<PAGE>
The Date of this Prospectus is August 1, 1997
TWEEDY, BROWNE GLOBAL VALUE FUND
TWEEDY, BROWNE AMERICAN VALUE FUND
<TABLE>
<S> <C>
52 VANDERBILT AVENUE SHAREHOLDER SERVICES: 800-432-4789, PRESS 3
NEW YORK, NY 10017 DAILY NAV PRICES: 800-432-4789, PRESS 3
FOR SPECIAL ASSISTANCE IN
OPENING A NEW ACCOUNT: 800-432-4789, PRESS 2
FUND INFORMATION KIT: 800-432-4789, PRESS 1
</TABLE>
- --------------------------------------------------------------------------------
[LOGO] GLOBAL FUND
Tweedy, Browne Global Value Fund (the "Global Fund") seeks long-term growth
of capital by investing throughout the world in a diversified portfolio
consisting primarily of marketable equity securities, including common stocks,
preferred stocks and securities representing the right to acquire stocks. The
Global Fund may also invest in debt instruments, although income is an
incidental consideration. The Global Fund expects to invest primarily in foreign
securities, although investments in U.S. securities are permitted and will be
made when opportunities in U.S. markets appear more attractive.
[LOGO] AMERICAN FUND
Tweedy, Browne American Value Fund (the "American Fund") seeks long-term
growth of capital by investing in a diversified portfolio consisting primarily
of domestic equity securities of U.S. issuers, including common stocks,
preferred stocks and securities representing the right to acquire stocks. The
American Fund may invest up to 20% of its portfolio in foreign securities when
opportunities in foreign markets appear attractive.
Both the Global Fund and the American Fund (the "Funds") are diversified
series of Tweedy, Browne Fund Inc., an open-end management investment company
(the "Corporation").
------------ -- ------------
The Funds are sold without any sales charges or 12b-1 fees and are
accordingly purely "no-load." The minimum initial investment for each Fund is
$2,500 ($500 for IRAs and similar accounts) and subsequent investments must be a
minimum of $250.
The Funds' investment adviser is Tweedy, Browne Company L.P. ("Tweedy,
Browne" or the "Investment Adviser"), which was founded as Tweedy & Co. in 1920
and has managed assets since 1968. Tweedy, Browne currently manages
approximately $4.5 billion in client funds, including approximately $2.2 billion
in foreign securities. The current and retired partners and their families, as
well as employees of Tweedy, Browne, have more than $236.8 million in portfolios
combined with or similar to client portfolios, including approximately $26.8
million in the Global Fund and $26.5 million in the American Fund.
This prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. Please retain it for future
reference.
If you require more detailed information, a Statement of Additional
Information dated August 1, 1997 (the "Statement of Additional Information"), as
amended from time to time, may be obtained without charge by writing to the
address or calling the number above. The Statement of Additional Information,
which is incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
EXPENSE INFORMATION
This information is designed to help you understand the various costs and
expenses of investing in the Global Fund and the American Fund. By reviewing
this table and those in other mutual funds' prospectuses, you can compare the
Funds' fees and expenses with those of other funds. You pay no commissions to
purchase or redeem shares of either Fund. As a result, all of your investment
goes to work for you.
HOW TO COMPARE THE GLOBAL FUND AND THE AMERICAN FUND TO OTHER MUTUAL FUNDS
1) SHAREHOLDER TRANSACTION EXPENSES:
Expenses charged directly to your individual account in each Fund for
various transactions.
<TABLE>
<CAPTION>
GLOBAL FUND AMERICAN FUND
----------- -------------
<S> <C> <C>
Sales Commissions to Purchase Shares (sales load)....... NONE NONE
Commissions to Reinvest Dividends....................... NONE NONE
Redemption Fees......................................... NONE NONE
</TABLE>
2) ANNUAL OPERATING EXPENSES:
Expenses paid by either Fund before it distributes its net investment
income, expressed as a percentage of the Funds' average daily net assets as
of fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
GLOBAL FUND AMERICAN FUND
----------- -------------
<S> <C> <C>
Investment Advisory Fee (after voluntary fee waiver).... 1.25% 1.14% *
12b-1 Fees.............................................. NONE NONE
Other Expenses (after voluntary fee waiver)............. 0.33% 0.25% *
---- ----
Total Fund Operating Expenses (after voluntary fee
waiver)............................................... 1.58% 1.39% *
==== ====
</TABLE>
- ---------------
The purpose of the above table is to assist the investor in understanding
the various costs and expenses that investors in the Global Fund and the
American Fund will bear directly or indirectly.
*Without the voluntary fee waiver the investment advisory fee would have been
1.25% for the American Fund. Without the voluntary fee waivers of the
administrator and custodian, Other Expenses would have been 0.27%. Absent
the voluntary fee waivers, Total Fund Operating Expenses would have been
1.52%.
- --------------------------------------------------------------------------------
-
2
-
<PAGE>
"Total Fund Operating Expenses" in the table on the preceding page is based
on the Funds' fiscal year ended March 31, 1997. See "Operation of the Funds --
Investment Adviser" for further information on the investment advisory fees
charged by each Fund.
EXAMPLE
Based on the level of total operating expenses listed on the preceding
page, the total expenses relating to a $1,000 investment in either Fund,
assuming a 5% annual return and redemption at the end of each period, are listed
below. Investors do not pay these expenses directly; they are paid by each Fund
before it distributes its net investment income to shareholders.
<TABLE>
<CAPTION>
GLOBAL FUND AMERICAN FUND
----------- -------------
<S> <C> <C>
One Year............................... $ 16 $ 14
Three Years............................ $ 50 $ 44
Five Years............................. $ 86 $ 76
Ten Years.............................. $188 $167
</TABLE>
This example assumes reinvestment of all dividends and distributions and
that the percentage amounts listed under "Total Fund Operating Expenses" remain
the same each year. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR RETURNS. ACTUAL EXPENSES AND RETURNS VARY FROM YEAR
TO YEAR AND MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
-
3
-
<PAGE>
FINANCIAL HIGHLIGHTS
TWEEDY, BROWNE GLOBAL VALUE FUND
The following information for the fiscal year ended March 31, 1997 has been
audited by Ernst & Young LLP, independent auditors whose report thereon appears
in the Global Fund's Annual Report, dated March 31, 1997. This information
should be read in conjunction with the financial statements and related notes
that also appear in the Global Fund's Annual Report.
- --------------------------------------------------------------------------------
TWEEDY, BROWNE GLOBAL VALUE FUND
(For a Fund share outstanding throughout each year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
3/31/97 3/31/96(a) 3/31/95 3/31/94(a)(b)
---------- ---------- -------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 14.28 $ 11.52 $ 12.26 $ 10.00
- --------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(c) 0.12 0.15 0.10 (0.00)(d)
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 2.18 2.81 (0.68) 2.26
- --------------------------------------------------------------------------------------------------------------
Total from investment operations 2.30 2.96 (0.58) 2.26
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Dividends from net investment income (0.19) -- -- --
- --------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income (0.36) -- -- --
- --------------------------------------------------------------------------------------------------------------
Distributions from net realized gains (0.57) (0.05) (0.06) --
- --------------------------------------------------------------------------------------------------------------
Distributions in excess of net realized gains -- (0.15) (0.10) --
- --------------------------------------------------------------------------------------------------------------
Total distributions (1.12) (0.20) (0.16) --
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 15.46 $ 14.28 $ 11.52 $ 12.26
- --------------------------------------------------------------------------------------------------------------
Total return(e) 16.66% 25.88% (4.74)% 22.60%
- --------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (in 000's) $1,441,210 $950,911 $655,035 $297,434
- --------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets(f) 1.58% 1.60% 1.65% 1.73%(g)
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net
assets 0.73% 1.15% 1.08% (0.00)%(g)(h)
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 20% 17% 16% 14%
- --------------------------------------------------------------------------------------------------------------
Average commission rate (per share of security)(i) $ 0.0249 $ 0.0206 N/A N/A
- --------------------------------------------------------------------------------------------------------------
(a) Per share amounts have been calculated using the monthly average share method, which more appropriately
presents the per share data for the period since the use of the undistributed income method does not accord
with results of operations.
(b) The Fund commenced operations on June 15, 1993.
(c) Net investment income for a Fund share outstanding, before the waiver of fees by the administrator and/or
investment adviser for the year ended March 31, 1997 and for the 7.5-month period ended March 31, 1994 was
$0.11 and $(0.01)per share, respectively.
(d) Amount represents less than $(0.01) per share.
(e) Total return represents aggregate total return for the periods indicated.
(f) Annualized expense ratio before the waiver of fees by the administrator and/or investment adviser for the year
ended March 31, 1997 and for the 7.5-month period ended March 31, 1994 was 1.58% and 1.83%, respectively.
(g) Annualized.
(h) Amount represents less than (0.01)% per share.
(i) Average commission rate (per share of security) as required by amended disclosure requirements effective
September 1, 1995.
</TABLE>
- --------------------------------------------------------------------------------
-
4
-
<PAGE>
TWEEDY, BROWNE AMERICAN VALUE FUND
The following information for the fiscal year ended March 31, 1997 has been
audited by Ernst & Young LLP, independent auditors whose report thereon appears
in the American Fund's Annual Report, dated March 31, 1997. This information
should be read in conjunction with the financial statements and related notes
that also appear in the American Fund's Annual Report.
- --------------------------------------------------------------------------------
TWEEDY, BROWNE AMERICAN VALUE FUND
(For a Fund share outstanding throughout each year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
3/31/97 3/31/96 (a) 3/31/95 (a) 3/31/94 (b)
-------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 14.29 $ 10.71 $ 9.71 $ 10.00
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (c) 0.13 0.15 0.13 0.01
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 2.39 3.56 0.93 (0.30)
- ----------------------------------------------------------------------------------------------
Total from investment operations 2.52 3.71 1.06 (0.29)
- ----------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Dividends from net investment income (0.17) (0.11) (0.06) --
- ----------------------------------------------------------------------------------------------
Distributions from net realized gains (0.42) (0.02) -- --
- ----------------------------------------------------------------------------------------------
Total distributions (0.59) (0.13) (0.06) --
- ----------------------------------------------------------------------------------------------
Net asset value, end of year $ 16.22 $ 14.29 $ 10.71 $ 9.71
- ----------------------------------------------------------------------------------------------
Total return (d) 17.75% 34.70% 11.02% (2.90)%
- ----------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (in 000's) $342,467 $201,599 $58,856 $16,133
- ----------------------------------------------------------------------------------------------
Ratio of operating expenses to average net
assets (e) 1.39% 1.39% 1.74% 2.26%(f)
- ----------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets 0.92% 1.13% 1.25% 0.64%(f)
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate 16% 9% 4% 0%(g)
- ----------------------------------------------------------------------------------------------
Average commission rate (per share of
security)(h) $ 0.0302 $ 0.0341 N/A N/A
- ----------------------------------------------------------------------------------------------
(a) Per share amounts have been calculated using the monthly average share method, which more appropriately
presents the per share data for the period since the use of the undistributed income method does not accord
with results of operations.
(b) The Fund commenced operations on December 8, 1993.
(c) Net investment income (loss) for a Fund share outstanding, before the waiver of fees by the investment adviser
and/or administrator and/or custodian for the years ended March 31, 1997, 1996 and 1995 and the 3.75-month
period ended March 31, 1994 was $0.11, $0.12, $0.11 and $(0.01), respectively.
(d) Total return represents aggregate total return for the periods indicated.
(e) Annualized expense ratios before the waiver of fees by the investment adviser and/or administrator and/or
custodian for the years ended March 31, 1997, 1996 and 1995 and the 3.75-month period ended March 31, 1994
were 1.52%, 1.61%, 1.94% and 3.51%, respectively.
(f) Annualized.
(g) Amount rounds to less than 1.0%.
(h) Average commission rate (per share of security) as required by amended disclosure requirements effective
September 1, 1995.
</TABLE>
- --------------------------------------------------------------------------------
-
5
-
<PAGE>
PERFORMANCE OF THE FUNDS
The following chart illustrates the unaudited total returns of the Global
Fund and the American Fund for the periods specified.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL VALUE OF $10,000
TWEEDY, BROWNE GLOBAL VALUE FUND TOTAL RETURN(1)(2) INVESTED AT INCEPTION
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
From inception (6/15/93) to 3/31/97 15.29% $17,149
- -----------------------------------------------------------------------------------------------------
One year period ended 3/31/97 16.66% --
- -----------------------------------------------------------------------------------------------------
From inception (6/15/93) to 6/30/97 17.03% $18,880
- -----------------------------------------------------------------------------------------------------
One year period ended 6/30/97 23.00% --
- -----------------------------------------------------------------------------------------------------
<CAPTION>
TWEEDY, BROWNE AMERICAN VALUE FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
From inception (12/8/93) to 3/31/97 17.58% $17,097
- -----------------------------------------------------------------------------------------------------
One year period ended 3/31/97 17.75% --
- -----------------------------------------------------------------------------------------------------
From inception (12/8/93) to 6/30/97 21.10% $19,774
- -----------------------------------------------------------------------------------------------------
One year period ended 6/30/97 31.85% --
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) See page 20, "Performance Information," for a discussion of "total return."
These unaudited figures reflect changes in the price of the shares and
assume that any income dividends and/or capital gains distributions made by
the Fund during the period were reinvested. The performance shown
represents past performance and is not a guarantee of future results. A
Fund's share price and investment return will vary with market conditions,
and the principal value of shares, when redeemed, may be more or less than
original cost.
(2) These figures reflect waiver of fees.
WHY INVEST IN THE FUNDS?
EXPERIENCED MANAGEMENT. Tweedy, Browne, founded in 1920, is a registered
investment adviser and, as of June 30, 1997, manages in excess of $4.5 billion,
which includes several private investment funds. The Investment Adviser is
substantially owned by its three general partners, Christopher H. Browne,
William H. Browne and John D. Spears. In its entire history, the Investment
Adviser has had only nine principals, three of whom are currently active and
have been with the Investment Adviser for nineteen to twenty-eight years and
have been principals working with each other for over nineteen years. No general
partner has ever left the Investment Adviser to join another investment firm.
COMMITMENT OF THE INVESTMENT ADVISER. Tweedy, Browne was founded as Tweedy
& Co. in 1920 and has extensive experience in selecting undervalued stocks in
U.S. domestic equity markets. Tweedy, Browne's history is grounded in
undervalued securities, first as a market maker, then as an investor and
investment adviser. The Investment Adviser does not attempt to be all things to
all people, but instead pursues a value-oriented approach to investment
management that is based on the work of the late Benjamin Graham, co-author of
the first textbook on investment research, Security Analysis (1934), and author
of The Intelligent Investor (1949). Tweedy, Browne began investing outside the
United States in 1983 by applying the same principles of value investing that
they have applied to U.S. securities for thirty-eight years.
- --------------------------------------------------------------------------------
-
6
-
<PAGE>
Tweedy, Browne strongly believes in the opportunities available to value
investors on both a global and domestic basis. So much so that the current and
retired general partners of Tweedy, Browne and their families and Tweedy, Browne
employees have more than $236.8 million of their personal funds invested in
domestic portfolios combined with or similar to their clients' portfolios,
including approximately $26.8 million in the Global Fund and $26.5 million in
the American Fund. They own what their clients own.
