director and Deputy Head of the European
desk, Mr. Anderson joined Scottish Widows in 1988. He
was initially a U.K. equity analyst before moving to
manage the South East Asian portfolios until March
1991. Thereafter he moved to the European team becoming
Deputy Head in 1995. He manages the European equity
portion of several unit trusts and various EAFE and
global separate accounts. Mr. Anderson studied
economics at Strathelyde and Cambridge Universities.
ADVISOR
Scottish Widows is registered as an investment advisor
with the U.S. Securities and Exchange Commission.
Scottish Widows furnishes investment advice with
respect to the Fund's assets pursuant to a sub-advisory
agreement with PSMC. PSMC has ultimate responsibility
for decisions to buy or sell assets for the Fund's
portfolio. Scottish Widows places all orders for the
purchase and sale of Fund portfolio assets, pursuant to
directions from PSMC.
For furnishing investment advice and related services
for the Fund, Scottish Widows receives a fee at the
annual rate of .50% of the Fund's average daily net
assets (subject to a minimum fee of $7,500 per calendar
quarter). This fee is paid out of the advisory fee that
the Fund pays to PSMC at the annual rate of .675% of
Fund average daily net assets. In addition to the
advisory fee, the Fund pays PSMC a fee, at the annual
rate of .175% of Fund average daily net assets, for
providing the Fund with office space for managing its
affairs, with the services of required executive
personnel and with certain administrative and clerical
services and facilities. Therefore, PSMC receives total
fees for advisory and administrative services at the
annual rate of .85% of Fund average daily assets.
DISTRIBUTOR
Penn Square Management Corporation is the Distributor
of the Fund. The Fund has entered into a Distribution
Agreement and has adopted a distribution plan pursuant
to Rule 12(b)1 under the Investment Company Act of
1940.
Class A Shares: Pursuant to a Servicing Agreement with
the Distributor, a Service Organization may receive, on
an annual basis, up to .50% of the average daily net
asset value of Fund shares owned by shareholders with
whom the Service Organization has a servicing
relationship. The Services provided by a Service
Organization pursuant to a Servicing Agreement may
include distribution or shareholder administrative
services, including establishing and maintaining
shareholder accounts, sending confirmations of
transactions, forwarding financial reports and other
communications to shareholders, and responding to
shareholder inquiries regarding the Fund.
Class C Shares: The Fund has adopted a Distribution
Plan for Class C shares to compensate the Distributor
for its services and costs in distributing Class C
shares. Under the Plan, the Fund pays the Distributor
an annual 12(b)1 Distribution Fee of 0.75% per year on
Class C shares. The Distributor also receives a Service
Fee of 0.25% per year. Both fees are computed on the
average annual net assets of Class C shares, determined
as of the close of each regular business day. The
Distribution Fee allows investors to buy Class C shares
without a front end sales charge while permitting the
Distributor to compensate dealers who sell Class C
shares. The Distribution Fee and Service Fee increase
Class C expenses by 1.00% of average net assets per
year.
The Distributor pays sales commissions of 1.00% of the
purchase price to dealers from its own resources at the
time of the sale. The Distributor retains the
Distribution Fee during the first year shares are
outstanding to recoup the sales commission it pays, the
advances of service fee payments it makes, and its
financing costs. The Distributor plans to pay the
Distribution Fee and a portion of the Service Fee as an
ongoing commission to the dealer on Class C shares that
have been outstanding for a year or more.
The Distributor receives no other compensation for its
services as distributor, except that the sales charge
(see "How to Buy Shares") will be paid to the
Distributor. The Distributor may, in turn, pay such
sales charge to broker/dealers as a commission for
generating sales of Fund shares.
TRANSFER AGENT
Penn Square Management Corporation acts as Transfer
Agent for the Fund. For the services it provides in
these capacities, the Corporation is reimbursed only
for the actual costs incurred in providing such
services. The Corporation will continue to provide
services as Transfer Agent at cost or below cost.
Performance Information
During the period from September 28, 1990, the
inception of the Fund, to December 31, 1996, $10,000
invested in Scottish Widows International Fund (class A) would
have grown to $14,940, if all distributions were
reinvested. Shown below are the cumulative total
returns and average annual total returns for various
periods ended December 31, 1996. These figures assume
the reinvestment of all income dividends and capital
gain distributions in additional shares of the Fund.
These figures are not necessarily indicative of future
results. The performance of the Fund is a function of
portfolio management in selecting the type and quality
of portfolio securities and is also affected by
operating expenses. Performance information shown below
may not provide a basis for comparison with other
investments using different dividend reinvestment
assumptions or time periods. Lipper figures are not
adjusted for sales charges.
Cumulative Total Returns:
Periods Ended December 31, 1996 One Year Five Years Inception
Class A - without sales charge 8.8% 45.3% 56.9%(1)
Morgan Stanley EAFE Index 4.4% 36.4% n/a
Class C 7.9% n/a 8.9%(2)
Class A - with 4.75% sales charge 3.6% 38.4% 49.4%(1)
Average Annual Total Returns:
Periods Ended December 31, 1996 One Year Five Years Inception
Class A - without sales charge 8.8% 7.8% 7.5%(1)
Morgan Stanley EAFE Index 4.4% 6.4% n/a
Class C 7.9% n/a 7.9%(2)
Class A - with 4.75% sales charge 3.6% 6.7% 6.6%
(1) Inception: 9/28/90
(2) Inception: 11/15/95
Risk Factors
Investing in the securities of foreign companies
involves special risks and considerations not typically
associated with investing in U.S. companies. These
include differences in accounting, auditing and
financial reporting standards, generally higher
commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation,
adverse changes in investment or exchange control
regulations, political instability which could affect
U.S. investments in foreign countries, and potential
restrictions on the flow of international capital.
Additionally, dividends payable on foreign securities
may be subject to foreign withholding and other taxes
withheld prior to distribution. Foreign securities
often trade with less frequency and volume than
domestic securities and therefore may exhibit greater
price volatility, and changes in foreign exchange rates
will affect the value of securities which are
denominated or quoted in currencies other than the U.S.
dollar. Many of the foreign securities held by the Fund
will not be registered with, nor the issuers thereof be
subject to the reporting requirements of, the SEC.
Accordingly, there may be less publicly available
information about the securities and about the foreign
company issuing them than is available about a domestic
company. 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 payment
positions. The Fund may invest in securities of foreign
governments (or agencies or subdivisions thereof), and
many of the foregoing considerations apply to such
investments as well.
The Fund will invest primarily in securities
denominated or quoted in currencies other than the U.S.
dollar. The Fund may also temporarily hold funds in
bank deposits or money market investments denominated
in foreign currencies. For these reasons, the Fund may
be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rate
between such currencies and the dollar. Changes in
foreign currency exchange rates will affect the value
of the Fund's assets, from the perspective of U.S.
investors. Changes in foreign currency exchange rates
may also affect the value of dividends and interest
earned, gains and losses realized on the sale of
securities, and net investment income and gains, if
any, to be distributed to shareholders by the Fund. The
rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and
demand in the foreign exchange markets. These forces
are affected by the international balance of payments
and other economic and financial conditions, government
intervention, speculation and other factors.
Dividends, Capital Gains
Distributions and Taxes
Dividends from net investment income and capital gains
distributions, if available, will be paid annually. If
net short-term capital gains are realized they will
also be distributed and are currently treated as
ordinary income for shareholder tax purposes. Income
dividends and capital gains distributions may be
accepted in cash or additional shares through the
distribution reinvestment plan.
It is the Fund's policy to meet the requirements of
Sub-Chapter M of the Internal Revenue Code, which
exempts the fund from federal income tax. Shareholders,
however, must report dividends and capital gains
distributions as taxable income. Shareholders are
informed of the federal tax status of dividend and
capital gains distributions on IRS Form 1099-DIV
shortly after the end of each calendar year.
The Fund expects to qualify and, if the Fund determines
it to be in the best interest of shareholders, to make
the election provided for in IRC Section 853, to treat
certain foreign taxes paid by the Fund as paid by
shareholders. Shareholders may be able to claim a
credit or deduction on their income tax returns for
their pro rata share of qualified taxes paid by the
Fund to foreign countries.
You should consult your tax advisor on state and local
taxes as well as on the tax consequences of gains or
losses from the redemption of Fund shares. The Fund may
be required to withhold and merit to the U.S. Treasury
31% of any redemption proceeds and of any dividend or
distribution on any account where a payee fails to
provide and/or certify a taxpayer identification number
or provides the wrong number.
Shareholder Inquiries
Shareholders should contact the Shareholder Services
Department for further information and forms for the
Retirement Plans, Systematic Purchase Plan, Systematic
Withdrawal Plan, Systematic Exchange Plan, or any
additional information concerning the Fund. Inquiries
about Scottish Widows International Fund, Penn Square
Mutual Fund and The William Penn Interest Income Fund,
"Pennsylvania's Hometown Mutual Funds," may be made
toll free by calling the Fund at (800) 523-8440 and
locally at (610) 670-1031. Shareholders may address
written inquiries to P.O. Box 1419, Reading, PA, 19603.
How to Buy Shares
Minimum Investments: The minimum initial investment is
$500 and the minimum repeat purchase is $100. A minimum
initial investment of $250 will be accepted for any
retirement plan. For certain accounts introduced by
professional investment advisors these minimums may be
waived.
Shares may be purchased by the following methods:
By Investment Dealer: Through any broker/dealer, bank
or savings bank which is registered in the state where
the purchase is made and which has a sales agreement
with the William Penn Funds.
By Mail: Make your check payable to the Fund and mail
along with a new account application or reorder form to
the address on the cover.
By Wire: Purchases by wire will be accepted only for
additions to existing accounts. Instruct your bank to
wire funds to:
CoreStates Bank
Philadelphia, PA
ABA #031000011
Credit:
William Penn Funds
a/c #0036438916
Scottish Widows International Fund
(your fund acct. no.)
By Telephone: Payments for telephone orders must be
received within three business days of the order. If
payment is not timely received, the Fund may cancel the
order and redeem shares in the account to compensate
the Fund for any decline in value of the canceled
purchase.
In Person: By visiting our office at 2650 Westview
Drive, Wyomissing, PA.
All purchase orders are executed based on the net asset
value calculated at the close of business on the day
such purchase orders are received. Purchase orders
received after the close of the New York Stock Exchange
will be executed based on the net asset value
calculated on the next business day. The Trustees
reserve the right to reject all orders that are
considered to be not in the best interest of the Fund.
Share certificates will not be issued unless an
investor specifically requests them.
Net Asset Value: The net asset value per share is
calculated by adding the current value of all the
securities in the Fund's portfolio and all other
assets, subtracting the liabilities, and dividing the
remainder by the number of the Fund's outstanding
shares. Securities listed on the New York Stock
Exchange or any other exchange approved by the Trustees
are valued on the basis of the closing sale that day,
or if there is no sale, on the basis of the median of
the closing bid and ask price of that day. All other
securities shall be valued at the median of the closing
bid and ask price of that day. If there is no sale or
closing bid and ask price on the day of calculation, a
portfolio security will be valued at the preceding
business day's available sale or median of the bid and
ask prices. When market quotations are not readily
available, such securities are valued as determined in
good faith by the Board of Trustees. See the Statement
of Additional Information for an illustration of net
asset value determination.
Class A Shares: The offering price for a share of
beneficial interest of the Fund is the net asset value
per share plus a sales charge as shown in the following
illustration:
Sales Charge
Sales Charge as a % of
Amount of as a % of Net Asset Dealers'
Purchase Offering Price Value Concession
Less than
$50,000 4,75% 5.00% 4.00%
$50,000 to
less than
$100,000 3.50% 3.60% 3.00%
$100,000 to
less than
$250,000 2.75% 2.80% 2.40%
$250,000 to
less than
$500,000 2.25% 2.30% 2.00%
$500,000 to
less than
$1,000,000 1.25% 1.30% 1.00%
$1,000,000
and over -0-% -0-% -0-%
There is no sales charge on purchases exceeding the
maximum amount stated above, on purchases by certain
employee benefit plans, on purchases made through a
recognized fee based program offered by some
broker/dealers, on purchases by policyholders of
selected insurance companies, on purchases by certain
investment advisors on behalf of their discretionary
accounts, or on purchases by certain other persons as
described in the Statement of Additional Information.
In addition, any person who was invested in Penn Square
Mutual Fund as of November 30, 1988 will not be charged
a sales charge for purchases made in any portfolio of
the William Penn family of funds providing the account
has remained open. Retirement accounts opened prior to
July 19, 1990 will not be subject to a sales charge.
The Fund receives all monies paid equal to the net
asset value per share, and any sales charge will be
allocated to the Fund's distributor. The distributor
may, in turn, pay such amounts to broker/dealers as
commission for sales of Fund shares. The distributor
may also, at its expense, provide additional
promotional incentives to broker/dealers who sell
shares of the Fund. The Fund reserves the right to
modify the sales charge at its discretion. From time to
time the Fund may sponsor sales contests among
registered representatives who sell shares of the Fund.
Class C Shares: Class C shares are sold at net asset
value without an initial sales charge. However, if
Class C shares are redeemed within 12 months of their
purchase, a contingent deferred sales charge of 1.0% is
deducted from redemption proceeds. The contingent
deferred sales charge is paid to the Distributor to
reimburse its expenses in providing distribution
related services to the Fund in connection with the
sale of Class C shares. The contingent deferred sales
charge is assessed on the lesser of the net asset value
of the shares at the time of redemption or purchase,
and does not apply to shares purchased through the
reinvestment of dividends or capital gains.
Waiver of Class C Contingent Deferred Sales Charge: The
Class C contingent deferred sales charge will be waived
if the shareholder requests a redemption for any of the
following reasons (1) distributions to participants or
beneficiaries from Retirement Plans, if the
distributions are made (a) under a Systematic
Withdrawal Plan, or (b) following death or disability
(as defined in the Internal Revenue Code) of the
participant or beneficiary; (2) redemptions from
accounts other than Retirement Plans following death or
disability of the shareholder accompanied by evidence
of a determination of disability by the Social Security
Administration, and (3) returns of excess contributions
to Retirement Plans.