INVESTMENT PRINCIPLES. The investment management principles practiced by
the Investment Adviser derive from the work of the late Benjamin Graham,
professor of investments at Columbia Business School and author of Security
Analysis and The Intelligent Investor. The Investment Adviser's research seeks
to appraise the worth of a company, what Graham called "intrinsic value", by
determining its acquisition value, or by estimating the collateral value of its
assets and/or cash flow. The term "intrinsic value" may also be referred to as
private market value, breakup value or liquidation value. The process is more
closely related to credit analysis, for as Will Rogers once said, "I'm more
concerned about the return of my money than the return on my money". Investments
are made at a significant discount to intrinsic value, normally 40% to 50%,
which Graham called an investor's "margin of safety". Investments are sold as
the market price approaches intrinsic value, with the proceeds reinvested in
other situations offering a greater discount to intrinsic value. These
principles result in a contrarian approach to investment, forcing the purchase
of securities in generally declining stock markets, conversely forcing sales as
stock markets or individual companies achieve new highs.
Most investments in Tweedy, Browne portfolios have one or more of the
following investment characteristics: low stock price in relation to book value,
low price-to-earnings ratio, low price-to-cash-flow ratio, above average
dividend yield, low price-to-sales ratio as compared to other companies in the
same industry, low corporate leverage, low share price, purchases of a company's
own stock by the company's officers and directors, company share repurchases, a
stock price which has declined significantly from its previous high price and/or
small market capitalization. Academic research and studies have indicated an
historical statistical correlation between each of these investment
characteristics and above average investment rates of return over long
measurement periods.
Tweedy, Browne has compiled a complimentary booklet, included with this
prospectus, entitled WHAT HAS WORKED IN INVESTING. We encourage all current and
prospective shareholders to read it. It describes 44 academic studies of certain
investment criteria that have produced high rates of return. In the 44 studies
included in WHAT HAS WORKED IN INVESTING, exceptional returns were found for
stocks with one or more of the following investment characteristics: low stock
price in relation to book value, net current assets, earnings, cash flow,
dividends or previous share price; small market capitalization; and a
significant pattern of stock purchases by one or more insiders (officers and
directors), or by the company itself. The study periods ranged from 1 to 55
years; indicated annual returns ranged from 12.1% to 49.6% and indicated annual
returns in excess of the market index used in the studies ranged from 2.7% to
33.5% for the various characteristics and historical periods that were examined.
Approximately one-half of the studies examined in the booklet focused on U.S.
stocks and the balance focused on mature foreign stock markets. The investment
characteristics explained in this booklet, which are "value" oriented
characteristics, have been the core of Tweedy, Bowne's investment philosophy and
stock selection decision making process for more than 30 years, and are the
basis for the management of the American Fund and the Global Fund.
- --------------------------------------------------------------------------------
-
7
-
<PAGE>
The returns from the American Fund and Global Fund will differ from those
indicated by these studies for a number of reasons. Tweedy, Browne does not make
its portfolio decisions in accordance with any one particular academic study or
computer model, but instead uses empirical studies of historically successful
investment characteristics as a framework for its stock selection screening and
decision making process. In addition, Tweedy, Browne assesses and weighs
qualitative information concerning specific companies that meet its initial
screening criteria. Finally, the studies analyze only historical data and
generally assume an equal dollar investment in each stock and calculate returns
without any reduction for advisory fees or other investment expenses, which are
incurred by the American Fund and the Global Fund.
GENERAL PARTNERS OF THE INVESTMENT ADVISER. The following is a brief
biography of each of the general partners of Tweedy, Browne:
Christopher H. Browne has been with the Investment Adviser since 1969. He
is a general partner of Tweedy, Browne Company L.P., and of TBK Partners, L.P.
and Vanderbilt Partners, L.P., both private investment partnerships. Mr. Browne
is on the Board of Directors of Tweedy, Browne Fund Inc. Mr. Browne is a Trustee
of the University of Pennsylvania and sits on the Executive Committee of its
Investment Board; he is also a Trustee and a member of The Council of The
Rockefeller University. He also serves as a Director of the American Atlantic
Corporation. Mr. Browne holds a B.A. degree from the University of Pennsylvania.
William H. Browne has been with the Investment Adviser since 1978. He is a
general partner of Tweedy, Browne Company L.P., and of TBK Partners, L.P. and
Vanderbilt Partners, L.P., both private investment partnerships. Mr. Browne is
on the Board of Directors of Tweedy, Browne Fund Inc. He also serves as a
Director of Fairchild Aerospace Corp. and Dornier Luftfahrt GmbH. Additionally,
he is a Trustee of Colgate University. Mr. Browne holds the degrees of B.A. from
Colgate University and M.B.A. from Trinity College in Dublin, Ireland.
John D. Spears joined the Investment Adviser in 1974, and is a general
partner of Tweedy, Browne Company L.P., TBK Partners, L.P. and Vanderbilt
Partners, L.P. Previously, he had been in the investment business for five years
with Berger, Kent Associates; Davic Associates; and Hornblower & Weeks-Hemphill,
Noyes & Co. Mr. Spears studied at the Babson Institute of Business
Administration, Drexel Institute of Technology and the University of
Pennsylvania -- The Wharton School.
REDUCING CURRENCY RISK THROUGH CURRENCY HEDGING. Both the Global Fund's
and the American Fund's share price will tend to reflect the movements of the
different securities markets in which they are invested and, to the degree not
hedged, the foreign currencies in which investments are denominated. Tweedy,
Browne intends to hedge both Funds' foreign securities investments back to the
U.S. dollar where practicable except when, in its judgment, currency movements
affecting particular investments are likely to improve the performance of the
Funds. Possible losses from changes in currency exchange rates are primarily a
risk of investing unhedged in foreign stocks. While a stock may perform well on
the London Stock Exchange, if the pound declines against the dollar, gains can
disappear or become losses. Currency fluctuations are more extreme than stock
market fluctuations. In the more than thirty-eight years in which the partners
of Tweedy, Browne have been investing, the Standard & Poor's Index of 500 stocks
has declined on an annual basis more than 20% only once, in 1974. By contrast,
the dollar/pound/deutsche mark relationship has moved more than 20% on numerous
occasions. In the last twenty years, there was a
- --------------------------------------------------------------------------------
-
8
-
<PAGE>
four to five-year period, during 1979-1984, when the U.S. dollar value of
British, French, German and Dutch currency declined by 45% to 58%. Accordingly,
the strength or weakness of the U.S. dollar against these foreign currencies may
account for part of the Funds' investment performance although both the Global
Fund and the American Fund intend to minimize currency risk through hedging
activities.
PURSUIT OF LONG-TERM CAPITAL GROWTH. The partners of Tweedy, Browne
believe that there are substantial opportunities for long-term capital growth
from professionally managed portfolios of securities selected from foreign and
domestic equity markets. A security's long-term capital growth based on a value-
oriented investment approach is generally realized over a three-year period,
although this period may be significantly shorter or longer depending on the
circumstances. Investments in the Global Fund will focus on those markets around
the world where Tweedy, Browne believes value is more abundant. Investments in
the American Fund will focus on those issues in the U.S. market that Tweedy,
Browne believes will provide greater value. With both Funds, Tweedy, Browne will
consider all market capitalization sizes for investment with the result that a
significant portion of the two portfolios may be invested in smaller (generally
under $1 billion as defined by the SEC) and medium (up to $5 billion as defined
by Morningstar) capitalization companies. Tweedy, Browne believes smaller and
medium capitalization companies can provide enhanced long-term investment
results in part because the possibility of a corporate acquisition may be
greater than with large, multinational companies.
ASSOCIATED RISK FACTORS. The Funds' investment techniques involve
potential risks. These include the special economic, currency exchange and
political risks of investing in non-U.S. securities, unrated and lower credit
quality debt obligations, smaller capitalization stocks, illiquid securities and
ancillary portfolio practices such as hedging currency risk, short sales and
lending of securities. For further information regarding these and other
investment considerations, please see "Other Investments of the Funds --
Associated Risk Factors" below and "Investment Objectives and Policies -- Risk
Considerations of the Funds" in the Statement of Additional Information. As with
any long-term investment, the value of the Funds' shares when sold may be higher
or lower than when purchased. Investment in shares of either Fund should not be
considered a complete investment program, which for many investors may include
cash or fixed income investments.
INVESTMENT OBJECTIVES AND POLICIES
Except as otherwise indicated, the Funds' investment objectives and
policies are not fundamental and thus may be changed without shareholder votes.
There can be no assurance that the Funds' respective investment objectives will
be achieved.
[LOGO] GLOBAL FUND
THE GLOBAL FUND. The Global Fund seeks long-term growth of capital by
investing throughout the world in a diversified portfolio consisting primarily
of marketable equity securities, including common stocks, preferred stocks and
securities representing the right to acquire stocks. The Global Fund may also
invest in debt securities, although income is an incidental consideration. The
Global Fund expects to invest primarily in foreign securities although
investments in U.S. securities are permitted and will be made when opportunities
in U.S. markets appear more attractive.
- --------------------------------------------------------------------------------
-
9
-
<PAGE>
GLOBAL FUND'S WORLDWIDE OPPORTUNITIES. The Global Fund was formed for
investors who would like to participate in a diversified fund which seeks
undervalued investment opportunities wherever they may be in the developed
world. Although economies around the world are becoming more integrated, local
variances in economic and stock market cycles can lead to a greater or lesser
number of investment opportunities in different stock markets or different
times. For this reason, the ability to invest on a global basis may provide
increased opportunities to the value investor than a fund which is restricted to
one country. Investing globally also increases the number of potential
investment opportunities that would meet Tweedy, Browne's investment criteria,
which are discussed below. For temporary defensive purposes, the Fund may be
invested 100% in U.S. issues, although under normal circumstances it is expected
that the Fund's portfolio will consist primarily of foreign investments.
Through the years, Tweedy, Browne has developed an understanding of the
different reporting and accounting procedures characteristic of non-U.S.
companies and has acquired financial databases that permit them to screen more
than 10,000 companies in much the same way that they screen U.S. companies. The
ability to screen so many non-U.S. companies is the key to Tweedy, Browne's
decision to sponsor the Global Fund since they are now able to research and
analyze many small and medium capitalization companies rather than concentrate
on the more obvious large capitalization, multinational corporations.
[LOGO] AMERICAN FUND
THE AMERICAN FUND. The American Fund seeks long-term growth of capital by
investing in a diversified portfolio of U.S. equity securities consisting
primarily of common stocks, preferred stocks and securities representing the
right to acquire stocks. The American Fund expects to invest primarily in
domestic equity securities although it may invest up to 20% of its assets in
foreign securities when opportunities in foreign markets appear attractive. The
American Fund may also invest in debt securities, although income is an
incidental consideration.
The American Fund invests in domestic companies of varying sizes that the
Fund's Investment Adviser believes are selling at a substantial discount to the
underlying value of the assets, earning power or private market value. It is
expected that investments will be spread broadly throughout U.S. equity markets.
Tweedy, Browne believes that its extensive investment experience in the U.S.
domestic equity markets, guided by investment principles that feature
undervalued stock selection and portfolio diversification, offers value
investors a sensible strategy for long-term profits.
AMERICAN FUND'S DOMESTIC OPPORTUNITIES. The American Fund was formed for
long-term value investors who desire to limit their exposure to foreign markets.
The equity capitalization of the United States is the largest in the world,
comprising more than one-third of the Morgan Stanley Capital International
(MSCI) World Index. The American Fund offers investors the opportunity to invest
in a diversified portfolio of primarily domestic, undervalued securities whose
market price may be well below the stock's intrinsic value. The American Fund's
portfolio consists of many of the same securities which are owned by the
separate accounts and private investment funds managed by the general partners
of Tweedy, Browne, including those in which they participate.
- --------------------------------------------------------------------------------
--
10
--
<PAGE>
OTHER INVESTMENTS OF THE FUNDS
The Global Fund and the American Fund generally invest in equity securities
of established companies (i.e., companies with at least three years' business
operations) listed on U.S. or foreign securities exchanges, but also may invest
in securities traded over-the-counter or privately. Equity securities include
common stock, preferred stock, securities representing the right to acquire
stock (such as convertible debentures, options and warrants) and depository
receipts for any of the above. Depository receipts are utilized to make
investing in a particular foreign security more convenient for U.S. investors.
Depository receipts that are not sponsored by the issuer may be less liquid and
there may be less readily available public information about the issuer.
Both the Global Fund and the American Fund may also invest in
non-convertible debt instruments of governments, government agencies,
supranational agencies and companies when the Investment Adviser believes the
potential for appreciation will equal or exceed the total return available from
investments in equity securities. These debt instruments will be predominantly
investment-grade securities, that is, those rated Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") or AAA, AA, A or BBB by Standard & Poor's
Ratings Group ("S&P") or those of equivalent quality as determined by the
Investment Adviser. Each Fund may not invest more than 15% of its total assets
in debt securities rated below Baa by Moody's, or below BBB by S&P or deemed by
the Investment Adviser to be of comparable quality. Each Fund may invest in
securities which are rated as low as C by Moody's or D by S&P at the time of
purchase. Securities rated D may be in default with respect to payment of
principal or interest. Securities rated below BBB or Baa are typically referred
to as "junk bonds" and have speculative characteristics.
For liquidity and flexibility, each Fund may also invest in cash or
investment grade short-term securities. The Funds may also engage in strategic
transactions as described below for hedging purposes and to seek to increase
gain.
For further information regarding these investments, see "Associated Risk
Factors" below and the Statement of Additional Information.
OTHER PORTFOLIO TRANSACTIONS
As a means of earning income for periods as short as overnight, both the
Global Fund and the American Fund may enter into repurchase agreements with
selected banks and broker/dealers. Under a repurchase agreement, the Funds
acquire securities, subject to the seller's agreement to repurchase at a
specified time and price. Each Fund does not expect to utilize repurchase
agreements with respect to more than 5% of its assets except for short-term
investment of excess cash. The Funds may also sell securities short or lend
portfolio securities to dealers or others with respect to up to 25% of its
assets and may buy securities on a when-issued basis and enter into delayed
delivery and forward commitment transactions.
STRATEGIC TRANSACTIONS
The Global Fund and the American Fund may, but are not required to, utilize
various other investment strategies as described below. Such strategies are
generally accepted as modern portfolio management techniques and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
- --------------------------------------------------------------------------------
--
11
--
<PAGE>
instruments may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
BORROWING
The Global Fund and the American Fund each may borrow up to one-third of
its total assets from banks for use in connection with Strategic Transactions,
as a temporary measure for extraordinary or emergency purposes, in connection
with clearance of transactions or to pay for redemptions. Except when borrowing
in connection with Strategic Transactions, a Fund will not purchase any security
when any borrowings are outstanding. The Funds' borrowings in connection with
Strategic Transactions will be limited to the purchase of liquid high grade
securities to post as collateral or satisfy segregation requirements with
respect to such transactions. The Funds do not enter into any of such borrowings
for the purpose of earning incremental returns in excess of borrowing costs from
investments made with such funds.
ASSOCIATED RISK FACTORS
The Global Fund's and the American Fund's risks are determined by the
nature of the securities each holds and the portfolio management strategy for
each used by Tweedy, Browne. The following are descriptions of certain risks
related to the investment policies and techniques that the Funds are permitted
to use from time to time.
Foreign Securities. Investing in foreign securities involves economic and
political considerations not typically found in U.S. markets. These
considerations include changes in exchange rates and exchange rate controls
(which may include suspension of the ability to transfer currency from a given
country), costs incurred in conversions between currencies, non-negotiable
brokerage commissions, less publicly available information, different accounting
standards, lower trading volume, delayed settlements and greater market
volatility, the difficulty of enforcing obligations in other countries, less
securities regulation, different tax provisions (including withholding on
dividends paid to each Fund), war, expropriation, political and social
instability and diplomatic developments.
These considerations generally are more of a concern in developing
countries, inasmuch as their economic systems are generally smaller and less
diverse and mature and their political systems less stable than those in
developed countries. The Funds seek to mitigate the risks associated with these
considerations through diversification and active professional management.
Strategic Transactions. Strategic Transactions have risks associated with
them including possible default by the other party to the transaction,
illiquidity and, to the extent the Investment Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. The
use of currency transactions can result in the Funds'
- --------------------------------------------------------------------------------
--
12
--
<PAGE>
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency.
Small Capitalization Companies. The equity securities of small
capitalization companies often exhibit more volatile trading patterns than
securities of larger companies. Often they are less established companies and
may have a more highly leveraged capital structure, less experienced management,
greater dependence on a few customers and similar factors that make their
performance susceptible to greater fluctuation.
Illiquid Securities. Disposition of illiquid securities often takes more
time than for more liquid securities, may result in higher selling expenses and
may not be able to be made at desirable prices or at the prices at which such
securities have been valued by the Fund.
Other Portfolio Transactions. If the seller under a repurchase agreement
becomes insolvent, the Fund's right to dispose of the securities may be
restricted or delayed. Lending of securities can result in a failure to deliver
the original securities by the borrower, and similar risks with respect to
disposition of collateral. When issued and delayed delivery securities
transactions and forward commitments involve potential loss to the Funds if the
counterparty fails to perform. If one of the Funds sells securities short, the
Fund will incur a loss if the security does not decrease in value by more than
the cost of maintaining the short position.
Redemptions-in-Kind. The Funds are authorized to pay for redemptions
in-kind on redemptions in excess of $250,000 by any one shareholder in any
three-month period. A shareholder receiving securities upon redemption will
incur additional expenses in disposing of such securities.
Further Information. Various investment policies and techniques that one
or both of the Funds intend to use and some of their risks are described more
fully in the Statement of Additional Information.
OPERATION OF THE FUNDS
STRUCTURE OF THE FUNDS
Both the Global Fund and the American Fund are diversified series of
Tweedy, Browne Fund Inc. (the "Corporation"), an open-end management investment
company registered under the Investment Company Act of 1940. The Corporation was
organized as a Maryland corporation on January 28, 1993.
The Corporation's activities are supervised by its Board of Directors.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Corporation is not required to and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Directors, or changing
fundamental investment policies. Shareholders will be assisted in communicating
with other shareholders in connection with any effort to remove a Director.
INVESTMENT ADVISER
The Corporation, on behalf of both Funds, retains Tweedy, Browne to manage
each of the Fund's daily investment and business affairs subject to the policies
established by the Board of Directors. Tweedy, Browne is substantially owned and
controlled by its general partners, who are Christopher H. Browne, William H.
Browne and John D. Spears.
- --------------------------------------------------------------------------------
--
13
--
<PAGE>
The general partners together manage the day-to-day operations of the Funds
and make all the investment decisions. Tweedy, Browne's management discussion
and analysis, and additional performance information regarding the Funds during
the fiscal year ended March 31, 1997, is included in the Annual Report for each
Fund.
Tweedy, Browne is entitled to receive investment advisory fees for each
Fund in an amount equal to 1.25% of each Fund's average daily net assets on an
annual basis. The fee is payable monthly, provided that each Fund makes such
interim payments as may be requested by the Investment Adviser not to exceed 75%
of the amount of the fee then accrued on the applicable Fund's books and unpaid.
For the fiscal year ended March 31, 1997, the Global Fund paid advisory fees
equal to 1.25% of the value of its average daily net assets. For the same
period, the American Fund paid advisory fees equal to 1.14% of the value of its
average daily net assets after voluntary waivers by the Investment Adviser of
$284,262.
In addition to the fees of the Investment Adviser, each Fund is responsible
for the payment of all its other expenses incurred in the operation of the Fund,
which include, among other things, expenses for legal and independent auditor's
services, charges of its custodian, transfer agent and dividend paying agent and
any other persons hired by the Fund, securities registration fees, fees and
expenses of unaffiliated directors, accounting and printing costs for reports
and similar materials sent to shareholders, membership fees in trade
organizations, fidelity bond and liability coverage for the Corporation's
directors, officers and employees, interest, brokerage and other trading costs,
taxes, expenses of qualifying the Fund for sale in various jurisdictions,
expenses of personnel performing shareholder servicing functions, litigation and
other extraordinary or nonrecurring expenses and other expenses properly payable
by the Funds.
The Investment Adviser is located at 52 Vanderbilt Avenue, New York, New
York 10017.
ADMINISTRATOR
First Data Investor Services Group, Inc. ("Investor Services Group") is
responsible for providing administrative services to the Global Fund and
American Fund for a fee equal to .09% of the average daily net assets of each
Fund on an annual basis. The fee is subject to reduction at certain asset levels
and fee minimums.
TRANSFER AGENT AND CUSTODIAN
First Data Investor Services Group, Inc., P.O. Box 5160, Westboro, MA
01581, is the Funds' transfer, shareholder servicing and dividend paying agent.
Boston Safe Deposit and Trust Company is the Funds' custodian.
UNDERWRITER
Tweedy, Browne, which is also a registered broker-dealer, is the Funds'
principal underwriter.
TAXATION
The Global Fund and the American Fund intend to qualify each year as
regulated investment companies under Subchapter M of the Internal Revenue Code
of 1986, as amended. As a result, the Funds generally will not be liable for
U.S. federal income or excise taxes with respect to net investment income and
net
- --------------------------------------------------------------------------------
--
14
--
<PAGE>
capital gains that have been distributed to shareholders. The Funds could be
subject to U.S. federal income tax on a portion of their income if they invest
in passive foreign investment companies. See the Statement of Additional
Information for more information regarding U.S. federal income tax consequences.
Investors are urged to consult with their tax advisors concerning the tax
consequences of an investment in the Funds.
ADDITIONAL INFORMATION
NO-LOAD FUNDS. The Funds are true no-load funds. There are no commissions
or fees for purchasing or redeeming shares, and no "12b-1" fees which many funds
charge to support their marketing efforts. The minimum investment is $2,500 for
individual accounts and $500 for IRAs and similar accounts. Subsequent
investments must be a minimum of $250.
DIVIDEND REINVESTMENT PLAN. Dividends and distributions are automatically
reinvested in additional shares unless shareholders request otherwise in
writing.
SHAREHOLDER STATEMENTS. Shareholders will receive a detailed account
statement every time there is a purchase or redemption of shares of either Fund.
All statements should be retained in order to keep track of account activity and
the cost of shares for tax purposes.
SHAREHOLDER REPORTS. In addition to account statements, shareholders will
receive periodic shareholder reports highlighting relevant information,
including investment results and a review of portfolio changes.
To reduce the volume of mail received by shareholders, only one copy of
each report will be mailed to your household (household is identified by tax
identification number and zip code). Please call shareholder services at
1-800-423-4789, press 3 if you wish to receive additional shareholder reports.
CHANGE OF ADDRESS. All address changes must be submitted in writing and
sent by mail to shareholder services c/o First Data Investor Services Group,
Inc., P.O. Box 5160, Westboro, MA 01581.
PURCHASING, REDEEMING AND EXCHANGING SHARES
PURCHASING SHARES
If you would like assistance in purchasing shares of either the Global Fund
or the American Fund or in providing us with the appropriate information, please
feel free to call shareholder services between 9:00 a.m. and 5:00 p.m. Eastern
time at 1-800-432-4789, press 3 and we will be happy to assist you.
Purchases are executed at the net asset value per share next calculated
after the Funds' transfer agent receives the purchase request in good order. A
purchase request will not be considered in good order unless it is accompanied
or preceded by a completed and signed application and a check or guaranteed
payment procedures acceptable to Tweedy, Browne. Purchases are made in full and
fractional shares. (See "Share Price" below.)
BY CHECK. If you purchase shares of either Fund with a check that does not
clear, your purchase will be cancelled and you will be subject to any losses or
fees incurred in the transaction. Checks must be drawn on or payable through a
U.S. bank or savings institution and payable to the Fund. If you purchase shares
by check and redeem them by letter within seven business days of purchase,
either Fund may hold redemption
- --------------------------------------------------------------------------------
--
15
--
<PAGE>
proceeds until the purchase check has cleared, which may take up to seven
business days. If you purchase shares by federal wire, you may avoid this delay.
Redemption requests by telephone or fax prior to the expiration of the seven-day
period will not be accepted.
BY THE AUTOMATED CLEARING HOUSE ("ACH"). You may use ACH to purchase
additional shares. ACH is the electronic transfer of money directly from your
bank account to either Fund or vice versa. If you want to use the ACH service,
complete the Systematic Purchase and Redemption Form and allow at least two
weeks for preparation before using ACH. Monies sent via ACH take approximately
two business days to clear. The transaction will be processed at clearance date.
Your bank may charge you a transaction fee. When you are ready to make a
purchase, call the Funds' transfer agent at 1-800-432-4789, press 3.
BY WIRE. To open a new account by wire, first call shareholder services at
1-800-432-4789, press 3 to obtain information with regard to procedures for
faxing a completed and signed application. A representative will call you back
with an account number which must be included on your application. Accounts
cannot be opened without a completed, signed application form. The application
must be faxed and the original mailed to Investor Services Group. Your account
will be subject to withholding and redemption of shares will be prohibited until
an original application is received by Investor Services Group. Contact your
bank to arrange a wire transfer to the transfer agent.
Give your bank:
-- the name and number of the bank account from which you wish to send
funds
-- the amount you wish to send
-- the name(s) of the account holder(s) exactly as will appear on your
application
-- the following instructions:
-- For Global Fund
Boston Safe Deposit & Trust Co.
Boston, MA
Account of Tweedy, Browne Global Value Fund
Account #138-517
ABA # 011001234
For further credit to [give the name(s) you want for your Fund's
account and the account number provided to you].
-- For American Fund
Boston Safe Deposit & Trust Co.
Boston, MA
Account of Tweedy, Browne American Value Fund
Account #138-517
ABA #011001234
For further credit to [give the name(s) you want for your Fund's
account and the account number provided to you].
- --------------------------------------------------------------------------------
--
16
--
<PAGE>
The account will be established at the net asset value per share next
calculated after the wire transfer is made. Wires must be received by 4:00 p.m.
to receive that day's price. You will not be able to redeem your shares,
however, until your application is received in good order.
You may also make additional investments of $250 or more to your existing
account by following the same procedures.
SUBSEQUENT PURCHASES BY TELEPHONE ORDER. If you are already a shareholder,
you may purchase shares of either Fund at a certain day's price by calling
shareholder services at 1-800-423-4789, press 3 before the regular close of the
New York Stock Exchange (the "Exchange"), normally 4 p.m. eastern time, on that
day. Orders must be for $250 or more and cannot be for an amount greater than
four times the value of your account at the time the order is placed. You must
include with your payment the order number given to you at the time the order is
placed. A confirmation with complete purchase information will be sent shortly
after your payment is received. If payment by check or wire is not received
within three business days, the order will be cancelled and you will be
responsible for any loss to the Funds resulting from this cancellation.
REDEEMING SHARES
Both the Global Fund and the American Fund allow you to redeem shares
(i.e., sell them back to the Funds) without redemption fees or deferred sales
charges of any kind. Redemptions are made at net asset value per share next
calculated after a redemption request in good order is received by the Funds'
transfer agent.
BY TELEPHONE. This is the quickest and easiest way to sell either Fund's
shares. If you elected telephone redemption on your application, you can call to
request a federal wire be sent to your authorized bank account or request the
proceeds to be transferred by ACH. ACH takes two business days to settle at your
bank. (See page 16 for additional details with respect to ACH procedures. See
page 18 "Share Price" with respect to certain delayed redemptions.) The Funds
and the transfer agent will not be liable for following telephone instructions
reasonably believed to be genuine. In this regard, the Funds and the transfer
agent require personal identification information before accepting a telephone
redemption. If the Funds or the transfer agent fail to use reasonable
procedures, the Funds might be liable for losses due to fraudulent instructions.
Redemption proceeds will be wired to your bank. Any other payment
instructions may not be accepted over the telephone; they must be submitted in
writing. If your bank cannot receive federal wires, redemptions will be mailed
to your bank.
If you open an account by wire, you cannot redeem shares by telephone until
the Funds' transfer agent has received your completed and signed application.
In the event that you are unable to reach either Fund by telephone, you
should write to both Funds c/o First Data Investor Services Group, Inc., P.O.
Box 5160, Westboro, MA 01581.
BY MAIL OR FAX. A shareholder may redeem shares by mailing a written
request to Tweedy, Browne Fund Inc., c/o First Data Investor Services Group,
Inc., P.O. Box 5160, Westboro, MA 01581. Written requests must state the
shareholder's name, the name of the Fund, the account number and the shares or
dollar amount to be redeemed and must be signed exactly as the shares are
registered. Shareholders requesting a redemption of $5,000 or more, or a
redemption of any amount payable to a person other than the shareholder of
record, or to be sent to an address other than that on record with the Fund,
must have all
- --------------------------------------------------------------------------------
--
17
--
<PAGE>
signatures guaranteed. (The Corporation on behalf of both Funds reserves the
right, however, to require a signature guarantee for all redemptions.) You can
obtain a signature guarantee from most banks, credit unions or savings
associations, or from broker/dealers, municipal securities broker/dealers,
government securities broker/dealers, national securities exchanges, registered
securities associations, or clearing agencies deemed eligible by the Securities
and Exchange Commission. Signature guarantees by a notary public are not
acceptable. Transactions requiring signature guarantees cannot be accepted via
fax. Redemption requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. For more information, please call
shareholder services at 1-800-432-4789, press 3.
EXCHANGING SHARES
Shares held in either the Global Fund or the American Fund which have been
registered in a shareholder's name for at least 5 days may be exchanged for
shares of the other Fund. Exchanges of shares between Funds are made at net
asset value per share calculated after an exchange request in good order is
received by the Funds' transfer agent. If any portion of the shares requested to
be exchanged between Funds represents an investment made by personal check for
which collection of payment has not yet been received, the transfer agent and
the Funds reserve the right not to honor the exchange until collection of
payment is reasonably satisfied, which could take up to 15 days or more. A
shareholder who anticipates the need for more immediate access to his or her
investment should purchase shares by federal wire or by certified or cashier's
check. The exchange privilege may be modified or terminated at any time subject
to shareholder notification. The Funds reserve the right to limit the number of
times an investor may exercise the exchange privilege.
BY TELEPHONE. If you elected telephone exchange on your application, you
can call to request that an exchange of shares between the Funds be made on your
behalf. To exchange shares by telephone, you must contact the transfer agent.
The transfer agent will not be liable for following telephone instructions
reasonably believed to be genuine. In this regard, the transfer agent requires
personal identification information before accepting a telephone exchange. If
the Funds or the transfer agent fail to use reasonable procedures, the Funds
might be liable for losses due to fraudulent instructions.
BY MAIL OR FAX. If you did not elect telephone exchange on your
application, you can exchange shares by mail or fax by sending a letter to the
transfer agent with the appropriate account information. For your protection and
to prevent fraudulent exchanges, on written exchange requests in excess of
$5,000, we require a signature and a signature guarantee for each person in
whose name the account is registered. (The Corporation on behalf of both Funds
reserves the right, however, to require a signature guarantee for all
exchanges.) Institutions granting signature guarantees for purposes of
redemption can also perform the same function for exchanges of shares. Signature
guarantees by notaries public are not acceptable. Transactions requiring
signature guarantees cannot be accepted via fax. Exchange requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call shareholder services at 1-800-432-4789, press
3.
SHARE PRICE
Purchases and redemptions, including exchanges, are made at net asset
value. The Funds' Administrator determines net asset value per share as of the
close of regular trading on the Exchange, normally 4 p.m. eastern time, on each
day the Exchange is open for trading. Net asset value per share is calculated by
dividing
- --------------------------------------------------------------------------------
--
18
--
<PAGE>
the current market value of total assets, less all liabilities, by the total
number of shares outstanding. The Funds will normally send your redemption
proceeds within one business day following the redemption request, but may take
up to seven days (or 15 days in the case of shares recently purchased by check).