Class Share Distinction: Once you decide that the Fund
is an appropriate investment for you, deciding which
class of shares is best suited to your needs depends on
a number of factors which you should discuss with your
broker or financial advisor. Because a fund's operating
costs and the effect of the different types of sales
charges and 12(b)1 distribution fees that apply to a
class of shares will affect your investment results
over time, how much you plan to invest and how long you
plan to hold your investment become very important
considerations. If your investment goals and objectives
change over time and you plan to purchase additional
shares, you should reevaluate those factors to see if
you should consider another class of shares. Your
investment advisor will help you determine which class
of shares is best for you.
Generally, an investor who expects to invest less than
$50,000 in any of the William Penn Family of Funds and
who expects to make substantial redemptions after one
year but within six years of investment should consider
purchasing Class C Shares. Class C Shares have no
initial sales charge, and after one year, have no
redemption charge. Depending on your investment time
horizon, you may also prefer to balance purchases of A
Share investments with C Share investments in order to
spread the cost of investing over time.
If you plan to invest more than $50,000 and your
investment horizon is six years or more, Class C shares
might not be as advantageous as Class A shares. This is
because the annual asset based Distribution Fee on
Class C shares will have a greater impact on your
account over the longer term than the reduced front end
sales charge available for larger purchases of Class A
shares. For example, Class A shares might be more
advantageous than Class C shares for investments of
more than $50,000 expected to be held for 5 years or
more, for investments over $250,000 expected to be held
3 years or more, or investments over $500,000 for which
an investor's time horizon is expected to be longer
than 2 or more years.
Account Registration: Guidelines are printed on the
Application form contained in this Prospectus. In the
case of joint registrations, joint tenancy with rights
of survivorship (JTWROS) is assumed, unless otherwise
indicated.
Right of Accumulation: Reduced sales charges apply to
any purchase of shares in the William Penn family of
funds except the William Penn Money Market Portfolio
(which does not impose a sales charge), where the
aggregate investment, including such purchase, is
$50,000 or more. If, for example, you previously
purchased and still hold shares of any eligible
portfolio or combination thereof, with an aggregate
current market value of $40,000 and subsequently
purchase shares of an eligible portfolio having a
current value of $20,000, the charge applicable to the
subsequent purchase would be reduced to 3.50% of the
offering price. All present holdings of eligible
portfolios may be combined to determine the current
offering price of the aggregate investment in
ascertaining the sales charge applicable to each
subsequent purchase.
To qualify for reduced sales charges, at the time of a
purchase you or your dealer/advisor must notify Penn
Square Management Corporation. This may be accomplished
by checking the appropriate box on a New Account
Application. The reduced charge is subject to
confirmation of your holdings through a check of
appropriate records.
Redemption Proceeds from other Mutual Funds and
Commissioned Investments: No sales charge will apply to
any purchase of shares in the Fund if the amount
invested represents redemption proceeds from another
mutual fund or commissioned investment and the
shareholder previously paid a sales charge for such
other mutual fund or commissioned investment. In order
to qualify for this privilege, (i) Scottish Widows
International Fund shares must be purchased within
thirty days after the redemption from the other mutual
fund or commissioned investment, and (ii) documentation
of such redemption satisfactory to Penn Square
Management Corporation shall be required at the time of
purchase.
Letter of Intent: A prospective shareholder may qualify
for a reduced sales load immediately by signing the
non-binding Letter of Intent to invest in one or more
of the William Penn family of funds, except Money
Market, over a thirteen month period an amount that
would qualify for a reduced sales charge. The
shareholder or his dealer/advisor must notify Penn
Square Management when any investment is being made
pursuant to the Letter of Intent. Acceptable forms of
Letters of Intent are available from the Shareholder
Services Department or on a New Account Application. A
Letter of Intent may be backdated 90 days to the date
of purchase.
How to Transfer Shares
Shares of the Fund, where a certificate has been
issued, may be transferred by endorsing the certificate
on the reverse side exactly as the registered name
appears on the face of the certificate. Signatures must
be guaranteed by a commercial bank, savings bank, or
broker/dealer.
Shares of the Fund held in book or statement form may
be transferred by sending a letter to the Fund
requesting transfer. This letter must be signed by the
registered owner(s) and the signature(s) must be
guaranteed.
How to Redeem Shares
Shareholders wishing to redeem certificated shares must
send their redemption request along with the share
certificates directly to the Fund. If shares are held
in book or statement form, a signature guaranteed
letter requesting redemption must be sent directly to
the Fund. The Fund will redeem shares as of the date of
receipt providing the certificates and/or letter
requesting redemption are in proper delivery form.
Alternatively, a telephone authorization form must be
completed in order for uncertificated shares to be
redeemed by telephone. Shares presented for redemption,
either in certificate, letter form or by telephone,
prior to the close of the New York Stock Exchange on
any business day are redeemed at the net asset value
calculated at the close of the exchange that day,
except that some Class C shares may be subject to a
1.0% contingent deferred sales charge. Shares presented
for redemption either in certificate, letter form or by
telephone after the close of the New York Stock
Exchange on any business day are redeemed at the net
asset value calculated at the close of the Exchange on
the next business day, except that some Class C shares
may be subject to a 1.0% contingent deferred sales
charge. Checks for redemption proceeds will be mailed
within three business days. However, redemption checks
will not be mailed until all checks in payment for the
shares redeemed have been cleared.
Letters requesting redemption of book or statement
shares must be properly signed by the registered
owner(s) with signature(s) guaranteed. A certificate
for shares presented for redemption must be endorsed by
the registered owner, with signature guaranteed only if
the redemption proceeds are to be paid to other than
the registered owner. Requests for IRA Transfer,
Qualified Retirement Plan Transfer, or Direct Rollover
require signature guarantee only if the amount involved
exceeds $10,000.00.
A signature guarantee is a widely accepted way to
protect you and the Fund by verifying the signature on
your request. A signature guarantee may not be provided
by a notary public. The following institutions should
be able to provide you with a signature guarantee: a
national or state bank, a federal savings and loan
association, a trust company or a member firm of a
national stock exchange.
Shareholders who liquidate accounts may repurchase
shares in the fund at Net Asset Value within 60 days of
redemption. The shareholder (or agent) must notify the
Transfer Agent of his or her intention to take
advantage of the 60 day repurchase option.
The Fund imposes no charges for redemptions of Class A
shares. For Class C shares, redemptions within the
first year of purchase will bear a redemption charge of
1.0% of net assets. See "Class C shares" in "How to Buy
Shares" section. However redemptions may be made
through a broker/dealer and that broker/dealer may
charge a transaction fee.
Shareholder Services
Distribution Reinvestment: Dividends and/or capital
gains distributed by the Fund may be automatically
reinvested in additional shares of Scottish Widows
International Fund, or in shares of any portfolio of
The William Penn Interest Income Fund or Penn Square
Mutual Fund (see "Flexivest" below). The cost of shares
purchased is calculated on the date of distribution.
There is no sales charge for the purchase of shares
through reinvestment.
Any changes in automatic reinvestment plans must be
made in writing at least 10 days before any
distribution date. If no distribution election is made,
the Fund will assume automatic reinvestment. The
automatic reinvestment plans are more fully described
in the Statement of Additional Information.
If you elect to receive dividends and distributions in
cash and the U.S. Postal Service cannot deliver the
checks, or if the checks remain uncashed for twelve
months, the checks will be reinvested into your account
at the then current net asset value.
Systematic Purchase Plan: Shareholders may establish a
Systematic Purchase Plan (SPP) by checking the
appropriate box on a New Account Application or by
calling Shareholder Services for an appropriate form.
This Plan authorizes The William Penn Funds to debit a
Shareholder's designated checking or savings account at
a bank or savings bank on a regular basis in order to
purchase additional Fund shares.
As Custodian of the Fund, CoreStates Bank acts as agent
for these transactions, and funds are sent directly
from the Shareholder's financial institution to
CoreStates Bank for purchase of fund shares. Purchases
are made monthly or quarterly, on the 20th day of the
month or quarter, or the following business day if the
20th is not a business day. The SPP is more fully
described in the Statement of Additional Information.
Systematic Withdrawal Plan: Shareholders may establish
a Systematic Withdrawal Plan (SWP) by checking the
appropriate box on a New Account Application or by
calling Shareholder Services for the appropriate form.
A minimum account balance of $10,000 is required to
establish a SWP.
With a SWP, a sufficient number of Fund shares are
redeemed each month or quarter from a Shareholder's
account to provide the Shareholder with a regular
payment. Shares are redeemed on the 10th day of each
month or quarter (on the 15th day for IRA and Keogh
Plans), or the next business day, in order to provide
for the withdrawal payment, and share redemptions are
calculated to the third decimal.
Although income and capital gains distributions will be
reinvested, continued withdrawals in excess of current
income may eventually exhaust principal, particularly
in a period of declining market prices. The Fund
reserves the right to terminate the Plan when
withdrawal payments are indefinitely suspended at the
request of the Plan participant.
Systematic Exchange Plan: Shareholders may establish a
Systematic Exchange Plan (SEP) by checking the
appropriate block on the New Account Application or by
calling Shareholder Services for the appropriate form.
This plan authorizes The William Penn Funds to exchange
a fixed dollar amount from one portfolio to another on
the 5th day of each month, or the next business day if
the 5th is not a business day. The Shareholder should
understand the tax consequences of such an exchange.
The Plan may be terminated on written instruction at
least 10 days prior to the next scheduled exchange.
Retirement Plans: The Fund offers IRA Plans: including
Simplified Employee Pension Plans (SEP-IRA) and Salary
Reduction Plans (SAR-SEP); Profit Sharing; and Money
Purchase Plans. There is a $250 minimum on initial
purchases for all retirement plans.
Flexivest: Shareholders may elect to have dividends
and/or capital gains automatically invested into
another William Penn portfolio by indicating the
receiving portfolio on a New Account Application. For
existing accounts, shareholders may request the form by
calling Shareholder Services. The Plan may be
terminated on written instruction at least 10 days
prior to the next dividend or capital gain distribution
payable date.
Exchange Privilege: As a shareholder of the William
Penn family of funds, you may exchange shares of
Scottish Widows International Fund for shares of Penn
Square Mutual Fund or any of the Portfolios of The
William Penn Interest Income Fund including the Money
Market Income Portfolio, Pennsylvania Tax-Free Income
Portfolio, Quality Income Portfolio, U.S. Government
Securities Income Portfolio and New York Tax-Free
Income Portfolio, without incurring an exchange fee. A
sales charge will not be incurred if the amount
exchanged had previously incurred a sales charge.
Exchanges involve the redemption of shares, and a tax
liability may be incurred. For more complete
information, including a telephone authorization form
and the Prospectus of The William Penn Interest Income
Fund or Penn Square Mutual Fund, call our Shareholder
Services Department.
For purposes of exchanging shares within the William
Penn Funds, all shares issued prior November 15, 1995
are designated Class A shares to distinguish them from
the new Class C shares. Shares of a particular class
may be exchanged only for shares of the same class in
the other William Penn family of funds. For example,
you may exchange Class C shares of a Fund only for
Class C shares of another Fund and Class A shares for
other Class A shares.
The exchange privilege is only available in states
where the exchange may legally be made.
Automated Clearing House (ACH) Transfers: Shareholders
may have their dividend, capital gain or Systematic
Withdrawal Plan checks transferred directly into their
checking or saving accounts by ACH. There is no charge
for this service. Please call Shareholder Services if
you wish to enroll in this program. This service may
take one month to activate and a check will be received
in the interim.
General Information
Reports: Shareholders receive semi-annual and annual
financial statements and first and third quarter
updates. Annual financial statements are audited by
Ernst & Young LLP, independent auditors, whose
selection is ratified by shareholders.
Litigation: The Fund is not involved in any litigation.
Closed Holidays: Currently, the days on which the New
York Stock Exchange and/or the Fund are closed for
business are: Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and New Year's Day.
Trustees
James E. Jordan, Chairman
Paul J. Lawler, Vice-Chairman
Lee D. Arning
Richard C. Farr
Gail M. Harrity
Emmett M. Murphy, CFA
Geoffrey Nunes, Esq.
Linda G. Sprague, Ph.D.
Officers
James E. Jordan, President
Dennis J. Westley, CPA, V.P. & Treasurer
Sandra J. Houck, Secretary
Investment Advisor, Distributor,
Transfer Agent
Penn Square Management Corp.
2650 Westview Drive
Wyomissing, PA 19610
Independent Auditors
Ernst & Young LLP
Reading, PA
Counsel
Stevens & Lee
Reading, PA
Custodian
State Street Bank and Trust Co.
THE WILLIAM PENN FUNDS
SCOTTISH WIDOWS INTERNATIONAL FUND
2650 Westview Drive
Wyomissing, Pennsylvania 19610
800-523-8440
Statement of Additional Information
April 30, 1997
This Statement of Additional Information is not a
prospectus, but expands upon and supplements the
information contained in the Prospectus of Scottish
Widows International Fund (the "Fund"), dated April 30,
1997, as supplemented from time to time, and should be
read in conjunction with it. The Fund's Prospectus may
be obtained from the Fund by writing to the address or
calling the telephone number shown above.
Table of Contents
Page
Investment Policies and Techniques 2
Investment Restrictions 7
Trustees of the Fund 9
Investment Advisor and Sub-Advisor 10
Transfer Agent 12
Redemption of Shares 12
Portfolio Transactions 12
Net Asset Value 13
Taxation 14
Performance Information 16
Description of the Fund 18
Distribution Plan 19
Additional Information 19
No dealer, salesman or other person has been authorized
to give any information or to make any representations
other than those contained in this Statement of
Additional Information or in the Prospectus, and, if
given or made, such other information or
representations must not be relied upon as having been
authorized by the fund. This Statement of Additional
Information does not constitute an offering in any
jurisdiction in which such offering may not be lawfully
made.