SHORT-TERM TRADING
Purchases and sales should be made for long-term investment purposes only.
The Corporation, on behalf of both Funds, and the distributor, Tweedy, Browne,
each reserve the right to restrict purchases of either Funds' shares when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in either Funds' share price appears evident.
TAX INFORMATION
A redemption of shares of either Fund is a sale of shares and may result in
a gain or loss for income tax purposes. An exchange of shares between Funds
pursuant to the exchange privilege is treated as a sale for Federal income tax
purposes and, depending upon the circumstances, a capital gain or loss may be
realized. Any loss realized on a sale of shares of either Fund will be
disallowed to the extent that shares disposed of are replaced within a 61-day
period beginning 30 days before and ending 30 days after the disposition of the
shares.
Be sure to complete the Tax Identification Number section in each Fund's
application when you open an account. Federal tax law requires the Funds to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a Social Security or tax identification number and certain other
certified information or upon notification from the IRS or a broker that
withholding is required. Both Funds reserve the right, following 30 days' notice
to shareholders, to redeem all shares in accounts that still do not have a
Social Security or tax identification number.
MINIMUM BALANCES
Shareholders should maintain a share account balance worth at least $2,500
($500 for retirement plans), which amount may be changed by the Directors. Both
Funds reserve the right, following 30 days' written notice to shareholders, to
redeem all shares in sub-minimum accounts, including accounts of new investors,
where a reduction in value has occurred due to a redemption out of the account.
Reductions in value that result solely from market activity will not trigger an
involuntary redemption. Each Fund will mail the proceeds of a redeemed account
to the shareholder. The shareholder may restore the account balance to the
requisite amount or more during the 30-day notice period and must maintain it at
no lower than that minimum to avoid involuntary redemption.
THIRD PARTY TRANSACTIONS
If purchases and redemptions of either Fund's shares are arranged and
settlement is made at an investor's election through a member of the National
Association of Securities Dealers, Inc., other than the distributor, that member
may, at its discretion, charge a fee for that service.
REDEMPTIONS-IN-KIND
The Corporation on behalf of both Funds reserves the right, if conditions
exist which make cash payments undesirable, to honor any request for redemption
in excess of $250,000 by making payment in whole or in part in readily
marketable securities chosen by the Funds and valued as they are for purposes of
- --------------------------------------------------------------------------------
--
19
--
<PAGE>
computing the Funds' net asset value (a redemption-in-kind). If payment is made
in securities, a shareholder may incur transaction expenses in converting these
securities to cash.
DISTRIBUTIONS
Each Fund intends to make distributions of substantially all of its net
investment income and any net realized capital gains after utilization of
capital loss carryforwards, if any, annually in December. Any dividends or
capital gains distributions declared in October, November or December with a
record date in such a month and paid during the following January will be
treated by shareholders for federal income tax purposes as if received on
December 31 of the calendar year declared. Distributions will be reinvested in
additional shares of each Fund unless an investor elects to receive
distributions in cash. If an investment is in the form of a retirement plan, all
dividends and capital gains distributions must be reinvested into the
shareholder's account.
TAX INFORMATION
Generally, dividends from net investment income (including short-term
gains) of the Funds are taxable to shareholders as ordinary income. The Funds
will seek to maximize gains which qualify for long-term capital gains treatment.
Long-term capital gains distributions, if any, are taxable as long-term capital
gains regardless of the length of time shareholders have owned their shares. A
portion of dividends from net investment income may qualify for the
dividends-received deduction for corporations. Shareholders may be able to claim
a credit or reduction on their income tax returns for their pro rata portions of
qualified taxes paid by the Funds to foreign countries.
Each Fund will send to its shareholders detailed tax information about the
amount and type of its distributions made during each calendar year and any
foreign income tax payments or credits.
PERFORMANCE INFORMATION
From time to time, quotations of each Fund's performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. "Total return" is the change in value
of an investment in a Fund for a specified period. "Average annual total return"
refers to the average annual compound rate of return of an investment in a Fund
assuming that the investment has been held for the indicated period as of a
stated ending date or for the life of the Fund to the extent it has not been in
existence for any such periods. "Cumulative total return" represents the
cumulative change in value of an investment in a Fund for various periods. These
calculations assume that dividends and capital gains distributions were
reinvested. "Capital change" measures return from capital, including
reinvestment of any capital gains distributions but not reinvestment of
dividends. Performance will vary based upon, among other things, changes in
market conditions and the level of the Funds' expenses.
- --------------------------------------------------------------------------------
--
20
--
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[TWEEDY, BROWNE GRAPHIC]
TWEEDY, BROWNE FUND INC.
CONTENTS
PAGE
----
Expense Information..................... 2
Financial Highlights.................... 4 --------------------------
Performance of the Funds................ 6 PROSPECTUS
Why Invest in the Funds?................ 6 --------------------------
Investment Objectives and Policies ..... 9 AUGUST 1, 1997
Global Fund............................. 9 --------------------------
American Fund........................... 10
Other Investments of the Funds.......... 11
Operation of the Funds.................. 13
Additional Information.................. 15
Purchasing, Redeeming, and Exchanging [LOGO]
Shares................................ 15 TWEEDY, BROWNE
Distributions........................... 20 GLOBAL VALUE FUND
Performance Information ................ 20
[LOGO]
TWEEDY, BROWNE
AMERICAN VALUE FUND
<TABLE>
- ---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C>
Shareholder Services 800-432-4789, Press 3 Shareholder Services 800-432-4789, Press 3
Daily NAV Prices: 800-432-4789, Press 3 Daily NAV Prices: 800-432-4789, Press 3
For Special Assistance In For Special Assistance In
Opening A New Account: 800-432-4789, Press 2 Opening A New Account: 800-432-4789, Press 2
Fund Information Kit: 800-432-4789, Press 1 Fund Information Kit: 800-432-4789, Press 1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TWEEDY, BROWNE GLOBAL VALUE FUND
TWEEDY, BROWNE AMERICAN VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997
This Statement of Additional Information is not itself a
Prospectus and should be read in conjunction with the
Prospectus of Tweedy, Browne Global Value Fund and Tweedy,
Browne American Value Fund also dated August 1, 1997, as
amended from time to time, copies of which may be obtained
without charge by writing to Tweedy, Browne Global Value Fund
and/or Tweedy, Browne American Value Fund, c/o First Data
Investor Services Group Inc., P.O. Box 5160, Westboro,
Massachusetts 01581 or calling 800-432-4789, Press 1.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objective and Policies.................... 1
Performance Information............................. 22
Operation of the Funds.............................. 25
Taxes............................................... 35
Portfolio Transactions............................. 42
Net Asset Value.................................... 43
Additional Information.............................. 45
Financial Statements............................... 46
Appendix A........................................ A-1
<PAGE>
8
INVESTMENT OBJECTIVES AND POLICIES
Tweedy, Browne Fund Inc., a Maryland
corporation of which Tweedy, Browne Global Value Fund (the
"Global Fund") and Tweedy, Browne American Value Fund (the
"American Fund") are separate series, is referred to herein as
the "Corporation." The Corporation is a no-load, open-end,
management investment company which continuously offers and
redeems its shares. The Corporation is a company of the type
commonly known as a mutual fund. The Funds are diversified
series of the Corporation. Tweedy, Browne Company L.P. is the
investment adviser of the Global Fund and the American Fund
and is referred to herein as "Tweedy, Browne" or the
"Adviser."
The Funds' objectives and policies, except
as otherwise stated, are not fundamental and may be changed
without shareholder votes. The Global Fund seeks long-term
growth of capital by investing throughout the world in a
diversified portfolio of marketable equity securities. The
American Fund seeks long-term growth of capital by investing
in a diversified portfolio of domestic equity securities. Both
Funds are permitted to invest in debt securities. There can be
no assurance that the Funds will achieve their respective
objectives.
Risk Considerations of the Funds
Global Fund. The Global Fund is intended to provide individual
and institutional investors with an opportunity to invest a
portion of their assets in globally oriented portfolios,
according to the Fund's objective and policies, and is
designed for long-term investors who can accept international
investment risk. Investment in shares of the Global Fund is
not intended to provide a complete investment program for an
investor. The Global Fund expects to invest primarily in
foreign securities although investments in U.S. securities are
permitted and will be made when opportunities in U.S. markets
appear attractive. The Global Fund may also invest in debt
instruments, although income is an incidental consideration.
Tweedy, Browne believes that allocation of assets on a global
basis decreases the degree to which events in any one country,
including the United States, will affect an investor's entire
investment holdings. As with any long-term investment, the
value of the Global Fund's shares when sold may be higher or
lower than when purchased.
Investors should recognize that investing in
foreign securities involves certain special considerations,
including those set forth below, which are not typically
associated with investing in United States securities and
which may favorably or unfavorably affect the Global Fund's
performance. As foreign companies are not generally subject to
uniform standards, practices and requirements with respect to
accounting, auditing and financial reporting to the same
degree as are domestic companies, there may be less or less
helpful publicly available information about a foreign company
than about a domestic company. Many foreign securities
markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities
of most foreign issuers are less liquid and more volatile than
securities of comparably sized domestic issuers. Similarly,
volume and liquidity in most foreign bond markets is less than
in the United States and volatility of price is often greater
than in the United States. Further, foreign markets have
different clearance and settlement procedures and in certain
markets there have been times when settlements have been
unable to keep pace with the volume of securities transactions
making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of
the Global Fund are uninvested and no return is earned
thereon. The inability of the Global Fund to make intended
security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems
could result in losses to the Global Fund due to subsequent
declines in value of the portfolio security. Fixed commissions
on some foreign securities exchanges and bid to asked spreads
in some foreign bond markets are higher than negotiated
commissions on U.S. exchanges and bid to asked spreads in the
U.S. bond market. Further, the Global Fund may encounter
difficulties or be unable to pursue legal remedies and obtain
judgments in foreign courts.
In foreign countries, there is generally
less government supervision and regulation of business and
industry practices, securities exchanges, securities traders,
brokers and listed companies than in the United States. It may
be more difficult for the Global Fund's agents to keep
currently informed about corporate actions such as stock
dividends or other matters which may affect the prices of
portfolio securities. Communications between the United States
and foreign countries are often less reliable than within the
United States, thus increasing the risk of delayed settlements
of portfolio transactions or loss of certificates for
portfolio securities. In addition, with respect to certain
foreign countries, there is the possibility of expropriation
or confiscatory taxation, political or social instability, or
diplomatic developments which could affect United States
investments in those countries. Moreover, at any particular
time, individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of
payments position. The Adviser seeks to mitigate the risks
associated with the foregoing considerations through
continuous professional management.
Investments in foreign securities usually
will involve currencies of foreign countries. Because of the
considerations discussed above, the value of the assets of the
Global Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the Fund
may incur costs in connection with conversions between various
currencies. Although the Global Fund values its assets daily
in terms of U.S. dollars, it does not intend to convert its
holdings of foreign currencies into U.S. dollars on a daily
basis. The Global Fund will engage in currency conversions
when it shifts holdings from one country to another. Although
foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the
"spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Global Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Global Fund will
conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market, or through entering into
forward or futures contracts (or options thereon) to purchase
or sell foreign currencies. The Global Fund may, for hedging
purposes, purchase foreign currencies in the form of bank
deposits.
Because the Global Fund may be invested in
both U.S. and foreign securities markets, changes in the
Fund's share price may have a low correlation with movements
in the U.S. markets. The Global Fund's share price will tend
to reflect the movements of both the different stock and bond
markets in which it is invested and, to the extent it is
unhedged, of the currencies in which the investments are
denominated; the strength or weakness of the U.S. dollar
against foreign currencies may account for part of the Fund's
investment performance. Foreign securities such as those
purchased by the Global Fund may be subject to foreign
government taxes which could reduce the yield on such
securities, although a shareholder of the Fund may, subject to
certain limitations, be entitled to claim a credit or
deduction for U.S. federal income tax purposes for his or her
proportionate share of such foreign taxes paid by the Fund
(see "TAXES"). U.S. and foreign securities markets do not
always move in step with each other, and the total returns
from different markets may vary significantly. The Global Fund
invests in many securities markets around the world in an
attempt to take advantage of opportunities wherever they may
arise.
American Fund. The American Fund is intended to provide
individual and institutional investors with an opportunity to
invest a portion of their assets in a domestic equity
portfolio, according to the Fund's objective and policies and
is designed for long-term investors who can accept domestic
investment risk. The American Fund will be invested largely in
U.S. equity securities although it may allocate up to 20% of
its portfolio assets to foreign equity securities when Tweedy,
Browne^ believes that economic conditions warrant foreign
investment. The Fund may also invest in debt instruments,
although income is an incidental consideration. Tweedy, Browne
believes that a value oriented investment strategy offers
investors profitable investment in undervalued domestic equity
securities whose prices may be below intrinsic worth, private
market value or previously high stock prices. As with any
long-term investment, the value of the American Fund's shares
when sold may be higher or lower than when purchased.
Investments in a fund which purchases value
oriented stocks as its guiding principle involve special
considerations. The equity capitalization of the United States
is the largest in the world comprising more than one-third of
the Morgan Stanley Capital International World Index. The
American Fund offers investors the opportunity to invest in a
diversified portfolio of primarily domestic undervalued
securities whose market price may be well below the stock's
intrinsic value.
The American Fund cannot guarantee a gain or
eliminate the risk of loss. The net asset value of the
American Fund's shares will tend to increase or decrease with
changes in the value of U.S. equity markets. To the extent the
American Fund invests in foreign securities, comparable risk
factors discussed above with regard to the Global Fund will
apply. There is no assurance that the American Fund's
objectives will be achieved. Investment in shares of the
American Fund is not intended to provide a complete investment
program for an investor.
Investments and Investment Techniques
Repurchase Agreements. Both the Global Fund
and the American Fund may enter into repurchase agreements
with member banks of the Federal Reserve System, any foreign
bank or with any domestic or foreign broker/dealer which is
recognized as a reporting government securities dealer, if the
creditworthiness of the bank or broker/dealer has been
determined by the Adviser to be at least as high as that of
other obligations the Funds may purchase.
A repurchase agreement provides a means for
each Fund to earn income on funds for periods as short as
overnight. It is an arrangement under which the purchaser
(i.e., one of the Funds) acquires a debt security
("Obligation") and the seller agrees, at the time of sale, to
repurchase the Obligation at a specified time and price.
Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities is kept at
least equal to the repurchase price (plus any interest accrued
if interest will be paid in cash) on a daily basis. The
repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on
repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation itself.
Obligations will be physically held by the Fund's custodian or
in the Federal Reserve Book Entry system.
For purposes of the Investment Company Act
of 1940 (the "1940 Act"), a repurchase agreement is deemed to
be a loan from the Fund to the seller of the Obligation
subject to the repurchase agreement. It is not clear whether a
court would consider the Obligation purchased by the Fund
subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the Obligation
before repurchase of the Obligation under a repurchase
agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Delays may involve loss of
interest or decline in price of the Obligation. Apart from the
risk of bankruptcy or insolvency proceedings, there is also
the risk that the seller may fail to repurchase the security.
It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver
additional securities.
Fixed Income Obligations. Each Fund may also
invest without limitation in fixed income obligations
including cash equivalents (such as bankers' acceptances,
certificates of deposit, commercial paper, short-term
government and corporate obligations and repurchase
agreements) for temporary defensive purposes when the
Investment Adviser believes market conditions so warrant and
for liquidity.
Debt Securities. The Funds may purchase
"investment grade" bonds, which are those rated Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's") or AAA, AA,
A or BBB by Standard & Poor's Ratings Group a division of
McGraw-Hill Companies, Inc., ("S&P") or, if non-rated, judged
to be of equivalent credit quality by the Adviser. Bonds rated
Baa or BBB may have speculative elements as well as
investment-grade characteristics.
High Yield, High Risk Securities. Both Funds
may also invest up to 15% of net assets in securities rated
lower than the foregoing and in non-rated securities of
equivalent credit quality in the Adviser's judgment. The Funds
may invest in debt securities which are rated as low as C by
Moody's or D by S&P. Securities rated D may be in default with
respect to payment of principal or interest. Below
investment-grade securities (those rated Ba and lower by
Moody's and BB and lower by S&P) or non-rated securities of
equivalent credit quality carry a high degree of risk
(including a greater possibility of default or bankruptcy of
the issuers of such securities), generally involve greater
volatility of price, and may be less liquid, than securities
in the higher rating categories and are considered
speculative. The lower the ratings of such debt securities,
the greater their risks render them like equity securities.
See the Appendix to this Statement of Additional Information
for a more complete description of the ratings assigned by
ratings organizations and their respective characteristics.
As has occurred during the 1990-1992 period,
an economic downturn can disrupt the high yield market and
impair the ability of issuers to repay principal and interest.
Also, an increase in interest rates is likely to have a
greater adverse impact on the value of such obligations than
on higher quality debt securities. During an economic downturn
or period of rising interest rates, highly leveraged issuers
may experience financial stress which would adversely affect
their ability to service their principal and interest payment
obligations. Prices and yields of high yield securities will
fluctuate over time and, during periods of economic
uncertainty, volatility of high yield securities may adversely
affect a Fund's net asset value. In addition, investments in
high yield zero coupon or pay-in-kind bonds, rather than
income-bearing high yield securities, may be more speculative
and may be subject to greater fluctuations in value due to
changes in interest rates.
The trading market for high yield securities
may be thin to the extent that there is no established retail
secondary market or because of a decline in the value of such
securities. A thin trading market may limit the ability of the
Funds to value accurately high yield securities in the Funds'
portfolios and to dispose of those securities. Adverse
publicity and investor perceptions may decrease the values and
liquidity of high yield securities. These securities may also
involve special registration responsibilities, liabilities and
costs.
It is the policy of the Adviser not to rely
exclusively on ratings issued by established credit rating
agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. If the
rating of a portfolio security is downgraded by one or more
credit rating agencies, the Adviser will determine whether it
is in the best interest of a Fund to retain or dispose of such
security.
Zero Coupon and Structured Securities. The
Funds may invest in zero coupon securities which pay no cash
income and are sold at substantial discounts from their value
at maturity although they currently have no intention to
invest in such securities. When held from issuance to
maturity, their entire income, which consists of accretion of
discount, comes from the difference between the issue price
and their value at maturity. Zero coupon securities are
subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities
which make current cash distributions of interest. Structured
securities, particularly mortgage backed securities, are
usually subject to some degree of prepayment risk which can
vary significantly with various economic and market factors.
Depending on the nature of the structured security purchased,
a change in the rate of prepayments can have the effect of
enhancing or reducing the yields to a Fund from such
investment and expose the Fund to the risk that any
reinvestment will be at a lower yield.
Convertible Securities. The Funds may invest
in convertible securities, that is, bonds, notes, debentures,
preferred stocks and other securities which are convertible
into or exchangeable for another security, usually common
stock. Investments in convertible securities can provide an
opportunity for capital appreciation and/or income through
interest and dividend payments by virtue of their conversion
or exchange features.
The convertible securities in which the
Funds may invest are either fixed income or zero coupon debt
securities which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common
stock. The exchange ratio for any particular convertible
security may be adjusted from time to time due to stock
splits, dividends, spin-offs, other corporate distributions or
scheduled changes in the exchange ratio. Convertible debt
securities and convertible preferred stocks, until converted,
have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt
securities generally, the market value of convertible
securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the
market value of convertible securities typically changes as
the market value of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield
basis, and so usually do not experience market value declines
to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock,
although usually not as much as the underlying common stock.
As debt securities, convertible securities
are investments which provide for a stream of income (or in
the case of zero coupon securities, accretion of income) with
generally higher yields than common stocks. Of course, like
all debt securities, there can be no assurance of income or
principal payments because the issuers of the convertible
securities may default on their obligations. Convertible
securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are
subordinated to other similar but non-convertible securities
of the same issuer, although convertible bonds, as corporate
debt obligations, enjoy seniority in right of payment to all
equity securities, and convertible preferred stock is senior
to common stock of the same issuer. However, because of the
subordination feature, convertible bonds and convertible
preferred stock typically have lower ratings than similar
non-convertible securities.
Other Rights to Acquire Securities
The Funds may also invest in other rights to
acquire securities, such as options and warrants. These
securities represent the right to acquire a fixed or variable
amount of a particular issue of securities at a fixed or
formula price either during specified periods or only
immediately prior to termination. These securities are
generally exercisable at premiums above the value of the
underlying security at the time the right is issued. These
rights are more volatile than the underlying stock and will
result in a total loss of the Funds' investment if they expire
without being exercised because the value of the underlying
security does not exceed the exercise price of the right.
Strategic Transactions
The Funds may, but are not required to,
utilize various other investment strategies as described below
to hedge various market risks (such as interest rates,
currency exchange rates, and broad or specific equity or
fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted by
modern portfolio managers and are regularly utilized by many
mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment
strategies, the Funds may purchase and sell exchange-listed
and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and
options thereon, enter into various currency transactions such
as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used to attempt
to protect against possible changes in the market value of
securities held in or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate
fluctuations, to protect a Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of
such securities for investment purposes, to manage the
effective maturity or duration of a Fund's portfolio, or to
establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities.
Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of a Fund's assets
will be committed to initial margin on instruments regulated
by the Commodity Futures Trading Commission ("CFTC") in
Strategic Transactions entered into for non-hedging purposes.
Any or all of these investment techniques may be used at any
time and there is no particular strategy that dictates the use
of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including
market conditions. A Fund's ability to utilize these Strategic
Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be
assured. Each Fund will comply with applicable regulatory
requirements when implementing these strategies, techniques
and instruments. Strategic Transactions involving financial
futures and options thereon will be purchased, sold or entered
into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions have risks associated
with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view
as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses
greater than if they had not been used. Purchase of put and
call options may result in losses to a Fund or limit the
amount of appreciation a Fund can realize on its investments.
The use of currency transactions can result in a Fund
incurring losses as a result of a number of factors including
the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a
specified currency. The use of options and futures
transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio
position of a Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of a
Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in
certain markets, a Fund might not be able to close out a
transaction without incurring substantial losses, if at all.
Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a
decline in the value of a hedged position, at the same time
they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily
variation margin requirements for futures contracts would
create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the
cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and
possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call
options typically have similar structural characteristics and
operational mechanics regardless of the underlying instrument
on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of
options discussed in greater detail below. In addition, many
Strategic Transactions involving options require segregation
of a Fund's assets in special accounts, as described below
under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the
option, upon payment of a premium, the right to sell, and the
issuer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise
price. For instance, a Fund's purchase of a put option on a
security might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value
by giving a Fund the right to sell such instrument at the
option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy,
and the issuer the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call
option on a security, financial future, index, currency or
other instrument might be intended to protect the Fund against
an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which
it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period
while a European style put or call option may be exercised
only upon expiration or during a fixed period prior thereto.
The Funds are authorized to purchase and sell exchange listed
options and over-the-counter options ("OTC options"). Exchange
listed options are issued by a regulated intermediary such as
the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to such options.
The discussion below regarding exchange listed options uses
the OCC as a paradigm, but is also applicable to other
financial intermediaries.
Each Fund's ability to close out its
position as a purchaser or seller of an OCC or exchange listed
put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i)
insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or
underlying securities including reaching daily price limits;
(iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or
OCC to handle current trading volume; or (vi) a decision by
one or more exchanges to discontinue the trading of options
(or a particular class or series of options), in which event
the relevant market for that option on that exchange would
cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with
their terms.
The hours of trading for listed options may
not coincide with the hours during which the underlying
financial instruments are traded. To the extent that the
option markets close before the markets for the underlying
financial instruments, significant price and rate movements
can take place in the underlying markets that cannot be
reflected in the option markets.
OTC options are purchased from or sold to
securities dealers, financial institutions or other parties
("Counterparties") through direct bilateral agreement with the
Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics,
all the terms of an OTC option, including such terms as method
of settlement, term, exercise price, premium, guarantees and
security, are set by negotiation of the parties.
Unless the parties provide for it, there is
no central clearing or guaranty function in an OTC option. As
a result, if the Counterparty fails to make or take delivery
of the security, currency or other instrument underlying an
OTC option it has entered into with a Fund or fails to make a
cash settlement payment due in accordance with the terms of
that option, the Fund may lose any premium it paid for the
option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement
of the Counterparty's credit to determine the likelihood that
the terms of the OTC option will be satisfied. The Funds will
engage in OTC option transactions only with United States
government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers," or broker
dealers, domestic or foreign banks or other financial
institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating
of A-1 from S&P or P-1 from Moody's or an equivalent rating
from any other nationally recognized statistical rating
organization ("NRSRO").
If a Fund sells (i.e., issues) a call
option, the premium that it receives may serve as a partial
hedge, to the extent of the option premium, against a decrease
in the value of the underlying securities or instruments in
its portfolio, or will increase the Fund's income. The sale of
put options can also provide income.
All calls sold by the Funds must be
"covered" (i.e., the Fund must own the securities or futures
contract subject to the calls) or must meet the asset
segregation requirements described below as long as the call
is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by one of
the Funds exposes that Fund during the term of the option to
possible loss of opportunity to realize appreciation in the
market price of the underlying security or instrument and may
require the Fund to hold a security or instrument which it
might otherwise have sold.
General Characteristics of Futures. The Funds may enter into
financial futures contracts or purchase or sell put and call
options on such futures as a hedge against anticipated
interest rate, currency or equity market changes, for duration
management and for risk management purposes. Futures are
generally bought and sold on the commodities exchanges where
they are listed with payment of initial and variation margin
as described below. The sale of a futures contract creates a
firm obligation by a Fund, as seller, to deliver to the buyer
the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or,
with respect to index futures and Eurodollar instruments, the
net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures
contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and
obligates the seller to deliver such position.
The Funds' use of financial futures and
options thereon will in all cases be consistent with
applicable regulatory requirements and in particular the rules
and regulations of the CFTC and will be entered into only for
bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon
requires a Fund to deposit with a financial intermediary as
security for its obligations an amount of cash or other
specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets
(variation margin) may be required to be deposited thereafter
on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any
further obligation on the part of the purchaser. If one of the
Funds exercises an option on a futures contract, it will be
obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as
it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position
can be offset prior to settlement at an advantageous price,
nor that delivery will occur.
Neither Fund will enter into a futures
contract or related option (except for closing transactions)
if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and
options thereon would exceed 5% of that Fund's total assets
(taken at current value); however, in the case of an option
that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
Options on Securities Indices and Other Financial Indices. The
Funds also may purchase and sell call and put options on
securities indices and other financial indices and in so doing
can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual
securities or other instruments. Options on securities indices
and other financial indices are similar to options on a
security or other instrument except that, rather than settling
by physical delivery of the underlying instrument, they settle
by cash settlement, i.e., an option on an index gives the
holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which
the option is based exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The
seller of the option is obligated, in return for the premium
received, to make delivery of this amount. The gain or loss on
an option on an index depends on price movements in the
instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather
than price movements in individual securities, as is the case
with respect to options on securities.
Currency Transactions. The Funds may engage in currency
transactions with counterparties in order to hedge the value
of portfolio holdings denominated in particular currencies
against fluctuations in relative value. Currency transactions
include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future
date, which may be any fixed number of days from the date of
the contract agreed upon by the parties, at a price set at the
time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate
swap, which is described below. The Funds may enter into
currency transactions with counterparties which have received
(or the guarantors of the obligations of which have received)
a credit rating of A-1 or P-1 by S&P or Moody's, respectively,
or that have an equivalent rating from an NRSRO or (except for
OTC currency options) are determined to be of equivalent
credit quality by the Adviser.
The Funds' dealings in forward currency
contracts and other currency transactions such as futures,
options, options on futures and swaps generally will be
limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is entering into a
currency transaction with respect to specific assets or
liabilities of a Fund, which will generally arise in
connection with the purchase or sale of its portfolio
securities or the receipt of income therefrom. Position
hedging is entering into a currency transaction with respect
to portfolio security positions denominated or generally
quoted in that currency.
The Funds generally will not enter into a
transaction to hedge currency exposure to an extent greater,
after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at
the time of entering into the transaction) of the securities
held in its portfolio that are denominated or generally quoted
in or currently convertible into such currency, other than
with respect to proxy hedging as described below.
The Funds may also cross-hedge currencies by
entering into transactions to purchase or sell one or more
currencies that are expected to decline in value relative to
other currencies to which the Funds have or in which the Funds
expect to have portfolio exposure.
To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings
of portfolio securities, the Funds may also engage in proxy
hedging. Proxy hedging is often used when the currency to
which a Fund's portfolio is exposed is difficult to hedge or
to hedge against the U.S. dollar. Proxy hedging entails
entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a
currency or currencies in which some or all of a Fund's
portfolio securities are or are expected to be denominated,
and to buy U.S. dollars. The amount of the contract would not
exceed the value of the Fund's securities denominated linked
currencies. For example, if the Adviser considers that the
Austrian schilling is linked to the German deutsche mark (the
"D-mark"), a Fund holds securities denominated in schillings
and the Adviser believes that the value of schillings will
decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy U.S. dollars.
Risks of Currency Transactions. Currency transactions are
subject to risks different from those of other portfolio
transactions. Because currency control is of great importance
to the issuing governments and influences economic planning
and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange
controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in
losses to a Fund if it is unable to deliver or receive
currency or funds in settlement of obligations and could also
cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract
for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out
positions on such options is subject to the maintenance of a
liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to
that country's economy. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in
value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present
during the particular time when a Fund is engaging in proxy
hedging. If a Fund enters into a currency hedging transaction,
the Fund will comply with the asset segregation requirements
described below.
Short Sales. Each Fund may make short sales of securities
traded on domestic or foreign exchanges. A short sale is a
transaction in which a Fund sells a security it does not own
in anticipation that the market price of that security will
decline. The Fund may make short sales to hedge positions, for
duration and risk management, in order to maintain portfolio
flexibility or to enhance income or gain.
When a Fund makes a short sale, it must
borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon
conclusion of the sale. The Fund may have to pay a fee to
borrow particular securities and is often obligated to pay
over any payments received on such borrowed securities.
A Fund's obligation to replace the borrowed
security will be secured by collateral deposited with the
broker-dealer, usually cash, U.S. government securities or
other high grade liquid securities. The Fund will also be
required to segregate similar collateral with its custodian to
the extent, if any, necessary so that the aggregate collateral
value is at all times at least equal to the current market
value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the
security regarding payment over any payments received by the
Fund on such security, the Fund may not receive any payments
(including interest) on its collateral deposited with such
broker-dealer.
If the price of the security sold short
increases between the time of the short sale and the time the
Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Trust will
realize a gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. Although
the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.
Combined Transactions. Each Fund may enter into multiple
transactions, including multiple options transactions,
multiple futures transactions, multiple currency transactions
(including forward currency contracts) and multiple interest
rate transactions and any combination of futures, options,
currency and interest rate transactions ("component"
transactions), instead of a single Strategic Transaction, as
part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of that Fund to do
so. A combined transaction will usually contain elements of
risk that are present in each of its component transactions.