SHAREHOLDER SERVICES:
610-670-1031
800-523-8440
P.O. Box 1419
Reading, Pennsylvania 19603
INVESTMENT POLICIES AND TECHNIQUES
The Prospectus describes the investment objective of
the fund and summarizes certain investment policies and
techniques it will employ. The following discussion
supplements the description of the Fund's involvement
policies and techniques in the Prospectus.
Repurchase Agreements
A repurchase agreement is an agreement under which the
Fund acquires a money market instrument (generally a
security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer,
subject to resale to the seller at an agreed upon price
and date (normally the next business day). The resale
price reflects an agreed upon interest rate effective
for the period the instrument is held by the Fund and
is unrelated to the interest rate on the underlying
instrument. In these transactions, the instruments
acquired by the Fund (including accrued interest) must
have a total value in excess of the value of the
repurchase agreement and will be held by the Fund's
custodian bank until repurchased. The Fund's advisor,
Penn Square Management Corporation ("PSMC"), or
subadvisor, Scottish Widows Investment Management
Limited ("Scottish Widows"), will use standards set by
the Fund's Trustees in reviewing the credit worthiness
of parties to repurchase agreements with the Fund. In
addition, no more than an aggregate of 10% of the
Fund's net assets, at the time of investment, will be
invested in illiquid investments, including repurchase
agreements having maturities longer than seven days.
The use of repurchase agreements by the Fund involves
certain risks. For example, if the seller under a
repurchase agreement defaults on its obligation to
repurchase the underlying instrument at a time when the
value of the instrument has declined, the Fund may
incur a loss upon its disposition. If the seller
becomes insolvent and subject to liquidation or
reorganization under bankruptcy or other laws, a
bankruptcy court may determine that the underlying
instrument is collateral for a loan by the Fund and
therefore is subject to sale by the trustee in
bankruptcy. Finally, the Fund's right to liquidate its
collateral in the event of a default could involve
certain costs, losses or delays and, to the extent that
proceeds from any sale upon default of the obligation
to repurchase are less than the repurchase price, the
Fund could suffer a loss.
Forward Commitments
The Fund may enter into forward commitments to purchase
securities. An amount of cash or high-grade debt
obligations equal to the Fund's commitment will be
deposited in a segregated account at the Fund's
custodian bank to secure the Fund's obligation (or the
Fund will enter into offsetting contracts for the
forward sale of other securities it owns). Although the
fund will generally enter into forward commitments to
purchase securities with the intention of actually
acquiring the securities for its portfolio, the Fund
may dispose of a security prior to settlement if
Scottish Widows and PSMC deem it advisable to do so.
The Fund may realize short-term gains or losses in
connection with such sales.
Lending Portfolio Securities
The Fund may lend portfolio securities to
broker-dealers and other financial institutions in an
amount up to one-third of the value of its total
assets, provided that such loans are callable at any
time by the Fund and are at all times secured by
collateral held by the Fund at least equal in market
value to the market value, determined daily, of the
loaned securities. The Fund will continue to receive
any income on the loaned securities, and/or will earn
interest on cash collateral (which will be invested in
short-term debt obligations) or a securities lending
fee in the case of collateral in the form of U.S.
Government Securities. A loan may be terminated at any
time by either the Fund or the borrower. Upon
termination of a loan, the borrower will be required to
return the securities to the Fund, and any gain or loss
in the market price during the period of the loan will
accrue to the Fund. If the borrower fails to maintain
the requisite amount of collateral, the loan will
automatically terminate, and the Fund may use the
collateral to replace the loaned securities while
holding the borrower liable for any excess of the
replacement cost over the amount of the collateral.
When voting or consent rights which accompany loaned
securities pass to the borrower, the Fund will follow
the policy of calling the loan, in whole or in part as
may be appropriate, to permit the exercise of such
rights if the matters involved would have a material
affect on the Fund's investment in the securities which
are the subject of the loan. The Fund may pay
reasonable finders, administrative and custody fees in
connection with loans of portfolio securities.
As with any extension of credit, there are risks of
delay in recovery of the loaned securities and in some
cases loss of rights in the collateral should the
borrower of the securities fail financially. However,
loans of portfolio securities will only be made to
firms considered by Scottish Widows or PSMC to be
creditworthy under guidelines adopted by the Fund's
Trustees.
Portfolio Turnover
Securities will generally not be purchased for
short-term trading profits; however, the rate of
portfolio turnover is not a limiting factor when
Scottish Widows and PSMC deem changes appropriate.
A high rate of portfolio turnover involves a
correspondingly greater amount of brokerage commissions
and other costs which must be borne directly by the
Fund and thus indirectly by its shareholders. It may
also result in the realization of larger amounts of
short-term capital gains which are taxable to
shareholders as ordinary income.
Foreign Currency Transactions
The Fund may engage in currency exchange transactions
to protect against uncertainty in the level of future
currency exchange rates.
The Fund may engage in both "transaction hedging" and
"position hedging." When it engages in transaction
hedging, the Fund enters into currency transactions
with respect to specific receivables or payables,
generally arising in connection with the purchase or
sale of portfolio securities. The Fund will engage in
transaction hedging when it desires to "lock in" the
value in one currency of a security it has agreed to
purchase or sell for a specific price in another
currency, or the equivalent in one currency of a
dividend or interest payment in another currency. By
transaction hedging the Fund will attempt to protect
itself against a possible loss resulting from an
adverse change in the relationship between the two
currencies during the period between the date on which
the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date
on which payment is to be made or received.
The Fund may purchase or sell a currency on a spot (or
cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio
securities in that currency. The Fund may also enter
into contracts to purchase or sell currencies at a
future date ("forward contracts") and purchase and sell
currency futures contracts.
For transaction hedging purposes the Fund may also
purchase exchange-listed and over-the-counter call and
put options on currencies. A put option on currency
gives the Fund the right to sell a currency at an
exercise price until the expiration of the option. A
call option on currency gives the Fund the right to
purchase a currency at the exercise price until the
expiration of the option.
When it engages in position hedging, the Fund enters
into currency exchange transactions to protect against
a decline in the values of the currencies in which its
portfolio securities are traded (or an increase in the
value of currencies, in cases of securities that the
Fund does not currently hold but expects to purchase).
Also for position hedging purposes, the Fund may
purchase put or call options on currencies and buy or
sell currency on a spot basis.
The precise matching of the amounts of currency
exchange transactions and the value of the portfolio
securities involved in position hedging will not
generally be possible since the future value of such
securities will change as a consequence of market
movements in the value of those securities after the
dates the currency exchange transactions are entered
into.
Transaction and position hedging do not eliminate
fluctuations in the underlying prices of the securities
which the Fund owns or intends to purchase or sell.
They simply establish a rate of exchange at some future
point in time. The success of a hedging transaction
depends upon Scottish Widows' and PSMC's abilities to
forecast future currency exchange rate changes. A
hedging transaction may not be fully effective, either
because a currency rate forecast is incorrect or
because of other factors affecting the markets for
hedging instruments, some of which factors are
described below. Additionally, although these
techniques are intended to reduce the risk of loss due
to a decline in the value of the hedged currency, they
also tend to limit any potential for gain from an
increase in value of such currency. As more fully
explained below, currency hedging transactions also
involve risks and costs in addition to the risks and
costs involved in the Fund's investments in the
securities that are the subject of the hedge.
The Fund's currency hedging transactions may call for
the delivery of one foreign currency in exchange for
another foreign currency and may at times not involve
currencies in which its then current portfolio holdings
are denominated or traded. The Fund will engage in such
"cross hedging" activities only when Scottish Widows
believes that such transactions provide significant
hedging opportunities for the Fund. Cross hedging
transactions by the Fund involve the risk of imperfect
correlation between changes in the values of the
currencies to which such transactions relate and
changes in the value of the currency or other asset or
liability which is the subject of the hedge.
Currency Forward and Futures Contracts
A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date,
which may be any fixed number of days after the date of
the contract, as agreed by the parties, at a price set
at the time of the contract. In the case of a
cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by
paying a specified fee. The contracts are generally
traded in the interbank market conducted directly
between currency traders (usually large commercial
banks) and their customers. A forward contract
generally has no deposit requirement, and involves no
commission.
Like a forward contract, a currency futures contract is
a contract for the future delivery of a specified
amount of a currency at a future date at the price set
at the time of the contract. Forward currency exchange
contracts differ from currency futures contracts,
however, in a number of respects. For example, futures
contracts are traded on exchanges between parties whose
identity is not disclosed to each other. The terms of
futures contracts are not negotiated between the two
parties, but instead are standardized as to maturity
date and contract amount. Transactions in futures
contracts generally involve the payment of commissions
to brokers who act as intermediaries in the
transactions. By contrast, forward currency exchange
contracts are traded directly between currency traders
so that no intermediary is required. In purchasing a
futures contract, the Fund is generally required to
deposit an amount of "initial margin" to the account of
the broker involved in the transaction, and to make
daily payments of "variation margin" if adverse changes
in the market value of the contract occur before the
maturity date of the contract. A forward contract, by
contrast, generally requires no margin or other
deposit.
At the maturity of a forward or futures contract, the
terms of the contract will require the Fund either to
accept or to make delivery of the currency specified in
the contract. At or prior to maturity, however, the
Fund may seek to enter into a closing transaction
involving the purchase or sale of an offsetting
contract. Such a closing transaction will extinguish
the parties' obligations to make and accept delivery of
currencies at the scheduled maturity. Closing
transactions with respect to forward contracts are
usually effected directly with the currency trader who
is a party to the original forward contract. The Fund's
ability to effect a closing transaction with respect to
a noncancellable forward currency contract is limited
by the willingness and ability of the other party to
the contract to effect such a transaction. Forward
currency contracts also involve the risk, at all times,
that the other party to the contract will default on
its obligations. Such a default could deprive the Fund
of any of the expected benefits of the hedging
transaction and could result in expenses and delays if
the Fund seeks to pursue remedies against the
defaulting party.
Closing transactions with respect to futures contracts
are effected through a broker on a commodities exchange
and involve the payment of a brokers' commission. A
clearing corporation associated with the exchange
generally assumes responsibility for closing out such
contracts. Positions in currency futures contracts may
be closed out only on an exchange or board of trade
which provides a secondary market in such contracts.
Although the Fund intends to purchase or sell currency
futures contracts only on exchanges or boards of trade
where there appears to be an active secondary market,
there is no assurance that a secondary market on an
exchange or board of trade will exist for any
particular contract or at any particular time. In such
event, it may not be possible to close a futures
position and, in the event of adverse price movements,
the fund would continue to be required to make daily
cash payments of variation margin. In some
circumstances, the Fund might have to sell other assets
to meet its variation margin payment obligations.
Futures transactions also involve a number of other
risks. These include the risk that movements in the
value of futures contracts may not precisely match
changes in the value of the underlying currencies. Such
disparities may limit the effectiveness of the hedging
transaction.
The Fund will maintain in a segregated account with its
custodian cash or high quality debt obligations in an
amount at least equal to the difference between (1) the
amount of currency that the Fund is obligated to
deliver under outstanding forward and futures contracts
and (2) the current value (determined daily) of the
Fund's liquid securities holdings that trade in that
currency (plus any variation margin already paid on
such futures contracts).
Currency Options
The Fund may purchase put or call options on
currencies. A put option gives the Fund the right, on
or before a specified date, to sell to the other party
to the contract a specified amount of a currency for a
specified price measured in another currency. A call
option gives the Fund a similar right to buy a
specified amount of a currency from the other party.
The Fund pays a purchase price (called a "premium")
when it initially acquires the option.
Currency options are traded primarily in the
over-the-counter market, although options on currencies
have recently been listed on several exchanges. Options
are traded not only on the currencies of individual
nations, but also on the European Currency Unit
("ECU"). The ECU is composed of amounts of a number of
currencies, and is the official medium of exchange of
the European Community's European Monetary System.
Currency options involve a number of risks. These
include the risk, in the case of over-the-counter
options, that the other party will default on its
obligations. Such a default could deprive the Fund of
the expected benefits of the hedging transaction and
could result in expenses and delays if the Fund seeks
to pursue remedies against the defaulting party.
Another risk associated with options is that, if
anticipated currency price movements do not occur, the
Fund may never exercise its rights under the option, in
which case the option will expire worthless and the
Fund will not recover the value of the premium it paid
to acquire the option.
Options on currencies are affected by many of the same
factors that influence exchange rates and investments
generally. The value of any currency, including U.S.
dollars and foreign currencies, may be affected by
complex political and economic factors applicable to
the issuing country. In addition, the exchange rates of
currencies (and therefore the values of currency
options) may be affected significantly, fixed or
supported directly or indirectly by U.S. and foreign
government actions. As with other currency hedging
transactions, government intervention may increase
risks involved in purchasing or selling foreign
currency options, since as a result of such
intervention exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option reflects the
value of an exchange rate, which in turn reflects
relative values of the two currencies in question.
Because currency transactions occurring in the
interbank market involve substantially larger amounts
than those that may be involved in the exercise of
currency options, investors may be disadvantaged by
having to deal in an odd lot market for the underlying
currencies in connection with options at prices that
are less favorable than for round lots. Governmental
restrictions or taxes could result in adverse changes
in the cost of acquiring or disposing of currencies.
There is no systematic reporting of last sale
information for foreign currencies and there is no
regulatory requirement that quotations available
through dealers or other market sources be firm or
revised on a timely basis. Available quotation
information is generally representative of very large
round-lot transactions in the interbank market and thus
may not reflect exchange rates for smaller odd-lot
transactions (less than $1 million) where rates may be
less favorable. The interbank market in currencies is a
global, around-the-clock market. To the extent that
options markets are closed while the markets for the
underlying currencies remain open, significant price
and rate movements may take place in the underlying
markets that cannot be reflected in the options
markets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental
investment policies in addition to those listed in the
Prospectus. These fundamental investment policies
cannot be changed by the Fund unless the change is
approved by the lesser of (i) 67% of more of the voting
securities present at a meeting of the Fund's
shareholders, if the holders of more than 50% of the
outstanding voting securities of the Fund are present
or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of the Fund.
The Fund may not:
1. Purchase securities on margin, except that the Fund
may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities.
The deposit or payment by the fund of initial or
maintenance margin in connection with financial futures
contracts or related options transactions is not
considered the purchase of a security on margin.
2. Write, purchase or sell puts, calls or combinations
thereof, except that the Fund may (a) write covered
call and covered put options and enter into closing
purchase transactions with respect to such options, (b)
purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of
its total assets, and enter into closing sale
transactions with respect to such options, and (c)
engage in financial futures contracts and related
options transactions to seek to hedge against either a
decline in the value of securities included in the
Fund's portfolio or an increase in the price of
securities which the Fund plans to purchase in the
future, or to increase the current return of its
portfolio by writing covered call or covered put
options.
3. Underwrite the securities of other issuers, except
to the extent that in connection with the disposition
of portfolio securities the Fund may be deemed to be an
underwriter.
4. Concentrate more than 25% of the value of its total
assets in the securities of issuers which conduct their
principal business activities in the same industry.
This restriction does not apply to obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities. For purposes of this restriction,
however, each foreign government is deemed to
constitute an industry.
5. Make any investment in real estate (including
limited partnership interests), commodities or
commodities contracts, except that the Fund may (a)
purchase or sell readily marketable securities which
are secured by interests in real estate or issued by
companies which deal in real estate, including real
estate investment and mortgage investment trusts, and
(b) engage in financial futures contracts and related
options transactions as described in Investment
Restriction No. 2 above.
6. Make loans, except that the Fund may (a) invest in
repurchase agreements, (b) purchase bonds, debentures,
commercial paper, notes and similar evidences of
indebtedness of a type commonly sold to financial
institutions, or purchase all or any portion of an
issue of such securities that is distributed publicly,
whether or not the purchase is made on the original
issuance, and (c) loan its portfolio securities in
amounts up to one-third of the market or other fair
value of its total assets.
7. Invest in securities of any company or if any
officer or trustee of the Fund or of the Fund's
investment advisor or sub-advisor owns more than 1/2 of
1% of the outstanding securities of such company and
such officers and trustees own in the aggregate more
than 5% of the securities of such company.
8. Invest in interests in oil, gas, or other mineral
exploration or development programs or leases.
9. Purchase securities of other investment companies,
except that the Fund may make such a purchase (a) in
the open market involving no commission or profit to a
sponsor or dealer (other than the customary broker's
commission), provided that immediately thereafter not
more than 10% of the Fund's total assets would be
invested in such securities and not more than 3% of the
voting stock of another investment company would be
owned by the Fund, or (b) as part of a merger,
consolidation, or acquisition of assets.
10. Issue any senior securities, as that term is
defined in the Investment Company Act of 1940, except
as otherwise permitted by the Fund's fundamental
investment restrictions.
In addition to the fundamental investment policies set
forth above, the Fund has additional policies that can
be changed by a majority vote of the Trustees without a
shareholder vote. These are: (a) it is the policy of
the Fund not to make short sales of securities; (b) it
is the Fund's policy not to purchase a restricted
security, a security for which market value quotations
are not readily available, any equity security that is
not readily marketable or any other illiquid security
if as a result of such purchase more than 10% of the
Fund's net assets would be invested in such securities,
provided that the Fund will not purchase any equity
security that is not readily marketable if as a result
of such purchase more than 5% of the Fund's total
assets would be invested in equity securities that are
not readily marketable; (c) it is the Fund's policy not
to purchase a warrant if as a result the total value of
all warrants held by the Fund (valued at the lesser of
cost or current value) would constitute more than 5% of
the current value of the Fund's net assets, and not to
purchase a warrant that is not listed on the New York
Stock Exchange or the American Stock Exchange if as a
result the total value of all warrants not so listed
and held by the Fund (valued at the lesser of cost or
current value) would constitute more than 2% of the
current value of the Fund's net assets, provided that,
for purposes of this policy, all warrants acquired by
the Fund in units or attached to other securities shall
be deemed to have no value.
All percentage limitations on investments will apply at
the time of the making of an investment and shall not
be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of
such investment.
TRUSTEES OF THE FUND
James E. Jordan*
Chairman Principal Occupation During Past Five Years
Chairman, Board of Trustees of Penn Square Mutual Fund
and William Penn Interest Income Fund; President,
Chief Investment Officer and Director of Penn Square
Management Corporation; Director of Leucadia National
Corporation, and Mezzanine Capital & Income Trust PLC,
a British investment trust company; Director, New York
State Board of the Nature Conservancy.
Lee D. Arning Trustee of The Lighthouse, Inc.; Vice Chairman of
Burdette Tomlin Memorial Hospital, Cape May Court
House, NJ; Formerly Vice Chairman, Chief Investment
Officer and Director of US-LIFE Corp.; Trustee of Penn
Square Mutual Fund and William Penn Interest Income
Fund.
Richard C. Farr Chairman and Chief Executive Officer of Farr
Investments; Chairman of the Board of Directors of
Bituminous Coal Corp., Inc.; Chairman and Chief
Executive Officer of Lincoln Logs, Ltd.; Trustee of
The Advantage Municipal Bond Fund; Director of
Archimedes Systems, Inc.; Trustee, Hendrix College;
Formerly, Director of Darling and Co., Inc.; Seal
Inc.; Bouton Corp.; Hunter Environmental Services,
Inc.; Northwest Direct Marketing Inc. and The United
Way (San Francisco).
Gail M. Harrity Chief Operating Officer of the Philadelphia Museum of
Art, 1996 to present. Deputy Director for Finance and
Administration of the Solomon R. Guggenheim Museum,
1989 to 1996. Assistant Treasurer of the Metropolitan
Museum of Art from 1982 to 1989. Trustee of Penn
Square Mutual Fund and William Penn Interest Income
Fund, 1993 to date.
Paul J. Lawler
Vice Chairman Vice President for Finance of Rensselaer Polytechnic
Institute; Trustee of Penn Square Mutual Fund and
William Penn Interest Income Fund; Director, Genesis,
Ltd.
Emmett M. Murphy* General Partner, Threshold Investments LP, 1996.
Partner of Luther King Capital Management Corp. 1981
to 1995; Trustee of Penn Square Mutual Fund and
William Penn Interest Income Fund.
Geoffrey Nunes, Esq.
Senior Vice President and General Counsel of Millipore
Corporation, Bedford, Massachusetts since 1975;
Director of Reebok International, Ltd.
Linda G. Sprague, Ph.D
Professor of Operations Management at the Whittemore
School of Business and Economics, University of New
Hampshire; Professor, School of Industrial and
Manufacturing Science, Cranfield University (England);
Management Advisor to SICOT (Societe Internationale de
Chirurgie Orthopedique et de Traumatologie) and
President of The SICOT Foundation.
* A Trustee who is an "interested person" of the Fund as
defined in the Investment Company Act of 1940.
The Trustees formulate the general policies of the
Trust within the limits described under "Investment
Objective and Policies" in the Prospectus and
"Investment Policies and Techniques" and "Investment
Restrictions" in this Statement of Additional
Information.
Each Trustee who is not an "interested person" of the
fund receives an annual retainer of $2,000 plus an
attendance fee of $500 for each meeting of the Trustees
meetings he attends.
The Trust pays no salaries or other compensation to any
of its officers who are officers or employees of PSMC.
The Agreement and Declaration of Trust of the Fund
provides that the Fund will indemnify its Trustees and
officers against liabilities and expenses incurred in
connection with litigation in which they may be
involved because of their offices with the Fund, but
that such indemnification will not relieve any Trustee
or officer of any liability to the Fund or its
shareholders by reason of willful malfeasance, bad
faith, gross negligence or reckless disregard of his or
her duties.
As of April 30, 1997, the Trustees and officers of the
Fund as a group owned less than 1% of the outstanding
shares of the Fund. No person owns of record or, to the
Fund's knowledge, owns beneficially 5% or more of the
Fund's shares.
1997 Trustee Compensation
Scottish Widows William Penn
International Fund Fund Family*
James E. Jordan $ -0- $ -0-
Lee D. Arning 4,000 12,000
Richard C. Farr 4,000 4,000
Gail M. Harrity 4,000 12,000
Paul J. Lawler 4,000 12,000
Emmett M. Murphy -0- -0-
Geoffrey Nunes 4,000 4,000
Linda G. Sprague 4,000 4,000
* The William Penn family of funds consists of the
following: Scottish Widows International Fund, Penn
Square Mutual Fund, and the William Penn Interest
Income Fund.
INVESTMENT ADVISOR AND SUB-ADVISOR
PSMC serves as investment advisor to the Fund pursuant
to a written investment advisory agreement. PSMC is a
Pennsylvania corporation organized in 1958, and is a
registered investment advisor under the Investment
Advisors Act of 1940. As compensation for PSMC's
services as advisor, the fund pays PSMC a fee at the
annual rate of .675% of the Fund's average daily net
asset value. For the fiscal years ended December 31,
1994, 1995 and 1996, the advisory fee paid by the Fund
was $276,179, $214,071 and $168,194, respectively.
Scottish Widows serves as sub-advisor to the Fund
pursuant to a written agreement between Scottish Widows
and PSMC. The agreement provides that Scottish Widows
shall furnish continuously an investment program for
the Fund, shall make recommendations to PSMC as to what
investments shall be purchased, held, sold or exchanged
by the Fund and what portion, if any, of the assets of
the Fund shall be held uninvested, and that Scottish
Widows shall, pursuant to directions from PSMC, place
all orders for the purchase and sale of Fund portfolio
securities and other Fund assets with brokers or
dealers selected by Scottish Widows. Scottish Widows is
a corporation organized in 1987 under the laws of
Scotland and is a registered investment advisor under
the Investment Advisers Act of 1940. For its services
as sub-advisor to the Fund, Scottish Widows receives a
fee at the annual rate of .50% of the Fund's average
daily net asset value, subject to a minimum fee of
$7,500 in each calendar quarter. The fee to Scottish
Widows is paid by PSMC out of the investment advisory
fee PSMC receives from the Fund. For the fiscal years
ended December 31, 1994, 1995 and 1996, the
sub-advisory fee paid was $204,577, $158,688, and
$124,116, respectively.
In addition to providing advisory services, PSMC under
an Administration Agreement with the Fund provides the
Fund with office space for managing its affairs, with
the services of required executive personnel, and with
certain administrative and clerical services and
facilities. For the services and facilities it provides
and the expenses it bears under the Administration
Agreement, PSMC receives a fee from the Fund,
calculated daily and paid monthly, at the annual rate
of .175% of the Fund's average daily net assets. For
the fiscal years ended December 31, 1994, 1995, and
1996 the fee paid by the Fund was $71,602, $56,473, and
$43,707, respectively.
Scottish Widows' Fund and Life Assurance Society
("Scottish Widows Group"), the parent company of
Scottish Widows, controls the right to use the words
"Scottish Widows" and has agreed that the Fund may use
such words as part of its name. At such time as no
affiliate of Scottish Widows Group remains advisor or
sub-advisor to the Fund, or the Fund is in violation of
any advisory or sub-advisory agreement with any
affiliate of Scottish Widows Group, Scottish Widows
Group, by written notice to the Fund, may require the
Fund to change its name to eliminate all reference to
the words "Scottish Widows." If Scottish Widows Group
required such a change of name, the sub-advisory
agreement among PSMC, Scottish Widows and the Fund
would automatically terminate upon the change of name,
unless the continuance of such agreement thereafter is
specifically approved (1) by vote of the Fund's
shareholders and (2) by vote of a majority of the
Fund's Trustees, including a majority of the Trustees
who are not interested persons of the Fund, PSMC or
Scottish Widows, cast in person at a meeting called for
the purpose of voting on such approval.
The Fund pays the expenses for its own legal and
auditing services, taxes and governmental
registrations, reports and fees, certain insurance
premiums, fees and disbursements of its custodian bank
and transfer agent, brokerage, interest, and all other
costs and expenses properly payable by the Fund and not
borne by PSMC or Scottish Widows. The Fund also pays
all costs of shareholder notices and reports and
prospectuses and statements of additional information
used in complying with laws regulating the issue and
sales of securities (including the cost of typesetting
and printing prospectuses for current shareholders).
However, the advisory agreement with PSMC provides that
if the total expenses of the fund in any fiscal year
exceed the permissible limits applicable to the Fund in
any state in which shares of the Fund are then
qualified for sale, the compensation due PSMC under the
advisory agreement for such fiscal year shall be
reduced by the amount of such excess by a reduction or
refund thereof at the time such compensation is payable
after the end of each calendar month during such fiscal
year of the Fund, subject to readjustment during the
Fund's fiscal year. Currently, the only state expense
limitation provision applicable to the Fund limits the
Fund's annual expenses to 2 1/2% of the first $30
million of average net assets, 2% of the next $70
million of net assets and 1 1/2% of any remaining net
assets. Taxes, brokerage costs, interest expenses,
extraordinary expenses and expenses incurred pursuant
to the Fund's distribution plan are excluded from this
limitation.
TRANSFER AGENT
Penn Square Management Corporation serves as the Fund's
transfer agent and performs shareholder service
activities.
The services of PSMC are provided pursuant to a
Transfer Agency and Service Agreement with the Fund.
Pursuant to this Agreement, PSMC will perform these
services at or below cost.
REDEMPTION OF SHARES
Detailed information on redemption of shares is
included in the Prospectus. The Fund may suspend the
right to redeem its shares or postpone the date of
payment upon redemption for more than three days (i)
for any period during which the New York Stock Exchange
is closed (other than customary weekend or holiday
closing) or trading on the exchange is restricted;
(ii) for any period during which an emergency exists as
a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine
the value of its net assets; or (iii) for such other
periods as the Securities and Exchange Commission may
permit for the protection of shareholders of the Fund.
The Fund will pay in cash all redemptions during any
90-day period, in amounts up to the lesser of $250,000
or 1% of the Fund's net assets at the beginning of the
period.