Although combined transactions are normally entered into based
on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination
will instead increase such risks or hinder achievement of the
portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic
Transactions into which the Funds may enter are interest rate,
currency and index swaps and the purchase or sale of related
caps, floors and collars. The Funds expect to enter into these
transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management
technique or to protect against any increase in the price of
securities the Funds anticipate purchasing at a later date.
Each Fund intends to use these transactions as hedges and not
as speculative investments and will not sell interest rate
caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by
a Fund with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments with respect to a notional
amount of principal. A currency swap is an agreement to
exchange cash flows on a notional amount of two or more
currencies based on the relative value differential among them
and an index swap is an agreement to swap cash flows on a
notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount
from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range of
interest rates or values.
The Funds will usually enter into swaps on a
net basis, i.e., the two payment streams are netted out in a
cash settlement on the payment date or dates specified in the
instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good
faith hedging purposes, the Adviser and the Funds believe such
obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to
its borrowing restrictions. Neither Fund will enter into any
swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt
of the counterparty, combined with any credit enhancements, is
rated at least A by S&P or Moody's or has an equivalent rating
from an NRSRO or is determined to be of equivalent credit
quality by the Adviser. If there is a default by the
counterparty, the Fund may have contractual remedies pursuant
to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which
standardized documentation has not yet been fully developed
and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Funds may make investments in
instruments that are U.S. dollar-denominated futures contracts
or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"). Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and
sellers to obtain a fixed rate for borrowings. The Funds might
use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps
and fixed income instruments are often linked.
Risks of Strategic Transactions Outside the United States.
When conducted outside the United States, Strategic
Transactions may not be regulated as rigorously as in the
United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of,
foreign securities, currencies and other instruments. The
value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic
factors; (ii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours
in the United States; (iii) the imposition of different
exercise and settlement terms and procedures and margin
requirements than in the United States; and (iv) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic
Transactions, in addition to other requirements, require that
the Funds segregate liquid assets with its custodian to the
extent the Funds' obligations are not otherwise "covered"
through ownership of the underlying security, financial
instrument or currency. Liquid assets include equity and debt
securities so long as they are readily marketable. The
Investment Adviser, subject to oversight by the Board of
Directors, is responsible for determining and monitoring the
liquidity of securities in segregated accounts on a daily
basis. In general, either the full amount of any obligation by
a Fund to pay or deliver securities or assets must be covered
at all times by the securities, instruments or currency
required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid securities at least
equal to the current amount of the obligation must be
segregated with the custodian. The segregated account may
consist of notations on the books of the custodian. The
segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option
written by a Fund will require the Fund to hold the securities
subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate
liquid securities sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by a
Fund on an index will require the Fund to own portfolio
securities which correlate with the index or to segregate
liquid assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by a
Fund requires the Fund to segregate liquid assets equal to the
exercise price.
A forward currency contract which obligates
the Fund to buy or sell currency will generally require the
Fund to hold an amount of that currency or securities
denominated in that currency equal to the Fund's obligations
or to segregate liquid assets equal to the amount of the
Fund's obligations unless the contract is entered into to
facilitate the purchase or sale of a security denominated in a
particular currency or for hedging currency risks of one or
more of a Fund's portfolio investments.
OTC options entered into by the Funds,
including those on securities, currency, financial instruments
or indices and OCC issued and exchange listed options, will
generally provide for cash settlement. As a result, when one
of the Funds sells these instruments, the Fund will only
segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts
will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option
sold by a Fund, or the in-the-money amount plus any sell-back
formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a
time when the in-the-money amount exceeds the exercise price,
the Fund will segregate, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess.
OCC issued and exchange listed options sold by the Funds other
than those above generally settle with physical delivery, and
the Seller will segregate an amount of assets equal to the
full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or
cash settlement will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an
option thereon, a Fund must deposit initial margin and
possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at
the expiration of an index-based futures contract. Such assets
may consist of cash, cash equivalents, liquid debt or equity
securities or other acceptable assets.
With respect to swaps, the Funds will accrue
the net amount of the excess, if any, of its obligations over
its entitlements with respect to each swap on a daily basis
and will segregate an amount of cash or liquid securities
having a value equal to the accrued excess. Caps, floors, and
collars require segregation of assets with a value equal to
the Fund's net obligation, if any.
Strategic Transactions may be covered by
other means when consistent with applicable regulatory
policies. In the case of portfolio securities which are
loaned, collateral values of the loaned securities will be
continuously maintained at not less than 100% by "marking to
market" daily. A Fund may also enter into offsetting
transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in
related options and Strategic Transactions. For example, a
Fund could purchase a put option if the strike price of that
option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating
assets if the Fund held a futures or forward contract, it
could purchase a put option on the same futures or forward
contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be
offset in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction no
segregation is required, but if it terminates prior to such
time, assets equal to any remaining obligation would need to
be segregated.
The Funds' activities involving Strategic
Transactions may be limited by the requirements of Subchapter
M of the Internal Revenue Code for qualification as a
regulated investment company (see "TAXES").
Borrowing for Strategic Transactions
Both Funds may borrow money in order to
purchase liquid high grade assets for segregation or margin
purposes in connection with Strategic Transactions. Although
neither Fund expects that the interest rate differential
between its borrowing costs and the yield on such securities
will be significant, such borrowings could result in net
interest expense for the Fund and also expose the Fund to risk
of loss from loss of market value due to adverse interest
rate, credit quality or currency exchange rate changes.
Investment Restrictions
The policies set forth below are fundamental
policies of the Global Fund and the American Fund and may not
be changed with respect to a Fund without approval of a
majority of the outstanding voting securities of that Fund. As
used in this Statement of Additional Information a "majority
of the outstanding voting securities of a Fund" means the
lesser of (1) 67% or more of the voting securities present at
such meeting, if the holders of more than 50% of the
outstanding voting securities of the Funds are present or
represented by proxy; or (2) more than 50% of the outstanding
voting securities of the Funds.
As a matter of fundamental policy, neither
Fund may:
1. borrow money, except to obtain liquid securities for use in connection
with Strategic Transactions conducted by the Funds in connection with its
portfolio activities or as a temporary measure for extraordinary or emergency
purposes, in connection with the clearance of transactions or to pay for
redemptions, in each case subject to applicable U.S. government limitations;
2. purchase or sell real estate (other than
securities representing interests in real
estate or fixed income obligations directly
or indirectly secured by real estate and
other than real estate acquired upon
exercise of rights under such securities) or
purchase or sell physical commodities or
contracts relating to physical commodities
(other than currencies and specie to the
extent they may be considered physical
commodities) or oil, gas or mineral leases
or exploration programs;
3. act as underwriter of securities issued by others, except to the extent
that it may be deemed an underwriter in connection with the disposition of
portfolio securities of the Fund;
4. make loans to other persons, except (a) loans of portfolio securities,
and (b) to the extent the entry into repurchase agreements and the purchase of
debt obligations may be deemed to be loans;
5. issue senior securities, except as appropriate to evidence borrowings of
money, and except that Strategic Transactions conducted by the Fund in
connection with its portfolio activities are not considered to involve the
issuance of senior securities for purposes of this restriction;
6. purchase any securities which would cause more than 25% of the market
value of its total assets at the time of such purchase to be invested in the
same industry; or
7. with respect to 75% of its total assets
taken at market value, purchase more than
10% of the voting securities of any one
issuer or invest more than 5% of the value
of its total assets in the securities of any
one issuer, except in each case securities
issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and
securities of other investment companies.
In addition, the Board of Directors has adopted the following
policy (among others) which may be changed without a
shareholder vote: neither Fund may invest more than 15% of its
net assets in securities which are not readily marketable.
These include securities subject to contractual or legal
resale restrictions in their primary trading market (such as
OTC options, including floors, caps, collars and swaps,
securities of private companies and longer-term repurchase
agreements).
If a percentage restriction on investment or utilization of
assets as set forth under "Investment Restrictions" above is
adhered to at the time an investment is made, a later change
in percentage resulting from changes in the value or the total
cost of the Funds' assets will not be considered a violation
of the restriction.
Share Certificates
Due to the desire of the Funds to keep
purchase and redemption of shares simple, generally,
certificates will not be issued to indicate ownership in
either of the Funds.
PERFORMANCE INFORMATION
From time to time, each Fund may calculate
its performances for inclusion in advertisements, sales
literature or reports to shareholders or prospective
investors. These performance figures are calculated by the
Funds in the manner described in the section below.
Average Annual Total Return
Average Annual Total Return is the average annual compound
rate of return for the periods of one year and the life of a
Fund, each ended on the last day of a recent calendar quarter.
Average annual total return quotations reflect changes in the
price of a Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were
reinvested in the Fund's shares. Average annual total return
is calculated by computing the average annual compound rates
of return of a hypothetical investment over such periods,
according to the following formula (average annual total
return is then expressed as a percentage):
T = (ERV/P)1/n - 1
Where:
P = a hypothetical initial investment
of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is
the value, at the end of the
applicable period, of a hypothetical
$1,000 investment made at the
beginning of the applicable period.
Cumulative Total Return
Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified
period. Cumulative total return quotations reflect changes in
the price of the Fund's shares and assume that all dividends
and capital gains distributions during the period were
reinvested in the Fund's shares. Cumulative total return is
calculated by computing the cumulative rates of return of a
hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed
as a percentage):
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment
of $1,000
ERV = ending redeemable value: ERV is
the value, at the end of the
applicable period, of a hypothetical
$1,000 investment made at the
beginning of the applicable period.
<PAGE>
Total Return
Total Return is the rate of return on an investment for a
specified period of time calculated in the same manner as
cumulative total return.
Capital Change
Capital Change measures the return from invested capital
including reinvested capital gains distributions. Capital
change does not include the reinvestment of income dividends.
Quotations of a Fund's performance are
historical, show the performance of a hypothetical investment,
and are not intended to indicate future performance. An
investor's shares when redeemed may be worth more or less than
their original cost. Performance of each Fund will vary based
on changes in market conditions and the level of the Fund's
expenses.
Comparison of Portfolio Performance
Comparison of the quoted non-standardized
performance of various investments is valid only if
performance is calculated in the same manner or the
differences are understood. Investors should consider the
methods used to calculate performance when comparing the
performance of either Fund with the performance of other
investment companies or other types of investments.
In connection with communicating its
performance to current or prospective shareholders, either
Fund also may compare these figures to unmanaged indices which
may assume reinvestment of dividends or interest but generally
do not reflect deductions for operational, administrative and
management costs.
Because normally most of the Global Fund's
investments are denominated in foreign currencies, the
strength or weakness of the U.S. dollar against these
currencies will account for part of the Global Fund's
investment performance except to the extent hedged to the U.S.
dollar. Historical information on the value of the dollar
versus foreign currencies may be used from time to time in
advertisements concerning the Global Fund. Such historical
information is not indicative of future performance.
From time to time, in advertising and
marketing literature, a Fund's performance may be compared to
the performance of broad groups of mutual funds with similar
investment goals, as tracked by independent organizations.
When these organizations' tracking results are used, a Fund
will be compared to the appropriate fund category, that is, by
fund objective and portfolio holdings, or to the appropriate
volatility grouping, where volatility is a measure of a fund's
risk.
Since the assets in funds are always
changing, either Fund may be ranked within one asset-size
class at one time and in another asset-size class at some
other time. In addition, the independent organization chosen
to rank a Fund in fund literature may change from time to time
depending upon the basis of the independent organization's
categorizations of mutual funds, changes in the Fund's
investment policies and investments, the Fund's asset size and
other factors deemed relevant. Footnotes in advertisements and
other marketing literature will include the organization
issuing the ranking, time period and asset-size class, as
applicable, for the ranking in question.
Evaluations of a Fund's performance made by
independent sources may also be used in advertisements
concerning that Fund, including reprints of, or selections
from, editorials or articles about the Fund.
OPERATION OF THE FUNDS
Structure of the Funds
Both the Global Fund and the American Fund
are separate series of Tweedy, Browne Fund Inc., a Maryland
corporation organized on January 28, 1993.
Costs incurred by each Fund in connection
with the organization and initial registration of the
corporation and each Fund will be amortized over a five year
period beginning at the commencement of the operation of the
applicable Fund.
The authorized capital stock of the
Corporation consists of one billion shares with $0.0001 par
value, 600 million shares of which are allocated to the Global
Fund and 400 million shares of which are allocated to the
American Fund. Each share has equal voting rights as to each
other share of that series as to voting for directors,
redemption, dividends and liquidation. Shareholders have one
vote for each share held. The Directors have the authority to
issue additional series of shares and to designate the
relative rights and preferences as between the different
series. All shares issued and outstanding are fully paid and
non-assessable, transferable, and redeemable at net asset
value at the option of the shareholder. Shares have no
preemptive or conversion rights.
The shares have non-cumulative voting
rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of
the directors if they choose to do so, and, in such event, the
holders of the remaining less than 50% of the shares voting
for the election of Directors will not be able to elect any
person or persons to the Board of Directors.
Maryland corporate law provides that a
Director of the Corporation shall not be liable for actions
taken in good faith, in a manner he or she reasonably believes
to be in the best interests of the Corporation and with the
care that an ordinarily prudent person in a like position
would use under similar circumstances. In so acting, a
Director shall be fully protected in relying in good faith
upon the records of the Corporation and upon reports made to
the Corporation by persons selected in good faith by the
Directors as qualified to make such reports. The By-Laws
provide that the Corporation will indemnify Directors and
Officers of the Corporation against liabilities and expenses
reasonably incurred in connection with litigation in which
they may be involved because of their positions with the
Corporation, to the fullest extent permitted by Maryland
corporate law as amended from time to time. However, nothing
in the Articles of Incorporation or the By-Laws protects or
indemnifies a Director or officer against any liability to
which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her
office.
Investment Adviser
Tweedy, Browne Company L.P. acts as
investment adviser (the "Adviser") to both the Global Fund and
the American Fund. The Adviser is registered with the
Securities and Exchange Commission (the "SEC") as an
investment adviser and as a broker/dealer and is a member of
the National Association of Securities Dealers.
Tweedy, Browne was founded in 1920 and began managing money for the account
of persons other than its principals and their families in 1968. Tweedy, Browne
began investing in foreign securities in 1983. Investment decisions are made by
consensus among its general partners, who collectively control Tweedy, Browne
and who are Christopher H. Browne, William H. Browne and John D. Spears. Messrs.
Browne are brothers.
Certain investments may be appropriate for
one or both of the Funds and also for other clients advised by
the Adviser. Investment decisions for each Fund and other
clients are made with a view to achieving their respective
investment objectives and after consideration of such factors
as their current holdings, availability of cash for investment
and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client
or in different amounts and at different times for more than
one but less than all clients. Likewise, a particular security
may be bought for one or more clients when one or more other
clients are selling the security. In addition, purchases or
sales of the same security may be made for two or more clients
on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by the
Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the
securities purchased or sold by a Fund. Purchase and sale
orders for the Funds may be combined with those of other
clients of the Adviser in the interest of most favorable net
results to a particular Fund.
The Adviser renders services to the Global
Fund pursuant to an Investment Advisory Agreement dated as of
June 2, 1993. This Agreement will remain in effect from year
to year upon the annual approval by the vote of a majority of
those Directors who are not parties to such Agreement or
interested persons of the Adviser or the Corporation, cast in
person at a meeting called for the purpose of voting on such
approval, and either by vote of the Corporation's Directors or
of the outstanding voting securities of the Fund. The
Agreement may be terminated at any time without payment of
penalty by either party on sixty days written notice, and
automatically terminates in the event of its assignment.