Redemptions in excess of this limit may be paid, in
whole or in part, in securities or in cash, as the
Trustees deem advisable; however, payment will be made
wholly in cash unless the Trustees believe that
economic or market conditions exist which would make
the practice detrimental to the best interests of the
Fund. If redemptions are paid in securities, the
securities will be valued as set forth under "Net Asset
Value" herein and a redeeming shareholder would
normally incur brokerage expenses if he or she
converted the securities into cash.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund are
made by PSMC pursuant to recommendations by Scottish
Widows. Scottish Widows is responsible for the
placement of the Fund's portfolio business with
transacting brokers or dealers and the negotiation of
commissions, if any, paid on these transactions.
Brokerage commissions are paid on listed securities.
Fixed income securities in which the Fund invests are
traded in the over-the-counter market. These securities
are generally traded on a net basis with dealers acting
as principal for their own accounts without a stated
commission, although prices of the securities usually
include a profit to the dealers. In over-the-counter
transactions, orders are placed directly with the
principal market maker unless Scottish Widows believes
that a better price and execution can be obtained by
using a broker. Scottish Widows is responsible for
effecting portfolio transactions and will do so in a
manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in
all portfolio transactions will be prompt execution of
orders in an efficient manner at the most favorable
price. In selecting broker/dealers and negotiating
commissions, Scottish Widows considers the firm's
reliability, the quality of its execution services on a
continuing basis and its financial condition. When more
than one firm is believed to meet these criteria,
preference may be given to brokers who provide research
or statistical materials or other services to the Fund
or Scottish Widows. Scottish Widows is of the opinion
that, because such materials and services must be
analyzed and reviewed by its staff, their receipt and
use does not tend to reduce expenses but may benefit
the Fund by supplementing Scottish Widows' research.
For the fiscal year ended December 31, 1994, the Fund
paid $227,422 in brokerage commissions (on $67,080,390
of portfolio transactions), for the fiscal year ended
December 31, 1995, the Fund paid $163,665 in brokerage
commissions (on $52,241,347 of portfolio transactions)
and for the fiscal year ended December 31, 1996, the
Fund paid $101,821 in brokerage commissions (on
$35,558,989 of portfolio transactions). All of the
foregoing commission were paid to brokers who provided
research or other services to the Fund or Scottish
Widows.
Scottish Widows effects portfolio transactions for
other investment companies and accounts. Research
services furnished by firms through which the Fund
effects its securities transactions may be used by
Scottish Widows in servicing all of its accounts; not
all of these services may be used by Scottish Widows in
connection with the Fund. In the opinion of Scottish
Widows, it is not possible to measure the benefits from
research services to each of the accounts (including
the Fund).
Scottish Widows will attempt to allocate portfolio
transactions equitably among the Fund and its other
client accounts whenever concurrent decisions are made
to purchase or sell securities by the fund and other
accounts. In making such allocations, the main factors
to be considered are the respective investment
objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of
cash for investment, the size of investment commitments
generally held, and the opinions of the persons
responsible for recommending investments to the Fund
and the others. In the opinion of Scottish Widows,
however, the results of such procedures will, on the
whole, be in the best interests of each of the clients.
NET ASSET VALUE
The Fund calculates its net asset value on each
business day except those holidays on which the New
York Stock Exchange is closed (currently New Year's
Day, Washington's Birthday, Good Friday, Memorial Day,
independence Day, Labor Day, Thanksgiving Day and
Christmas). The net asset value of the Fund's shares is
determined as of the close of regular trading on the
New York Stock Exchange (ordinarily 4:00 p.m., New York
time) and is computed by dividing the value of all
securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and
adjusting to the nearest cent per share.
Portfolio securities which are traded on exchanges are
valued at the last sale or settlement price on the
exchange where primarily traded or, if none that day,
at the mean of the last reported bid and asked prices,
using prices as of the close of trading on the
applicable exchange. Securities which are traded in the
over-the-counter market are valued at the mean of the
last available bid and asked prices. Such valuations
are based on quotations of one or more dealers that
make markets in the securities as obtained from such
dealers or from a pricing service. Securities with an
initial maturity or remaining maturity of 60 days or
less may be valued at amortized cost, provided that it
approximates market value. Securities for which market
quotations are not readily available and other assets
are valued at their fair value as determined by or
under the direction of the Trustees. Such fair value
may be determined by various methods, including
utilizing information furnished by pricing services
which determine calculations for such securities using
methods based, among other things, upon market
transactions for comparable securities and various
relationships between securities which are generally
recognized as relevant.
Generally, trading in foreign securities is
substantially completed each day at various times prior
to the close of the New York Stock Exchange.
Occasionally, events affecting the values of such
securities may occur between the times at which they
are determined and the close of the New York Stock
Exchange which will not be reflected in the computation
of the Fund's net asset value unless PSMC and Scottish
Widows deem that such event would materially affect the
net asset value, in which case an adjustment would be
made.
For purposes of determining the Fund's net asset value,
all investments and assets are expressed in U.S.
dollars based upon current currency exchange rates.
TAXATION
The Fund intends to continue to qualify each year as a
regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code").
In order to qualify, the Fund must, among other things,
(i) derive at least 90% of its gross income from
dividends, interest, payments with respect to certain
securities loans, gains from the sale of 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; (ii)
derive less than 30% of its gross income from gains
from the sale or other disposition of securities held
for less than three months; (iii) distribute at least
90% of its dividend, interest and certain other taxable
income each year; and (iv) at the end of each fiscal
quarter maintain at least 50% of the value of its total
assets in cash, government securities, securities of
other regulated investment companies, and other
securities of issuers which represent, with respect to
each issuer, no more than 5% of the value of the Fund's
total assets and 10% of the outstanding voting
securities of such issuer, and with no more than 25% of
its assets invested in the securities (other than those
of the U.S. government or other regulated investment
companies) of any one issuer or of two or more issuers
which the Fund controls and which are engaged in the
same, similar or related trades and businesses. To the
extent it qualifies for treatment as a regulated
investment company, the Fund will not be subject to
federal income tax on income paid to its shareholders
in the form of dividends or capital gains
distributions.
An excise tax at the rate of 4% will be imposed on the
excess, if any, of the Fund's "required distribution"
over actual distributions in any calendar year.
Generally, the "required distribution" is 98% of the
Fund's ordinary income for the calendar year plus 98%
of its capital gain net income recognized during the
one-year period ending on October 31 (or December 31,
if the Fund so elects) plus undistributed amounts from
prior years. The Fund intends to make distributions
sufficient to avoid imposition of the excise tax.
Distributions declared by the Fund during October,
November or December to shareholders of record on a
date in any such month and paid by the Fund during the
following January will be treated for federal tax
purposes as paid by the Fund and received by
shareholders on December 31 of the year in which
declared.
Shareholders of the Fund will be subject to federal
income taxes on distributions made by the Fund whether
received in cash or additional shares of the Fund.
Distributions by the Fund of net income and short-term
capital gains, if any, will be taxable to the
shareholders as ordinary income. Distributions of
long-term capital gains, if any, will be taxable to the
shareholders as long-term capital gains, without regard
to how long a shareholder has held shares of the Fund.
A loss on the sale of shares held for 12 months or less
will be treated as a long-term capital loss to the
extent of any long-term capital gain dividend paid to
the shareholder with respect to such shares. Since
dividends paid by foreign corporations generally do not
qualify for the dividends-received deduction for
corporate shareholders, the dividends paid by the Fund
are not expected to qualify for the dividends-received
deduction.
The Fund expects to qualify for and, if the Fund
determines it to be in the best interest of
shareholders, make the election permitted under Section
853 of the Code so that shareholders may be able to
claim a credit or deduction on their income tax returns
for, and will 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.
The shareholders of the Fund may claim a foreign tax
credit by reason of the Fund's election under Section
853 of the Code, subject to certain limitations imposed
by Section 904 of the Code, which in general limit the
amount of foreign tax the Fund has paid allocable to
the shareholder which may be used to reduce a
shareholder's U.S. tax liability to that amount of U.S.
tax which would be imposed on the amount and type of
income in respect of which the foreign tax was paid.
A shareholder who for U.S. income tax purposes claims a
foreign tax credit in respect of Fund distributions may
not claim a deduction for foreign taxes paid by the
Fund, regardless of whether the shareholder itemizes
deductions.
Also, under Section 63 of the Code, no deduction for
foreign taxes may be claimed by shareholders of the
Fund who do not itemize deductions on their federal
income tax returns. It should also be noted that a
tax-exempt shareholder, like other shareholders, will
be required to treat as part of the amounts distributed
to it a pro rata portion of the income taxes paid by
the Fund to foreign countries. However, that income
will generally be exempt from United States taxation by
virtue of such shareholder's tax-exempt status and such
a shareholder will not be entitled to either a tax
credit or a deduction with respect to such income.
The Fund will notify shareholders each year of the
amount of dividends and distributions and the
shareholder's pro rata share of qualified taxes paid by
the Fund to foreign countries.
Redemptions of Fund shares are taxable events and,
accordingly, shareholders may realize gains and losses
on these transactions. If shares have been held for
more than one year, gain or loss realized will be
long-term capital gain or loss unless the shareholder
is a dealer in securities. However, if a shareholder
sells Fund shares at a loss within six months after
purchasing the shares, the loss will be treated as a
long-term capital loss to the extent of any long-term
capital gain distributions received by the shareholder.
Furthermore, no loss will be allowed on the sale of
Fund shares to the extent the shareholder acquired
other Fund shares within 30 days prior to the sale of
the loss shares of 30 days after such sale.
The Fund's transactions in foreign currencies are
likely to result in a difference between the Fund's
book income and taxable income. This difference may
cause a portion of the Fund's income distributions to
constitute a return of capital for tax purposes or
require the Fund to make distributions exceeding book
income to qualify as a regulated investment company.
The Fund may limit its investments in certain "passive
foreign investment companies" in order to avoid certain
taxes that arise as a result of such investments.
The foregoing is a general and abbreviated summary of
the applicable provisions of the Code and Treasury
Department regulations currently in effect. For the
complete provisions, reference should be made to the
pertinent Code sections and regulations. The Code and
regulations are subject to change by legislative or
administrative action.
Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to
consult their tax advisors regarding specific questions
as to federal, state or local taxes.
The foregoing discussion relates solely to U.S. federal
income tax law. Non-U.S. investors should consult their
tax advisors concerning the tax consequences of
ownership of shares of the Fund, including the
possibility that distributions may be subject to a 31%
United States withholding tax (or a reduced rate of
withholding provided by treaty).
PERFORMANCE INFORMATION
Total Return
Under a standard formula adopted by the Securities and
Exchange Commission, mutual fund total return is
computed by finding the average annual compounded rates
of return over the prior one, five and ten years (or,
if less, the period since the fund commenced investment
operations) that would equate the initial amount
invested to the ending redeemable value, according to
the following formula:
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical $1,000
payment made at the beginning of the designated period.
The calculation set forth above is based on the further
assumptions that: (i) all dividends and distributions
of the Fund during the period were reinvested at the
net asset value on the reinvestment dates; (ii) all
recurring expenses that were charged to all shareholder
accounts during the applicable period were deducted;
and (iii) the Fund's sales load was deducted at the
maximum rate of 4.75% of the hypothetical initial
payment. For the period from September 28, 1990
(commencement of the Fund's operations) through
December 31, 1996 and the year ended December 31, 1996,
the Fund's average annual total return was 6.6%, and
3.6%, respectively, for Class A shares.
Non-Standardized Performance
In addition to the total return information described
above, the Fund may provide total return information
for designated periods, such as for the most recent
rolling six months or most recent rolling twelve
months. Such total return is computed as described
under "Total Return" above except that no annualization
is made and the total returns presented may not reflect
deduction of sales loads provided that a statement to
such effect is made. The Fund's total returns, for the
period from September 28, 1990 (commencement of the
Fund's operations) through December 31, 1996 and the
year ended December 31, 1996, without taking the sales
load into account, were 56.9% and 8.8%, respectively,
for Class A shares.
Total returns quoted in advertising reflect all aspects
of a Fund's return, including the effect of reinvesting
dividends and capital gain distributions, and any
change in the Fund's net asset value per share over the
period. Average annual returns are calculated by
determining the growth or decline in value of a
hypothetical historical investment in the Fund over a
stated period, and then calculating the annually
compounded percentage rate that would have produced the
same result if the rate of growth or decline in value
had been constant over the period. For example, a
cumulative return of 100% over ten years would produce
an average annual return of 7.18%, which is the steady
annual return rate that would equal 10% growth on a
compounded basis in ten years. While average annual
returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's
performance is not constant over time, but changes from
year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year
performance of the Fund.
Other Information Concerning Fund Performance
A Fund may quote its performance in various ways, using
various types of comparisons to market indices, other
funds or other investment alternatives, or to general
increases in the cost of living. All performance
information supplied by the Fund in advertising is
historical and is not intended to indicate future
returns. The Fund's share price and total return
fluctuate in response to market conditions and other
factors, and the value of the Fund's shares when
redeemed may be more or less than their original cost.
The Fund may compare its performance over various
periods to various indices, including the performance
record of the Standard & Poor's 500 Composite Stock
Price Index (the "S&P"), the Dow Jones Industrial
Average (the "DJIA"), the NASDAQ Industrial Index and
the cost of living (measured by the Consumer Price
Index, or the "CPI") over the same period. Comparisons
may also be made to yields on certificates of deposit
or to U.S. Treasury instruments. The comparisons to the
S&P and DJIA show how the Fund's total return compared
to the record of a broad average of U.S. common stock
prices (S&P) and a narrower set of stocks of major U.S.
industrial companies (DJIA). The fund ordinarily
invests primarily in securities not included in either
index, or its investment portfolio therefore generally
will not be similar in composition to the indices. The
Fund may also compare its performance to that of the
Morgan Stanley Capital International Europe, Australia
and Far East Index ("EAFE"), an index that includes a
large number of common stocks traded in many of the
same markets in which the Fund may invest, and to the
Lipper International Funds Average. Figures for the
S&P, the DJIA and EAFE are based on the prices of
unmanaged groups of stocks, and, unlike the Fund's
returns, their returns do not include the effect of
paying brokerage commissions and other costs of
investing; Lipper does reflect some costs. The period
since the Fund's inception has been a period of widely
fluctuating stock prices and returns from such period
should not be considered a representation of the
dividend income or capital gain or loss that could be
realized from an investment in the Fund today.
Comparisons between the Fund's performance and an
index's may be made on the basis of a hypothetical
initial investment in the Fund (such as $10,000), and
reflect the aggregate cost of reinvested dividends and
capital gain distributions for the period covered (that
is, their cash value at the time they were reinvested).
Such comparisons may also reflect the change in value
of such an investment assuming distributions are not
reinvested. Tax consequences of different investments
may not be factored into the figures presented.
The Fund's performance may be compared in advertising
to the performance of other mutual funds in general or
to the performance of particular types of mutual funds,
especially those with similar objectives. These may
include comparisons of the Fund's performance to the
performance of grouping of funds prepared by Lipper
Analytical Services ("Lipper") or other organizations.
Although Lipper and other organizations include funds
within various classifications based upon similarities
in their investment objectives and policies, investors
should be aware that these may differ significantly
among funds within a grouping.
Other widely used indices that the Fund may use for
comparison purposes include the Shearson Lehman Bond
Index, the Shearson Lehman GNMA Single Family Index and
the Shearson Lehman Government/Corporate Bond Index.
The Fund may also discuss in advertising the highest,
lowest and median or average returns of various types
of investments over various holding periods. These
comparisons tend to show that while certain types of
investments may exhibit a wide range of returns over
short periods of time and subject the short-term
investor to the risk of substantial loss, the range of
returns over longer holding periods narrow and returns
tend to be more stable and positive.
The Fund may advertise examples of the effects of
periodic investment plans, including the principal of
dollar cost averaging. In such program, the investor
invests a fixed dollar amount in the Fund at periodic
intervals, thereby purchasing fewer shares when prices
are high and more shares when prices are low. While
such a strategy does not assure a profit or guard
against loss in a declining market, the investor's
average cost per share may be lower than if fixed
numbers of shares had been purchased at those
intervals. In evaluating such a plan, investors should
consider their ability to continue purchasing shares
through periods of low price levels.
The Fund may be available for purchase through
retirement plans or other programs offering deferral of
or exemption from income taxes, which may produce
superior after-tax returns over time. For example, a
$1,000 investment earning a taxable return of 10%
annually would have an after-tax value of $2,004 after
ten years, assuming tax was deducted from the return
each year at a 28% rate. An equivalent tax-deferred
investment would have an after-tax value of $2,147
after ten years, assuming tax was deducted at a 28%
rate from the deferred earnings at the end of the ten
year period.
DESCRIPTION OF THE FUND
The Fund is an open-end diversified management
investment company, established as an unincorporated
business trust under the laws of The Commonwealth of
Massachusetts pursuant to a Declaration of Trust dated
May 23, 1990.
The Trustees of the Fund have authority to issue an
unlimited number of shares of beneficial interest in
the Fund without par value. Each share in the Fund
represents an equal proportionate interest in the Fund
with each other share of the Fund and is entitled to
such dividends and distributions as are declared by the
Fund's Trustees. Upon any liquidation of the Fund,
shareholders of the Fund are entitled to share pro rata
in the net assets of the Fund available for
distribution.
The Declaration of Trust permits the Trustees, without
shareholder approval, to establish one or more
additional separate portfolios for investments in the
Fund. Shareholders' investments in any such additional
portfolio would be evidenced by a separate series of
shares. At such time as the Trustees create another
portfolio, the Fund would become a "series" company as
that term is used in Section 18(f) of the Investment
Company Act of 1940.
The Fund will normally not hold annual meetings of
shareholders to elect Trustees. If less than a majority
of the Trustees of the Fund holding office have been
elected by shareholders, a meeting of shareholders of
the Fund will be called to elect Trustees. Under the
Declaration of Trust of the Fund and the Investment
Company Act of 1940, the record holders of not less
than two-thirds of the outstanding shares of the Fund
may remove a Fund Trustee by votes cast in person or by
proxy at a meeting called for the purpose or by a
written declaration filed with the Fund's custodian
bank. Except as described above, the Trustees will
continue to hold office and may appoint successor
Trustees.
Under Massachusetts law, shareholders could, under
certain circumstances, be held personally liable for
the obligations of the Fund. However, the Declaration
of Trust of the Fund disclaims shareholder liability
for acts or obligations of the Fund and requires that
notice of this disclaimer be given in each agreement,
obligations or instrument entered into or executed by
the Fund or the Trustees. The Declaration of Trust
provides for indemnification out of the Fund's property
for all loss and expense of any shareholder held
personally liable for obligations of the Fund. Thus,
the risk of a shareholder of the Fund incurring a
financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would
be unable to meet its obligations. The likelihood of
such circumstances is remote.
DISTRIBUTION PLAN
As described in the Prospectus under "Distributor and
Distribution Plan," the Fund pays PSMC a distribution
fee at the annual rate of 0.25% of Fund average net
assets for services provided in connection with the
maintenance of shareholder accounts. PSMC believes that
amounts paid under the Distribution Plan furnish an
incentive for sales of Fund shares and the maintenance
of Fund assets, helping to maintain and increase fund
asset levels and produce economies of scale in the
Fund's operations.
ADDITIONAL INFORMATION
Further information concerning the Fund and its shares
may be found in the Fund's Registration Statement, of
which the Prospectus and this Statement of Additional
Information Constitute a part, on file with the
Securities and Exchange Commission.
PART C
OTHER INFORMATION
Item 24 Financial Statements and Exhibits
(a) Financial Statements
(1) The Prospectus contains the Condensed
Financial Information as of December
31, 1996 under Financial Highlights.
(2) The following financial statements,
each as of December 31, 1996, are
Incorporated by reference into the
Statement of Additional Information
From the Registrant's 1996 Annual
Report:
Statement of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
(b) Exhibits:
(1) Consent of Independent Accountants
(2) All other exhibits are incorporated
By reference to previous N1-A; and
and all amendments thereto
since the Fund's initial
Effective registration on May 25, 1990.
Item 25 Persons Controlled by or Under Control with Registrant
Inapplicable
Item 26 Number of Holders of Securities
Title of Class A Number of Record Holders
Shares of beneficial 1,070 as of 2/21/97
Interest
Item 27 Indemnification
Incorporated by reference to Item 27 of the Regis-
tration Statement as originally filed with the
Commission on May 25, 1990.
Item 28 Business and Other Connections of Investment Advisor
To Registrant's knowledge, none of the directors or
officers of Penn Square Management Corporation,
except those set forth below, is, or has been at any
time during the past two calendar years, engaged in
any other business, profession, vocation or employ-
ment of a substantial nature. Set forth below are
the names and principal businesses of the directors
and certain of the senior executive officers of Penn
Square Management Corporation who are or have been
engaged in any other business, profession, location
or employment of a substantial nature.
Name Position with
Penn Square Management
Corporation
James E. Jordan President and Director
John W. Jordan, II Director
David W. Zalaznick Director
Mr. James Jordan is an executive with, and Messrs.
John Jordan and David Zalaznick are partners of The
Jordan Company, New York, NY. The Jordan Company is
a private investment banking partnership.
Item 29 Principal Underwriter
(a) Penn Square Management Corporation acts as
distributor for and investment advisor to the
William Penn Interest Income Fund and Penn
Square Mutual Fund.
(b) The Directors and executive officers of Penn Square
Management Corporation are as follows:
Name and Principal Positions and Offices Positions and Offices
Business Address with Penn Square with Registrant
Management Corporation
James E. Jordan President & Director Chairman, President
And Trustee
Dennis J. Westley Sr. V.P. Vice President &
Finance & Administration Treasurer
Sandra J. Houck Secretary Secretary
Kevin J. Mailey Sr. V.P. for Marketing None
John W. Jordan II Director None
David W. Zalaznick Director None
The principal business address for each of the above is 2650
Westview Drive, Wyomissing, PA 19610
(C) Inapplicable
Item 30 Location of Accounts and Records
(1) Penn Square Management Corporation, 2650 Westview
Drive, Wyomissing, PA 19610 (records relating to
Its functions as distributor, transfer agent,
dividend paying agent, investment advisor, and
Registrant's Declaration of Trust).
(2) CoreStates Bank, P. O. Box 7618, Philadelphia,
PA 19101 (records relating to its function as
custodian)
Item 31 Management Services
None
Item 32 Undertakings
The Registrant undertakes to furnish to any person to
whom a prospectus is delivered a copy of Registrant's
latest annual report upon request and without charge.
THE WILLIAM PENN FUNDS
SCOTTISH WIDOWS INTERNATIONAL FUND
December 31, 1996
ANNUAL REPORT
Scottish Widows International Fund
Annual Report 1996
January 14, 1997
Dear Shareholders:
As always, the full report of Allan McKenzie of Scottish
Widows Investment Management, Ltd., Edinburgh, follows
this cover letter, and we urge you to read it thoroughly.
The report discusses in detail both the management
strategy followed in 1996, and Scottish Widows' current
thinking on international markets and relative values
within those markets looking ahead in 1997.
Relative to the Morgan Stanley Europe, Australia, Far
East Index ("the EAFE Index"), Scottish Widows
International Fund performed well in 1996 and over the
past five years. For one and five years ended December
31, 1996, on a total rate of return basis, which
incorporates the reinvestment of dividends and capital
gains, and net of all expenses, Scottish Widows
International Fund rose by +8.8% and +45.3% respectively,
as compared with +4.4% and +36.4% respectively for the
EAFE Index. Further performance analysis is provided on
page 5 of this Report.
Even though these returns may pale in comparison to
returns available in domestic markets over the same
periods, they are nevertheless solid, and the validity of
investing in a conservative international fund in order
to provide risk diversity is, we believe, compelling.
With best regards,
Sincerely yours,
James E. Jordan
Chairman
Scottish Widows International Fund
Message from Scottish Widows Investment Management Limited
Edinburgh, December 31, 1996
TO OUR SHAREHOLDERS:
In economic terms 1996 will be remembered as a year when
growth turned out to be anemic and consequently
inflationary pressures remained subdued. This proved to
be a favorable cocktail for financial markets with both
equity and bond prices generally showing strong gains.
This scenario was especially evident in the US market
which once again confounded the skeptics and produced
returns well above the MSCI World Index. The best
performing equity markets for 1996 were in Continental
Europe, notably Sweden, Spain and Finland, all of which
generated dollar returns in excess of 30%. Japan was yet
again the worst performing major equity market, where the
long awaited and desperately needed devaluation of the
yen and near zero interest rates proved insufficient to
shift the domestic economy out of recession.
It was also an active year for bond and currency markets.
Aside from the necessary adjustments to offset a
debt/deflation spiral in Japan, the main driving force
was the European convergence theme. Politicians have been
giving out strong signals to suggest that some form of
single European currency union will start on schedule,
notwithstanding the obvious difficulties that many
countries will have in meeting the entrance criteria.
Germany, Austria, Switzerland and the Netherlands
(DM-bloc) were generally weaker against the US dollar as
markets took the view that a single currency (the euro)
would likely be fundamentally weaker than a stand alone
Deutschemark. Conversely, peripheral currencies (such as
the Italian lira and Spanish peseta) enjoyed a
substantial rally against the US dollar.
During 1996, the Japanese equity market fell by over 15%
in US dollar terms and the first few trading days of 1997
do not appear to set a very hopeful scene for the
remainder of the year. Given that the domestic economy is
barely out of recession, the market is rightly concerned
about prospective government initiatives to reduce the
burgeoning public sector deficit. With the stock market
seemingly on an inexorably declining path, issues about
systemic risk in the banking and insurance sectors are
resurfacing. With the yen now 16% lower against the US
dollar since January 1995 (see Exhibit 1) and the Central
Bank of Japan still happy to pump any amount of liquidity
into the system, the bear arguments look to be dominated
by short-term fear rather than rational analysis. It is
normally at times of extreme pessimism that the most
lucrative opportunities emerge. We view the current panic
in Japan as overblown and can find many respectable
companies where valuations are attractive in an
international context. We have increased our Japanese
weight in the fund by 4%, funded from cash, in early
January.
We remain optimistic on the outlook for Continental
Europe. Recently currency movements have given a boost to
international competitiveness. Prospects for corporate
earnings will be augmented by the dual effects of
corporate restructuring and improving economic growth
trends. The development of private sector pension funds
along with the emergence of local equity expertise, has
only just begun to give measurable liquidity support to
markets, notably in Germany and Spain. Our heavily
overweight position in Europe (see page 4) has served us
well for most of last year and we believe will do so
again in 1997.
We have been cautious on the prospects for the UK market
for most of 1996. With a sterling return of 16%, the UK
performed the poorest of all major equity markets except
Japan. In spite of this, cyclical pressures for higher
interest rates made sterling the strongest major
currency. We remain underweight in UK equities for three
reasons: first, further interest rate rises are likely;
second, the lagged effect of a stronger currency will put
pressure on UK company profitability; and finally,
general uncertainty surrounds the outcome of the election
in the Spring.
The Far East and emerging markets have had very mixed
experiences, but their economies are very linked to the
world trade cycle (especially electronics in the case of
the Far East) and they have been squeezed by the rise of
the US dollar (to which they generally peg their
currencies). Longer term they are still capable of
producing superior growth. In the near term, the trade
cycle, China's recovery and a more stable dollar should
be in their favor. These still suggest that we ought to
stay with them long term but all will undoubtedly be hit
disproportionately if Wall Street falls or if US interest
rates rise. We are happy to continue to hold our current
weightings in these markets.