The Adviser renders services to the American
Fund pursuant to an Investment Advisory Agreement dated as of
December 8, 1993. This Agreement will remain in effect from
year to year upon the annual approval by the vote of a
majority of those Directors who are not parties to such
Agreement or interested persons of the Adviser or the
Corporation, cast in person at a meeting called for the
purpose of voting on such approval, and either by vote of the
Corporation's Directors or of the outstanding voting
securities of the Fund. The Agreement may be terminated at any
time without payment of penalty by either party on sixty days
written notice, and automatically terminates in the event of
its assignment.
Under both Investment Advisory Agreements,
the Adviser regularly provides the Funds with continuing
investment management for the Funds' portfolios consistent
with the Funds' investment objectives, policies and
restrictions and determines what securities shall be purchased
for the portfolios of the Funds, what portfolio securities
shall be held or sold by the Funds, and what portion of the
Funds' assets shall be held uninvested, subject always to the
provisions of the Corporation's Articles of Incorporation and
By-Laws, the 1940 Act and the Internal Revenue Code of 1986
and to the Funds' investment objectives, policies and
restrictions, and subject, further, to such policies and
instructions as the Directors of the Corporation may from time
to time establish.
Under both Investment Advisory Agreements,
the Adviser also renders significant administrative services
(not otherwise provided by third parties) necessary for the
Funds' operations as open-end investment companies including,
but not limited to: preparing reports and notices to the
Directors and shareholders, supervising, negotiating
contractual arrangements with, and monitoring various
third-party service providers to the Funds (such as the Funds'
transfer agent, pricing agents, custodians, accountants and
others); preparing and making filings with the Commission and
other regulatory agencies; assisting in the preparation and
filing of the Funds' federal, state and local tax returns;
assisting in preparing and filing the Funds' federal excise
tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the
calculation of net asset value; monitoring the registration of
shares of the Funds under applicable federal and state
securities laws; maintaining the Funds' books and records;
assisting in establishing accounting policies of the Funds;
assisting in the resolution of accounting and legal issues;
establishing and monitoring the Funds' operating budgets;
processing the payment of the Funds' bills; assisting the
Funds in, and otherwise arranging for, the payment of
distributions and dividends and otherwise assisting each Fund
in the conduct of its business, subject to the direction and
control of the Directors.
Subject to the ability of the Adviser upon
approval of the Board to obtain reimbursement for the
administrative time spent on the Funds' operations (other than
investment advisory matters) by employees of the Adviser, the
Adviser pays the compensation and expenses of all directors,
officers and executive employees of the Corporation affiliated
with the Adviser and makes available, without expense to the
Funds, the services of such directors, officers and employees
as may duly be elected officers, subject to their individual
consent to serve and to any limitations imposed by law, and
provides the Funds' office spaces and facilities.
For the Adviser's investment advisory
services to the Global Fund, the Adviser is entitled to
receive an annual fee equal to 1.25% of that Fund's average
daily net assets. The fee is payable monthly in arrears,
provided the Global Fund will make such interim payments as
may be requested by the Adviser not to exceed 75% of the
amount of the fee then accrued on the books of the Global Fund
and unpaid. For the fiscal years ended March 31, 1997, March
31, 1996 and March 31, 1995, the Global Fund incurred
$14,318,034, $9,864,278 and $6,221,404, respectively, in
investment advisory fees.
For the Adviser's investment advisory
services to the American Fund, the Adviser is entitled to
receive an annual fee equal to 1.25% of that Fund's average
daily net assets. The fee is payable monthly in arrears,
provided the American Fund will make such interim payments as
may be requested by the Adviser not to exceed 75% of the
amount of the fee then accrued on the books of the American
Fund and unpaid. For the fiscal years ended March 31, 1997,
March 31, 1996 and March 31, 1995, the American Fund incurred
$2,892,275, $1,518,122 and $321,535, respectively, in
investment advisory fees after voluntary waivers of $284,262,
$192,301 and $61,245, respectively.
Under the Agreements, each Fund is
responsible for all of its other expenses including
organization expenses; fees and expenses incurred in
connection with membership in investment company
organizations; broker's commissions; legal, auditing and
accounting expenses; taxes and governmental fees; net asset
valuation; the fees and expenses of the transfer agent; the
cost of preparing share certificates or any other expenses,
including clerical expenses of issue, redemption or repurchase
of shares of capital stock; the expenses of and the fees for
registering or qualifying securities for sale; the fees and
expenses of the Directors, officers and employees who are not
affiliated with the Adviser and, to the extent described
above, employees of the Adviser; the cost of printing and
distributing reports and notices to shareholders; and the fees
and disbursements of custodians. The Corporation may arrange
to have third parties assume all or part of the expenses of
sale, underwriting and distribution of shares of the Funds.
Each Fund is also responsible for its expenses incurred in
connection with litigation, proceedings and claims and the
legal obligation it may have to indemnify the Adviser and its
Directors and officers with respect thereto.
Each Agreement also provides that the
applicable Fund and the Corporation may use any name utilizing
or derived from the name "Tweedy, Browne" only as long as the
Agreement or any extension, renewal or amendment thereof
remains in effect.
Each Agreement provides that the Adviser
shall not be liable for any error of judgment or mistake of
law or for any loss suffered by a Fund in connection with
matters to which the Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of
its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreement and indemnifies the
Adviser and its employees, officers and partners against any
cost or expense in any circumstance in which the Adviser is
not liable to the Fund.
Officers and employees of the Adviser from
time to time may have transactions with various banks,
including the Funds' custodian banks. It is the Adviser's
opinion that the terms and conditions of those transactions
which have occurred were not influenced by existing or
potential custodial or other Fund relationships.
None of the Directors or officers may have
dealings with the Funds as principals in the purchase or sale
of securities, except as individual subscribers or holders of
shares of the Funds.
Administrator
First Data Investor Services Group, Inc.
(the "Administrator" or "FDISG") provides administrative
services for the Global Fund for a fee equal to .09% of the
Global Fund's average daily net assets on an annual basis,
subject to specified minimum fee levels and subject to
reductions as low as .03% on average assets in excess of $1
billion. For the fiscal year ended March 31, 1997, the Global
Fund incurred $1,313,340 in administration fees after a
voluntary waiver of $84,934. For the fiscal years ended March
31, 1996 and March 31, 1995, the Global Fund incurred
$1,116,971 and $758,219, respectively, in administration fees.
Prior to February 15, 1997, the Company paid
FDISG an administrative fee equal to .12% of the Global Fund's
average daily net assets on an annual basis, subject to
specified minimum fee levels and subject to reductions as low
as .08% on average assets in excess of $500 million.
The Administrator also provides
administrative services for the American Fund for a fee equal
to .09% of the American Fund's average daily net assets on an
annual basis, subject to specified minimum fee levels and
subject to reductions as low as .03% on average assets in
excess of $1 billion. For the fiscal year ended March 31,
1997, the American Fund incurred $296,867 in administration
fees, after voluntary waiver of $32,914 for the period April
1, 1996 through February 14, 1997 and $21,979 for the period
February 15, 1997 through March 31, 1997. For the fiscal years
ended March 31, 1996 and March 31, 1995, the American Fund
incurred $156,669 (after voluntary waiver of $54,000) and
$51,904, respectively, in administration fees.
Prior to February 15, 1997, the Company paid
FDISG an administrative fee equal to .10% of the American
Fund's average daily net assets on an annual basis, subject to
specified minimum fee levels and subject to reductions as low
as .06% on average assets in excess of $500 million.
Under the Administration Agreement for each
Fund, the Administrator is required to provide office
facilities, clerical, legal and administrative services,
accounting and record keeping, internal auditing, valuing a
Fund's assets, preparing SEC and shareholder reports,
preparing, signing and filing tax returns, monitoring 1940 Act
compliance and providing other mutually agreeable services.
Subject to certain conditions, the Administration Agreement
has a term of three years until February 15, 2000 and
thereafter shall automatically renew for successive terms of
one year unless terminated and is terminable on 60 days notice
by either party.
Directors and Executive Officers
The Directors and executive officers of the
Corporation, together with information as to their principal
business occupations during the past five years are shown
below. Each Director who is an "interested person" of the
Corporation, as defined in the Investment Company Act of 1940,
as amended, is indicated by an asterisk.
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Position with Corporation Principal Occupation**
-------------------------------- ---------------------------- -------------------------------------
Bruce A. Beal, Age 61 Director Partner and Officer of various real
The Beal Companies estate development and investment
177 Milk Street companies. Real estate consultant.
Boston, MA 02109
Christopher H. Browne*, President, Director General Partner of Investment
Age 51 Adviser and Distributor
William H. Browne*, Treasurer, Director General Partner of Investment
Age 52 Adviser and Distributor
Arthur Lazar, Age 85 Director President of Lazar Brokerage
Lazar Brokerage (insurance brokerage)
355 Lexington Avenue
New York, NY 10017
Daniel J. Loventhal, Age 76 Director Private Investor
4740 S. Ocean Boulevard
Highland Beach, FL 33487
Richard Salomon, Age 50 Director Partner in Christy & Viener
Christy & Viener (law firm)
620 5th Avenue
New York, NY 10020
M. Gervase Rosenberger, Secretary General Counsel for Investment
Age 46 Adviser and Distributor
John D. Spears, Age 49 Vice President General Partner of Investment
Adviser and Distributor
* Messrs. Christopher Browne and William Browne are considered by the Corporation to be
Directors who are "interested persons" of the Adviser or of the Corporation (within the
meaning of the 1940 Act). Messrs. Browne are brothers.
** Unless otherwise stated, all the Directors and Officers
have been associated with their respective companies for
more than five years.
</TABLE>
Except as stated, the address of each such person is
the same as the Adviser's. Each of the Directors who is not
affiliated with the Adviser will be paid by the Corporation on
behalf of the Funds. Each of these unaffiliated Directors
receives an annual Director's fee of $2,000 and fees of $500
for attending each Directors meeting. The officers are paid by
the Adviser or the Administrator.
The following table sets forth certain
information regarding the compensation of the Corporation's
Directors for the fiscal year ended March 31, 1997. No
executive officer or person affiliated with the Funds received
compensation from the Funds. No Director receives pension or
retirement benefits from the Funds.
<PAGE>
COMPENSATION TABLE
TOTAL COMPENSATION
FROM THE CORPORATION
AND COMPLEX PAID TO
AGGREGATE DIRECTORS
COMPENSATION FROM
NAME OF PERSON THE CORPORATION
AND POSITION
Christopher H. Browne $0 $0
Chairman of the Board
and President
William H. Browne $0 $0
Treasurer and Director
TOTAL COMPENSATION
FROM THE CORPORATION
AND COMPLEX PAID TO
AGGREGATE DIRECTORS
COMPENSATION FROM
NAME OF PERSON THE CORPORATION
AND POSITION
Bruce A. Beal $4,000 $4,000
Director
Arthur Lazar $4,000 $4,000
Director
Daniel J. Loventhal $4,000 $4,000
Director
Richard Salomon $4,000 $4,000
Director
Control Persons and Principal Holders of Securities
As of May 15, 1997, the following persons
owned 5% or more of the outstanding shares of the Global Fund
and the American Fund:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Percent
of Total Shares
Fund Name Name and Address Outstanding
Tweedy, Browne Global Value Fund Charles Schwab & Co., Inc. 22.8%
101 Montgomery Street
San Francisco, CA 94104
Tweedy, Browne Global Value Fund Donaldson Lufkin & Jenrette 5.1%
P.O. Box 2052
Jersey City, NJ 07303
Tweedy, Browne Global Value Fund National Financial Services Corp 7.8%
P.O. Box 3908
Church Street Station
New York, NY 10008
Tweedy, Browne American Value Fund National Financial Services Corp 24.6%
P.O. Box 3908
Church Street Station
New York, NY 10008
Tweedy, Browne American Value Fund Charles Schwab & Co., Inc. 19.3%
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
The Corporation believes that such ownership
is of record only and is not aware that any person owns
beneficially 5% or more of the shares of the Global Fund or
American Fund.
As of May 15, 1997, the Directors and
officers of the Corporation beneficially owned 7.7% of the
outstanding common stock of the Global Fund and 2%, of the
outstanding common stock of the American Fund.
Distributor
The Corporation has a distribution agreement
with the Adviser to act as distributor (the "Distributor") for
the Global Fund dated as of June 2, 1993. This Agreement will
remain in effect from year to year upon the annual approval by
a majority of the Directors who are not parties to such
agreement or interested persons of any such party and either
by vote of a majority of the Board of Directors or a majority
of the outstanding voting securities of the Corporation.
The Corporation has a distribution agreement
with the Adviser for the American Fund dated as of December 8,
1993. This Agreement will remain in effect from year to year
upon the annual approval by a majority of the Directors who
are not parties to such agreement or interested persons of any
such party and either by vote of a majority of the Board of
Directors or a majority of the outstanding voting securities
of the Corporation.
Under both distribution agreements (the
"Distribution Agreements"), the Corporation is responsible
for: the payment of all fees and expenses in connection with
the preparation and filing with the Commission of the
Corporation's registration statement and a Fund's prospectus
(including this Statement of Additional Information) and any
amendments and supplements thereto, the registration and
qualification of shares for sale in the various states,
including registering the Corporation as a broker/dealer in
various states; the fees and expenses of preparing, printing
and mailing prospectuses annually to existing shareholders,
notices, proxy statements, reports or other communications to
shareholders of the Fund; the cost of printing and mailing
confirmations of purchases of shares and any prospectuses
accompanying such confirmations; any issue taxes or any
initial transfer taxes; shareholder toll-free telephone
charges and expenses of shareholder service representatives,
the cost of wiring funds for share purchases and redemptions
(unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business
reply envelopes; and that portion of any equipment, service or
activity which is primarily intended to result in the sale of
shares issued by the Corporation.
The Distributor will pay for printing and
distributing prospectuses or reports prepared for its use in
connection with the offering of the Fund's shares to the
public and preparing, printing and mailing any other
literature or advertising in connection with the offering of
shares of a Fund to the public. The Distributor will pay all
fees and expenses in connection with its qualification and
registration as a broker or dealer under federal and state
laws, as well as the sales related portion of any equipment,
service or activity which is primarily intended to result in
the sale of shares issued by the Corporation.
As agent, the Distributor currently offers
each Fund's shares on a continuous basis to investors. The
Distribution Agreements provide that the Distributor accepts
orders for shares at net asset value as no sales commission or
load is charged to the investor.
TAXES
Each Fund intends to qualify each year and
elect to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended,
(the "Code"). To qualify as a regulated investment company, a
Fund must comply with certain requirements of the Code
relating to, among other things, the sources of income and
diversification of assets. If the Fund fails to qualify for
treatment as a regulated investment company for any taxable
year, the Fund would be taxed as an ordinary corporation on
taxable income for that year (even if that income was
distributed to its shareholders), and all distributions out of
earnings and profits would be taxable to shareholders as
dividends (that is, ordinary income).
A regulated investment company qualifying
under the Code is required to distribute each year to its
shareholders at least 90% of its investment company taxable
income (generally including dividends, interest and net
short-term capital gain but not net capital gain, which is the
excess of net long-term capital gains over net short-term
capital losses) and generally is not subject to federal income
tax to the extent that it distributes annually its investment
company taxable income and net capital gains in the manner
required under the Code. Each Fund intends to distribute at
least annually all of its investment company taxable income
and net capital gains and therefore generally does not expect
to pay federal income taxes.