Looking forward into 1997, we are generally cautious on
prospects for international equity markets. Valuations in
most cases look stretched and if economics grow either
too quickly or too slowly, then a sharp correction may be
in the offing. We perceive that the greatest risk lies
with the US market, although other areas are unlikely to
escape the contagion altogether. Our aim is to focus on
individual companies and sectors in order to generate
excess performance. Our principle ideas for 1997 include:
defense stocks (such as British Aerospace and Daimler
Benz), media stocks (such as NewsCorp, Elsevier and
AsiaSat) and technology stocks (Ericsson, Rohm, Philips
and Murata). If our view that general market returns will
be more difficult to come by is correct, our bottom up
approach should be particularly appropriate.
Sincerely,
Allan McKenzie,
Director,
Scottish Widows Investment Management
Portfolio Summary: December 31, 1996
Total Net Assets $ 22,513,375
Class A:
Shares Outstanding 1,827,223
Net Asset Value Per Share $ 12.19
Offering Price Per Share $ 12.80
Class C:
Shares Outstanding 19,137
Net Asset Value and Offering Price Per Share $ 12.08
Geographical
Europe 42%
Japan 22%
United Kingdom 17%
Pacific Basin 12%
Cash 7%
100%
SWIF vs. MSCI EAFE Index
Cash 6.80
Europe 5.86
United Kingdom 2.64
Pacific Basin 0
Japan -10.67
Cumulative Total Returns
Periods Ended December 31, 1996 One Year Five Years Inception
Class A _ without sales charge 8.8% 45.3% 56.9%(1)
Morgan Stanley EAFE Index 4.4% 36.4% n/a
Class C 7.9% n/a 8.9%(2)
Class A _ with 4.75% sales charge 3.6% 38.4% 49.4%(1)
Average Annual Total Returns
Periods Ended December 31, 1996 One Year Five Years Inception
Class A _ without sales charge 8.8% 7.8% 7.5%(1)
Morgan Stanley EAFE Index 4.4% 6.4% n/a
Class C 7.9% n/a 7.9%(2)
Class A _ with 4.75% sales charge 3.6% 6.7% 6.6%(1)
(1)Inception: 9/28/90
(2)Inception: 11/15/95
Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so
that shares, when redeemed, may be worth more or less
than their original cost. The Fund's portfolio may differ
significantly from the securities in the index. The index
is unmanaged and therefore does not reflect the cost of
portfolio management or trading.
Investments: December 31, 1996
COMMON STOCK - 93.1%
Shares Country/Security Description Value (US $)
AUSTRALIA_ 1.5%
62,000 NEWS CORPORATION
An international media company,
involved in television,
newspapers and on-line services 326,978
FRANCE_ 10.7%
2,273 ADECCO SA
International business contracting group 574,071
4,000 IMETAL
Producer and supplier of building materials 589,373
1,650 PINAULT PRINTEMPS
Department store and building materials
distribution company 653,176
9,600 VALEO S.A.
Manufacturer of electrical and mechanical
components 590,911
GERMANY_ 8.4%
18,000 BAYER AG
An international specialist chemical
manufacturer 729,409
1,490 MANNESMANN AG
Manufacturer of electrical and mechanical
components 640,239
4,130 SGL CARBON
World market leader in the production of
graphite electrodes 520,166
HONG KONG_ 6.0%
117,000 ASIA SATELLITE*
Owns and operates two satellites used by
broadcasting and telecommunication industries 271,512
65,000 CITIC PACIFIC LIMITED
Hong Kong based holding company with interests
in power stations, telecommunications and
property 377,310
18,395 HSBC HOLDINGS
Global banking with over 50% of earnings
derived from Asia Pacific region 393,583
182,000 PEREGRINE HOLDINGS
A financial services provider totally geared
towards the Asia-Pacific Region 311,764
* Non-income producing security.
INDONESIA_ 1.4%
58,000 HANJAYA MANDALA SAMPOERNA IDR
Kretek cigarette manufacturer 309,128
JAPAN_ 21.1%
16,000 INES
Major information and data services company 232,950
40,000 KURIMOTO IRON WORKS
Specialized civil engineering company (bridges,
pipelines, etc.) 358,384
74,000 MITSUBISHI HEAVY INDUSTRIES LTD
Japan's largest comprehensive heavy machinery
maker 586,509
15,000 MURATA MANUFACTURING CO.
Manufacturer of ceramic products including
filters and oscillators 497,516
29,000 NIPPON COMSYS
Japan's second largest telecommunications
engineering company 329,782
88,000 NISSAN MOTOR CO.
Japan's second largest automotive manufacturer 509,457
5,000 ORIENTAL LAND
Operator of "Tokyo Disney Land" 351,492
7,000 ROHM CO.
Largest specialist maker of linear integrated
circuits 458,318
40,000 SCHOCHIKU
Retail store chain 344,600
94,000 SUMITIMO REALTY & DEVELOPMENT
Real estate developer 591,161
51,000 SUMITOMO TRUST & BANKING
Financial institution combining banking and asset
management services 509,663
MALAYSIA_ 1.6%
40,000 UNITED ENGINEERS
A dominant player in the local construction
market 361,116
NETHERLANDS_ 9.5%
41,000 ELSEVIER N.V.
Publisher and printer of scientific and business
journals 692,128
19,292 INTERNATIONAL NETHERLANDS GROUP
International bank and financial services group 693,725
18,500 PHILIPS ELECTRONICS N.V.
Dutch manufacturer of lighting and consumer
electronics 748,668
PHILIPPINES_ 1.4%
133,800 FIRST PHILIPPINE HOLDINGS CORP B
Leading infrastructural group 305,241
SWEDEN_ 7.0%
11,400 PHARMACIA & UPJOHN
An international pharmaceutical group of
companies 466,650
21,600 SANDVIK AB
Manufacturer of cemented carbide products 585,234
16,640 TELEFONAKTIEBOLAGET LM ERICSSON
Telecommunications company which produces and
installs cable and network systems 514,209
SWITZERLAND_ 6.4%
666 NOVARTIS AG
International pharmaceutical and chemical company 760,378
87 ROCHE HOLDINGS AG - (Genusscheine)
Pharmaceutical company 674,826
THAILAND_ 1.5%
45,000 BANGKOK BANK
Provider of commercial banking services 335,214
UNITED KINGDOM_ 16.6%
26,000 BRITISH AEROSPACE ORD
Major European defense and aerospace manufacturer 568,626
123,000 DEWHIRST GROUP
Leading UK supplier of toiletries and clothing 380,987
37,000 FARNELL ELECTRONICS
Manufactures and distributes electronic
components and equipment worldwide 474,886
37,000 GRANADA GROUP
Television rental, leisure and business services
group 546,435
31,500 LAPORTE PLC
Manufacturer and distributor of specialty
chemical products 368,447
66,000 LOW & BONAR
Produces consumer and industrial packaging and
specialist polymers 459,689
58,438 LLOYDS TSB GROUP
Provider of comprehensive range of banking
and financial services in UK and overseas 431,021
119,000 STOREHOUSE ORD
A UK-based retailer with three main brands:
BhS, Mothercare and Blazer 526,422
TOTAL COMMON STOCK (Cost $17,115,355) 20,951,354
WARRANTS_ 0%
18,200 PEREGRINE INVESTMENTS - WARRANTS*
Expiration Date: May 15, 1998 Strike price: 15 HK
dollars, 5,823
Total Warrants (cost $0)5,823
SHORT-TERM INVESTMENTS_ 6.7%
CoreStates London Balance 1,510,381
Total Short Term Investments (at cost) 1,510,381
TOTAL INVESTMENTS_ 99.8% (Cost $18,625,736) 22,467,558
Receivables and other assets, less liabilities_ .2% 45,817
TOTAL NET ASSETS_100% $22,513,375
*Non-income producing security
See notes to financial statements
Statement of Assets and Liabilities
December 31, 1996
Assets
Investment securities at cost $18,625,736
Investment securities at value $22,467,558
Cash 313,617
Receivables:
Other 14,902
Dividends, interest and tax reclaims 70,976
Fund shares sold 3,070
Total Assets 22,870,123
Liabilities
Fund shares repurchased 5,256
Investment securities purchased 351,492
Total Liabilities 356,748
Net Assets $22,513,375
Class A:
Shares outstanding 1,827,223
Net asset value per share $ 12.19
Offering price per share $ 12.80
Class C:
Shares outstanding 19,137
Net asset value and offering price per share $ 12.08
Net Assets consist of:
Paid-in capital (a): $18,703,590
Undistributed realized (loss) on investments (32,037)
Unrealized appreciation on investments and foreign
currency contracts 3,841,822
$22,513,375
Statement of Operations
Year ended December 31, 1996
Investment Income
Dividends
(net of foreign taxes withheld of $116,979) $ 409,104
Interest 20,142
429,246
Expenses
Investment advisory & administrative fees 212,194
Distribution fees
Class A 40,599
Class C 1,372
Custodian fees 42,422
Transfer agent fees 42,398
Auditing and legal fees 35,561
Trustees' fees 28,010
Registration fees 15,945
Insurance 9,572
Postage and mailing 5,400
Printing 3,918
Total Expenses 437,391
Net Investment (Loss) (8,145)
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies
Net realized gain from investment
and option transactions 2,352,612
Net realized gain from foreign
currency conversions and
forward currency contracts 34,970
Net change in unrealized
depreciation of investments
and foreign currency contracts (191,064)
Net Gain on Investments 2,196,518
Net increase in net assets
resulting from operations $2,188,373
(a) At December 31, 1996 there were an unlimited number
of shares of beneficial interest of $0.01 par value
authorized.
See notes to financial statements.
Statements of Changes in Net Assets
Year Ended December 31
1996 1995
Changes Resulting from Operations
Net investment loss $ (8,145) $ ( 21,499)
Net realized gain from investment
transactions 2,387,582 782,687
Net unrealized appreciation
(depreciation) of investments (191,064) 1,849,734
Net increase in net assets resulting
from operations 2,188,373 2,610,922
Distributions to Shareholders
Dividends from net investment income -0- -0-
Distributions from investment
transactions (3,049,014) (108,145)
Distributions from paid-in capital (153,033) -0-
Total distributions to shareholders (3,202,047) (108,145)
Capital Share Transactions
Class A:
Shares sold 3,490,369 1,770,163
Reinvested dividends 973,743 27,329
Shares redeemed (8,903,590) (12,080,842)
Net (decrease) from Class A (4,439,478) (10,283,350)
Class C:
Shares sold 192,129 40,234
Reinvested dividends 25,150 78
Shares redeemed (7,678) -0-
Net increase from Class C 209,601 40,312
Total (Decrease) in Net Assets (5,243,551) (7,740,261)
Net Assets
Beginning of year 27,756,926 35,497,187
End of year $ 22,513,375 $ 27,756,926
Fund Share Transactions
Class A:
Shares sold 273,377 119,835
Reinvested dividends 79,510 2,117
Shares redeemed (671,528) (952,635)
Net share (decrease) from Class A (318,641) (830,683)
Class C:
Shares sold 14,463 3,166
Reinvested dividends 2,081 6
Shares redeemed (579) -0-
Net share increase from Class C 15,965 3,172
Net capital share (decrease) (302,676) (827,511)
See notes to financial statements.
Financial Highlights
PER SHARE INCOME AND CAPITAL CHANGES
(for a share outstanding throughout the indicated period)
Class C Class A*
Year Ended December 31
19961995(5)1996199519941993199219911990(2)
Net Asset Value: Beginning of
period$12.90$12.84$12.91$11.93$14.28$11.03$11.96$11.21$
11.34
Investment Operations:
Net investment income (loss)(0.10)__ (0.01)
(0.07) (0.02)0.060.120.10
Net realized and unrealized gain (loss)1.080.111.081.04
(0.10)3.72 (0.86)0.73 (0.07)
Total from Investment Operations0.980.111.081.03
(0.17)3.70 (0.80) 0.850.03
Distributions:
Dividends from net investment income______ (0.08)
(0.10) (0.10)
Distributions from realized capital
gains(1.71)(0.05)(1.71)(0.05) (2.16) (0.45)
(0.05)_ (0.06)
Distribution from paid-in capital(0.09)_(0.09)______
Distributions in excess of accumulated
net gains____ (0.02)____
Total Distributions(1.80)(0.05)(1.80) (0.05)
(2.18) (0.45) (0.13) (0.10) (0.16)
Net Asset Value: End of
period$12.08$12.90$12.19$12.91$11.93$14.28$11.03$11.96$
11.21
Total Return(1)7.9%n/a(3)8.8%8.7%-1.4%33.6%-6.7%7.6%0.3%
Net assets, end of period ($
thousands)2314122,28227,71635,49740,58733,97345,62339,316
Ratio of operating expenses to average
net assets2.58%n/a(3)1.74%1.69%1.92%2.09%2.07%2.11%
2.31%(2)
Ratio of net investment income (loss) to
average net assets-0.9%n/a(3)-0--0.1%-0.5%-0.2%0.5%1.0%
3.6%(2)
Portfolio turnover rate
(4)58.9%99.4%58.9%99.4%107.0%91.7%84.6%38.4%0.0%
Average commission per share
(4)$.0240n/a$.0240n/an/an/an/an/an/a
*Effective November 15, 1995, the Fund commenced offering
Class C shares. All capital shares issued and outstanding
as of November 15, 1995, were reclassified as Class A
shares.
Effective January 23, 1995, the Fund entered into a new
investment advisory agreement with Penn Square Management
Corporation. Prior to such date the advisor was Boston
Security Counsellors Inc., a wholly owned subsidiary of
the Advest Group.
(1) Total return does not include the maximum sales load
of 4.75% for Class A shares.
Total return for 1990 represents actual, not annualized
percentage.
(2) Period from 9/28/90 to 12/31/90. Ratios are
annualized.
(3) Ratios not meaningful due to short period of
operation of Class C shares.
(4) Portfolio turnover and average commission per share
are calculated on the basis of the Fund as a whole
without distinguishing
between the classes of shares issued. Average
commission per share disclosure required for fiscal years
beginning after 9/1/95.
(5)Period from November 15, 1995 to December 31, 1995.
See notes to financial statements.
Notes to Financial Statements
NOTE A_ORGANIZATION
The Scottish Widows International Fund (the "Fund") was
organized as a Massachusetts business trust on May 23,
1990 and commenced operations on September 28, 1990. The
Fund is registered under the Investment Company Act of
1940, as amended, as an open-end diversified management
investment company.
The Fund's investment objective is long-term capital
appreciation. The Fund seeks its objective by investing
primarily in equity securities of issuers in countries
outside the United States.
The following footnotes detail significant accounting
policies used by the Fund.
Trail commission and service fees for Class A and C are
accounted for as class specific expenses. All other
expenses are accounted for at the Fund level.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts
of income and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B_SECURITY VALUATION AND TRANSACTIONS
The net asset value of the Fund's shares is determined as
of the close of trading on the New York Stock Exchange
("NYSE").
Market values for the Fund's portfolio investments are
determined as follows:
a. Portfolio securities which are traded on exchanges
are valued at the last sale or settlement price on the
exchange where primarily traded or, if none that day, at
the mean of the last reported bid and asked prices, using
prices as of the close of trading on the applicable
exchange. Securities which are traded in the
over-the-counter market are valued at the mean of the
last available bid and asked prices.
b. Securities with an initial maturity or remaining
maturity of 60 days or less are valued at amortized cost,
which approximates market value.
c. Securities for which market quotations are not
readily available and other assets are valued at their
fair values, as determined by or under the direction of
the Trustees.
d. Generally, trading in foreign securities is
substantially completed each day at various times prior
to the close of the NYSE. Occasionally, events affecting
the values of such securities may occur between the times
at which they are determined and the close of the NYSE
which will not be reflected in the computation of the
Fund's net asset value unless the Trustees deem that such
events would materially affect the net asset value, in
which case an adjustment would be made.
Security transactions are accounted for on the date the
securities are purchased or sold. Dividend income is
recorded on the ex-dividend date except certain dividends
from foreign securities are recorded as soon as the Fund
is informed of the ex-dividend date. Interest income is
recorded on the accrual basis. Income is recorded net of
unrecoverable foreign tax withheld according to the
applicable country's rate. The Fund uses the identified
cost basis in computing gains or losses on sales of
investment securities or foreign currency holdings.
NOTE C_FOREIGN CURRENCY TRANSLATION
The books and records of the Fund are maintained in U.S.
dollars. The value of investments, assets and liabilities
denominated in currencies other than U.S. dollars are
translated into U.S. dollars based upon current foreign
exchange rates. Purchases and sales of foreign
investments and income and expenses are converted into
U.S. dollars based on currency exchange rates prevailing
on the respective dates of such trans-actions. The Fund
does not isolate that portion of the results of
operations arising from changes in the exchange rates
from that portion arising from changes in the market
prices of securities.
Net realized and unrealized gain (loss) on foreign
currency transactions represents the foreign exchange of:
(1) gains and losses from the sale of holdings of foreign
currencies; (2) gains and losses between trade date and
settlement date on investment securities transactions and
forward exchange contracts; and (3) gains and losses from
the difference between amounts of interest and dividends
recorded and the amount actually received.
NOTE D_FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS
The Fund may enter into forward foreign currency exchange
contracts ("contracts") to purchase or sell currencies at
a specified rate at a future date. The Fund may enter
into these contracts solely for hedging
purposes.
The Fund purchases put and call options on foreign
currencies. The premium paid by the Fund for the purchase
of a call or put option is included in the Fund's
"Statement of Assets and Liabilities" as an investment
and subsequently "marked-to-market" to reflect the
current market value of the option. If an option which
the Fund has purchased expires on the stipulated
expiration date, the Fund realizes a loss in the amount
of the cost of the option.
The amount of potential gain or loss to the Fund upon
exercise of a written call option is the value (in U.S.
dollars) of the currency sold, less the value of the U.S.
dollars received in exchange. The amount of the potential
gain or loss to the Fund upon exercise of a written put
option is the value (in U.S. dollars) of the currency
received, less the value of the U.S. dollars paid in
exchange.
Risks may arise upon entering these contracts from the
potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in
the value of a foreign currency relative to the U.S.
dollar.
NOTE E_FEDERAL TAXES
It is the policy of the Trustees to distribute
substantially all of the Fund's taxable net investment
income and net realized gain from investment transactions
for each year as taxable dividends and distributions, and
to qualify as a "Regulated Investment Company" under the
applicable sections of the Internal Revenue Code.
Accordingly, no provision has been made for federal
income taxes. In addition, by distributing during each
calendar year substantially all of its net investment
income and realized capital gains, the Fund will not be
subject to a federal excise tax.
Dividends from ordinary income, and any net short-term
and long-term capital gains, will be distributed
annually. Dividends to shareholders are recorded as a
liability by the Fund on the ex-date.
During the year ended December 31, 1996, the Fund
reclassified $153,033 from undistributed realized loss on
investments to additional paid in capital. The
reclassification was made to present undistributed
realized losses on a tax basis and has no impact on the
net asset value of the Fund.
NOTE F_FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Advisory and Administrative Agreements _ The Fund has
entered into an Investment Advisory Agreement with Penn
Square Management Corporation ("PSMC"). For its services
as Investment Advisor, PSMC receives from the Fund an
advisory fee equal on an annual basis to .675% of the
average daily net assets of the Fund. In addition, the
Fund pays PSMC an administrative fee of .175% of the
average daily net assets for providing the Fund with
office space, and other management, administrative and
clerical services. During the year ended December 31,
1996, the Fund paid or accrued fees to PSMC of $212,194.
PSMC has entered into a sub-advisory agreement with
Scottish Widows Investment Management Limited, Edinburgh,
Scotland, ("Scottish Widows") to provide investment
advice regarding the Fund's portfolio. For furnishing
investment advice and related services to the Fund,
Scottish Widows receives a fee equal on an annual basis
to .50% of the Fund's average daily net assets, which is
paid out of the advisory fee that the Fund pays to PSMC.
Distribution Agreement_The Fund has entered into a
Distribution Agreement with PSMC and has adopted a
distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will pay
annually up to .25% for Class A and 1.00% for Class C of
the average daily net assets to securities dealers who
are dealers of record with respect to Fund shares, for
services provided in connection with maintenance of
shareholder accounts.
Transfer Agent Agreement _ The Fund has entered into a
transfer agency and service agreement with PSMC, who
provides these services at cost.
Other Related Party Transactions _ Unaffiliated trustees
of the Fund receive an annual retainer of $2,000 and an
additional fee of $500 for each Trustees' meeting
attended.
Penn Square Management Corporation, the general
distributor of the Fund, received sales charges and
underwriting fees aggregating approximately $6,000 on
sales of shares of the Fund and was reimbursed
$58,621 for expenses incurred pursuant to the
Distribution Plan with the Fund for the year ended
December 31, 1996.
Penn Square Management Corporation shall reimburse the
Fund for any expenses, excluding taxes and brokerage
commissions, that exceed the maximum expense limitation
imposed by the applicable law of any jurisdiction where
the Fund's shares are offered for sale.
NOTE G_PURCHASES AND SALES OF PORTFOLIO INVESTMENTS
For the year ended December 31, 1996, purchases
(excluding short-term securities) of portfolio
investments were $14,377,107 and sales proceeds were
$22,514,495.
At December 31, 1996, the cost of investments owned is
the same for financial reporting and federal income tax
purposes. Net unrealized appreciation of investments is
$3,841,822 (aggregate gross unrealized appreciation of
$4,902,168 less aggregate gross unrealized depreciation
of $1,060,346).
Report of Independent Auditors
Trustees and Shareholders
Scottish Widows International Fund
We have audited the accompanying statement of assets and
liabilities of the Scottish Widows International Fund
including the schedule of investments as of December 31,
1996, and the related statement of operations for the
year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and
the financial highlights for each of the two years in the
period then ended. These financial statements and
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion
on these financial statements and financial highlights
based on our audit. The financial highlights for each of
the four years in the period ended December 31, 1994 and
for the period from commencement of operations of the
Fund (September 28, 1990) to December 31, 1990, were
audited by other auditors whose report dated February 17,
1995, expressed an unqualified opinion with respect
thereto.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and
financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of
securities owned as of December 31, 1996, by
correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all
material respects, the financial position of the Scottish
Widows International Fund as of December 31, 1996, the
results of its operations for the year then ended, the
changes in its net assets for each of the two years in
the period then ended, and the financial highlights for
each of the two years in the period then ended, in
conformity with generally accepted principles.
ERNST & YOUNG LLP
Reading, Pennsylvania
January 16, 1997
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993 and
the investment Company Act of 1940, the Registrant certifies
that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this amendment to this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York, on the 5th day of March, 1997.
SCOTTISH WIDOWS INTERNATIONAL FUND
By: [sig]
James E. Jordan, President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to this registration has been signed below by the following
persons in the capacities and on the date indicated. Each of the
persons whose signature appears below hereby authorizes James E.
Jordan, President of the Registrant, to execute in the name of each
person and to file all amendments to this Registration Statement as
the Registrant deems appropriate and appoints such person as his
attorney-in-fact to sign on his behalf individually and in each
capacity stated below and to file all amendments and post-effective
amendments to this Registration Statement.
SIGNATURE TITLE DATE
[sig]
James E. Jordan President, March 5, 1997
principal
executive
officer and
Trustee
[sig]
Dennis J. Westley V.President March 5, 1997
and Treasurer
Lee D. Arning Trustee
[sig]
Richard C. Farr Trustee March 5, 1997
Paul J. Lawler Trustee
[sig]
Emmett M. Murphy Trustee March 5, 1997
[sig]
Geoffrey Nunes Trustee March 5, 1997
[sig]
Linda G. Sprague Trustee March 5, 1997
[sig]
Gail M. Harrity Trustee March 5, 1997
Consent of Independent Accountants
We consent to the reference to our firm under the caption "Financial
Highlights" in the Prospectus and to the incorporation by reference
in the Post-Effective Amendment No. 11 to the Registration Statement
(Form N-1A No. 33-35081) of the Scottish Widows International Fund of
our report dated January 16, 1997, included in the 1996 Annual Report
to Shareholders of the Scottish Widows International Fund.
ERNST & YOUNG LLP
Reading, Pennsylvania
April 24, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
12/31/96 N-SAR and is qualified in its entirety by reference to such N-SAR.
</LEGEND>
<CIK> 0000863886
<NAME> SCOTTISH WIDOWS INTERNATIONAL FUND
<SERIES>
<NUMBER> 1
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 18,625,736
<INVESTMENTS-AT-VALUE> 22,467,558
<RECEIVABLES> 74,046
<ASSETS-OTHER> 328,519
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,870,123
<PAYABLE-FOR-SECURITIES> 351,492
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,256
<TOTAL-LIABILITIES> 356,748
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,703,590
<SHARES-COMMON-STOCK> 1,827,223
<SHARES-COMMON-PRIOR> 2,145,864
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (32,037)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,841,822
<NET-ASSETS> 22,513,375
<DIVIDEND-INCOME> 409,104
<INTEREST-INCOME> 20,142
<OTHER-INCOME> 0
<EXPENSES-NET> 437,391
<NET-INVESTMENT-INCOME> (8,145)
<REALIZED-GAINS-CURRENT> 2,387,582
<APPREC-INCREASE-CURRENT> (191,064)
<NET-CHANGE-FROM-OPS> 2,188,373
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 3,049,014
<DISTRIBUTIONS-OTHER> 153,033
<NUMBER-OF-SHARES-SOLD> 273,377
<NUMBER-OF-SHARES-REDEEMED> 671,528
<SHARES-REINVESTED> 79,510
<NET-CHANGE-IN-ASSETS> (5,243,551)
<ACCUMULATED-NII-PRIOR> (249,517)
<ACCUMULATED-GAINS-PRIOR> 974,542
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 212,194
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 437,391
<AVERAGE-NET-ASSETS> 24,955,000
<PER-SHARE-NAV-BEGIN> 12.91
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 1.08
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.71
<RETURNS-OF-CAPITAL> .09
<PER-SHARE-NAV-END> 12.19
<EXPENSE-RATIO> .017
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
12/31/96 N-SAR and is qualified in its entirety by reference to such N-SAR.
</LEGEND>
<CIK> 0000863886
<NAME> SCOTTISH WIDOWS INTERNATIONAL FUND
<SERIES>
<NUMBER> 1B
<NAME> CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 18,625,736
<INVESTMENTS-AT-VALUE> 22,467,558
<RECEIVABLES> 74,046
<ASSETS-OTHER> 328,519
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,870,123
<PAYABLE-FOR-SECURITIES> 351,492
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,256
<TOTAL-LIABILITIES> 356,748
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,703,590
<SHARES-COMMON-STOCK> 19,137
<SHARES-COMMON-PRIOR> 3,172
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (32,037)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,841,822
<NET-ASSETS> 22,513,375
<DIVIDEND-INCOME> 409,104
<INTEREST-INCOME> 20,142
<OTHER-INCOME> 0
<EXPENSES-NET> 437,391
<NET-INVESTMENT-INCOME> (8,145)
<REALIZED-GAINS-CURRENT> 2,387,582
<APPREC-INCREASE-CURRENT> (191,064)
<NET-CHANGE-FROM-OPS> 2,188,373
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 3,049,014
<DISTRIBUTIONS-OTHER> 153,033
<NUMBER-OF-SHARES-SOLD> 14,463
<NUMBER-OF-SHARES-REDEEMED> 579
<SHARES-REINVESTED> 2,081
<NET-CHANGE-IN-ASSETS> (5,243,551)
<ACCUMULATED-NII-PRIOR> (249,517)
<ACCUMULATED-GAINS-PRIOR> 974,542
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 212,194
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 437,391
<AVERAGE-NET-ASSETS> 24,955,000
<PER-SHARE-NAV-BEGIN> 12.90
<PER-SHARE-NII> (0.10)
<PER-SHARE-GAIN-APPREC> 1.08
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.71
<RETURNS-OF-CAPITAL> .09
<PER-SHARE-NAV-END> 12.08
<EXPENSE-RATIO> .026
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