Each Fund is subject to a 4% nondeductible
excise tax on amounts required to be but not distributed under
a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions
representing at least 98% of a Fund's ordinary income for the
calendar year, at least 98% of its capital gain net income
realized during the one-year period ending October 31 during
such year, and all ordinary income and capital gain net income
for prior years that were not previously distributed. For
purposes of the excise tax, any ordinary income or capital
gain net income retained by, and subject to federal income tax
in the hands of, the Funds will be treated as having been
distributed.
Distributions of investment company taxable
income are taxable to shareholders as ordinary income.
Dividends from domestic corporations are expected to comprise
some portion of each Fund's gross income. To the extent that
such dividends constitute a portion of a Fund's investment
company taxable income, a portion of the income distributions
of that Fund may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the
portion of dividends which may so qualify. Distributions of
net capital gains are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of
the distributing Fund have been held by such shareholders.
Such distributions are not eligible for the dividends-received
deduction discussed above. Any loss realized upon the
redemption of shares held at the time of redemption for six
months or less from the date of their purchase will be treated
as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain during such
six-month period.
Distributions of investment company taxable
income and net realized capital gains will be taxable as
described above, whether received in shares or in cash.
Shareholders receiving distributions in the form of additional
shares will have a cost basis for federal income tax purposes
in each share so received equal to the net asset value of a
share on the distribution date.
All distributions of investment company
taxable income and net realized capital gain, whether received
in shares or in cash, must be reported by each shareholder on
his or her federal income tax return. Dividends and capital
gains distributions declared in October, November or December
and payable to shareholders of record in such a month will be
deemed to have been received by shareholders on December 31 if
paid during January of the following year. Redemptions of
shares may result in tax consequences (discussed below) to the
shareholder and are also subject to these reporting
requirements.
Distributions by a Fund results in a
reduction in the net asset value of the Fund's shares. Should
distributions reduce the net asset value below a shareholder's
cost basis, such distributions would nevertheless be taxable
to the shareholder as ordinary income or capital gain as
described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular,
investors should consider the tax implications of buying
shares just prior to a distribution. The price of shares
purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution
will then receive a partial return of capital upon the
distribution which will nevertheless be taxable to them.
Each Fund intends to qualify for and may
make the election permitted under Section 853 of the Code so
that shareholders may (subject to limitations) be able to
claim a credit or deduction on their federal income tax
returns for, and may be required to treat as part of the
amounts distributed to them, their pro rata portion of
qualified taxes paid by that Fund to foreign countries (which
taxes relate primarily to investment income). A shareholder
who does not itemize deductions may not claim a deduction for
such taxes. Each Fund may make an election under Section 853
of the Code, provided that more than 50% of the value of the
total assets of the Fund at the close of the taxable year
consists of stocks or securities in foreign corporations. The
foreign tax credit available to shareholders is subject to
certain limitations imposed by the Code. Each Fund will notify
each shareholder within 60 days after the close of the Fund's
taxable year as to whether the taxes paid by the Fund to
foreign countries will qualify for the treatment discussed
above for that year, and if they do, such notification will
designate (i) each shareholders' pro rata portion of the
qualified taxes paid and (ii) the portion of the distributions
that represents income derived from foreign sources.
Generally, a foreign tax credit is subject
to the limitation that it may not exceed the shareholder's
U.S. tax (before the credit) attributable to the shareholder's
total taxable income from foreign sources. For this purpose,
the shareholder's proportionate share of dividends paid by the
Fund that represents income derived from foreign sources will
be treated as foreign source income. The Fund's gains and
losses from the sale of securities, and certain currency gains
and losses, generally will be treated as being derived from
U.S. sources. The limitation on the foreign tax credit applies
separately to specific categories of foreign source income,
including "passive income," a category that includes the
portion of dividends received from each Fund that qualifies as
foreign source income. The foregoing limitation may prevent a
shareholder from claiming a credit for the full amount of his
proportionate share of the foreign income taxes paid by each
Fund.
Equity options (including options on stock
and options on narrow-based stock indices) and
over-the-counter options on debt securities written or
purchased by a Fund are subject to Section 1234 of the Code.
In general, no loss is recognized by a Fund upon payment of a
premium in connection with the purchase of a put or call
option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of
a lapse or sale of the option, on a Fund's holding period for
the option and, in the case of an exercise of the option, on
the Fund's holding period for the underlying stock. The
purchase of a put option may constitute a short sale for
federal income tax purposes, causing an adjustment in the
holding period of the underlying stock or substantially
identical stock in the Fund's portfolio. If the Fund sells a
put or call option, no gain is recognized upon its receipt of
a premium. If the option lapses or is closed out, any gain or
loss is treated as a short-term capital gain or loss. If a
call option sold by the Fund is exercised, any resulting gain
or loss is a short-term or long-term capital gain or loss
depending on the holding period of the underlying stock. The
exercise of a put option sold by the Fund is not a taxable
transaction for the Fund.
Many of the futures contracts (including
foreign currency futures contracts) entered into by a Fund,
certain forward foreign currency contracts, and all listed
non-equity options written or purchased by the Fund (including
options on a debt securities, options on futures contracts,
options on securities indices and certain options on
broad-based stock indices) will be governed by Section 1256 of
the Code. Absent a tax election to the contrary, gain or loss
attributable to the lapse, exercise or closing out of any such
position generally will be treated as 60% long-term and 40%
short-term capital gain or loss. In addition, on the last
trading day of the Fund's fiscal year, all outstanding Section
1256 positions will be marked to market (i.e., treated as if
such positions were closed out at their closing price on such
day), with any resulting gain or loss recognized as 60%
long-term and 40% short-term capital gain or loss. Under
certain circumstances, entry into a futures contract to sell a
security may constitute a short sale for federal income tax
purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in
the Fund's portfolio. Under Section 988 of the Code, discussed
below, certain foreign currency gain or loss from foreign
currency related forward contracts, certain futures and
similar financial instruments entered into or acquired by the
Fund will be treated as ordinary income or loss.
The Code requires that a Fund realize less
than 30% of its annual gross income from the sale or other
disposition of stock, securities and certain options, futures
and forward contracts held for less than three months. The
Fund's options, futures and forward transactions may increase
the amount of gains realized by the Fund that are subject to
this 30% limitation. Accordingly, the amount of such
transactions that each Fund may undertake may be limited.
Positions of each Fund which consist of at
least one stock and at least one stock option with respect to
such stock or substantially identical stock or securities or
other position with respect to substantially similar or
related property which substantially diminishes a Fund's risk
of loss with respect to such stock could be treated as a
"straddle" which is governed by Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments
in the holding periods of stock or securities and conversion
of short-term capital losses into long-term capital losses. In
addition, the Fund will not be allowed to currently deduct
interest and carry costs properly attributable to the straddle
position. The Fund may make certain elections to mitigate the
operation of the rules discussed above. An exception to these
straddle rules exists for any "qualified covered call options"
on stock written by the Fund.
Straddle positions of a Fund which consist
of at least one position not governed by Section 1256 and at
least one futures contract or forward contract or non-equity
option governed by Section 1256 which substantially diminishes
the Fund's risk of loss with respect to such other position
will be treated as a "mixed straddle." Although mixed
straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or
mitigate the operation of these rules. Each Fund will monitor
its transactions in options and futures and may make certain
tax elections in connection with these investments.
Under the Code, gains or losses attributable
to fluctuations in exchange rates which occur between the time
a Fund accrues interest or other receivables, or accrues
expenses or other liabilities, denominated in a foreign
currency and the time the Fund actually collects such interest
or receivables, or pays such expense or liabilities, generally
is treated as ordinary income or ordinary loss. Similarly,
gains or losses from dispositions of foreign currencies, debt
securities denominated in a foreign currency and certain
futures and forward contracts, attributable to fluctuations in
the value of the foreign currency between the date of
acquisition of the currency or security or contract and the
date of disposition are also treated as ordinary gain or loss.
These gains or losses may increase or decrease the amount of
the Fund's investment company taxable income to be distributed
to its shareholders as ordinary income.
If a Fund owns shares in a foreign
corporation that constitutes a "passive foreign investment
company" for U.S. federal income tax purposes and the Fund
does not elect to treat the foreign corporation as a
"qualified electing fund" within the meaning of the Code, the
Fund may be subject to U.S. federal income tax on a portion of
any "excess distribution" it receives from the foreign
corporation or any gain it derives from the disposition of
such shares, even if such income is distributed as a taxable
dividend by the Fund to its U.S. shareholders. Each Fund may
also be subject to additional tax in the nature of an interest
charge with respect to deferred taxes arising from such
distributions or gains. Any tax paid by a Fund as a result of
its ownership of shares in a "passive foreign investment
company" will not give rise to any deduction or credit to the
Fund or any shareholder. If the Fund owns shares in a "passive
foreign investment company" and the Fund elects to treat the
foreign corporation as a "qualified electing fund" under the
Code, the Fund may be required to include in its income each
year a portion of the ordinary income and net capital gains of
the foreign corporation, even if this income is not
distributed to the Fund. Any such income would be subject to
the distribution requirements described above, even if the
Fund does not receive any funds to distribute.
A portion of the difference between the
issue price of zero coupon securities and their face value
("original issue discount") is considered to be income to the
Fund each year, even though the Fund will not receive cash
interest payments from these securities. This original issue
discount imputed income will comprise a part of the investment
company taxable income of the Fund which must be distributed
to shareholders in order to maintain the qualification of the
Fund as regulated investment company and to avoid federal
income tax at the level of the Fund.
Each Fund will be required to report to the
IRS all distributions of investment company taxable income and
capital gains as well as gross proceeds from the redemption or
exchange of the Fund's shares, except in the case of certain
exempt shareholders. Under the backup withholding provisions
of Section 3406 of the Code, distributions of investment
company taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment
company may be subject to withholding of federal income tax at
the rate of 31% in the case of non-exempt shareholders who
fail to furnish either Fund with their taxpayer identification
numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also
be required if either Fund is notified by the Internal Revenue
Service or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the
shareholder is incorrect or that the shareholder has
previously failed to report interest or dividend income. If
the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the
amounts required to be withheld.
Redeeming shareholders will recognize gain
or loss in an amount equal to the difference between the basis
in their redeemed shares and the amount received. If such
shares are held as a capital asset, the gain or loss will be a
capital gain or loss and will be long-term if such shares have
been held for more than one year. Any loss realized upon a
taxable disposition of shares held for six months or less will
be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares.
Shareholders of each Fund may be subject to
state and local taxes on distributions received from either
Fund and on redemptions of each Fund's shares.
Each distribution is accompanied by a brief
explanation of the form and character of the distribution. In
January of each year the Corporation issues to each
shareholder a statement of the federal income tax status of
all distributions.
The foregoing general discussion of U.S. federal income tax law relates
solely to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Funds, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 31% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Shareholders should consult their tax
advisers about the application of the provisions of tax law
described in this Statement of Additional Information in light
of their particular tax situations.
PORTFOLIO TRANSACTIONS
The Adviser conducts all of the trading
operations for both the Global Fund and the American Fund. The
Adviser executes portfolio transactions with or through
issuers, underwriters and other brokers and dealers. In its
capacity as a broker-dealer, the Adviser reserves the right to
receive a ticket charge from each Fund for such service
although it currently does not engage in this practice.
The primary objective of the Adviser in
placing orders for the purchase and sale of securities for
each Fund's portfolio is to obtain the most favorable net
results, taking into account such factors as price,
commission, where applicable, (which is negotiable in the case
of U.S. national securities exchange transactions but which is
generally fixed in the case of foreign exchange transactions),
size of order, difficulty of execution and skill required of
the executing broker/dealer. The Adviser reviews on a routine
basis commission rates, execution and settlement services
performed, making internal and external comparisons.
When it can be done consistently with the
policy of obtaining the most favorable net results, it is the
Adviser's practice to place such orders with brokers and
dealers who supply market quotations to the custodian of the
Funds for appraisal purposes, or who supply research, market
and statistical information to either Fund or the Adviser. The
term "research, market and statistical information" includes
advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of
securities, and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. The
Adviser is not authorized when placing portfolio transactions
for either Fund to pay a brokerage commission in excess of
that which another broker might have charged for executing the
same transaction solely on account of the receipt of research,
market or statistical information. The Adviser does not place
orders with brokers or dealers on the basis that the broker or
dealer has or has not sold a Fund's shares. Except for
implementing the policy stated above, there is no intention to
place portfolio transactions with particular brokers or
dealers or groups thereof. In effecting transactions in
over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless
it appears that more favorable results are available
otherwise.
Although certain research, market and
statistical information from brokers and dealers can be useful
to the Funds and to the Adviser, it is the opinion of the
Adviser, that such information is only supplementary to its
own research effort since the information must still be
analyzed, weighed, and reviewed by the Adviser's staff. Such
information may be useful to the Adviser in providing services
to clients other than the Funds, and not all such information
is useful to the Adviser in providing services to the Funds.
For the fiscal years ended March 31, 1997 and March 31, 1996,
the Global Fund paid brokerage commissions of $2,167,248 and
$1,135,039, respectively. For the fiscal year ended March 31,
1995, the Global Fund paid brokerage commissions of $1,336,935
of which $7,960 was paid to second-tier affiliated persons.
For the fiscal years ended March 31, 1997 and March 31, 1996,
the American Fund paid brokerage commissions of $223,652 and
$210,767, respectively. For the fiscal year ended March 31,
1995, the American Fund paid brokerage commissions of $54,742
of which $2,240 was paid to second-tier affiliated persons.
The increase in commission payments is attributable to the
increased size of the Funds.
Average annual portfolio turnover rate is
the ratio of the lesser sales or purchases to the monthly
average value of the portfolio securities owned during the
year, excluding from both the numerator and the denominator
all securities with maturities at the time of acquisition of
one year or less. For the fiscal years ended March 31, 1997,
March 31, 1996 and March 31, 1995, the Global Fund's portfolio
turnover rates were 20%, 17% and 16%, respectively. For the
fiscal years ended March 31, 1997, March 31, 1996 and March
31, 1995, the American Fund's portfolio turnover rates were
16%, 9% and 4%, respectively.
NET ASSET VALUE
The net asset value of shares for both the
Global Fund and the American Fund will be computed as of the
close of regular trading on the New York Stock Exchange on
each day during which the Exchange is open for trading. The
Exchange is normally closed on the following national
holidays: New Year's Day, Martin Luther King Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas. Net asset value per share for the
Funds is determined by dividing the value of the total assets,
less all liabilities, by the total number of shares
outstanding.
In valuing a Fund's assets, a security
listed on an exchange or through any system providing for
daily publication of actual prices (and not subject to
restrictions against sale by the Fund on such exchange or
system) will be valued at its last sale price prior to the
close of regular trading (or, in the case of securities traded
on the London Stock Exchange, at the "Mid Price", i.e., the
mid price between the bid and ask prices, rounded to the
nearest dollar if the spread between the bid and the ask
prices is more than one pence). Lacking any sales, the
security will be valued at the mean between the last asked
price and the last bid price prior to the close of regular
trading.
Securities for which daily publication of
actual prices is not available and for which bid and asked
quotations are readily available will be valued at the mean
between the current bid and asked prices for such securities
in the over-the-counter market. Other securities will be
valued at their fair value as determined in good faith by or
under the direction of the Directors. Open futures contracts
are valued at the most recent settlement price, unless such
price does not reflect the fair value of the contract, in
which case such positions will be valued by or under the
direction of the Directors.
The value of a security which is not readily
marketable and which accordingly is valued by or under the
direction of the Directors is valued periodically on the basis
of all relevant factors which may include the cost of such
security to the Fund, the market price of unrestricted
securities of the same class at the time of purchase and
subsequent changes in such market price, potential expiration
or release of the restrictions affecting such security, the
existence of any registration rights, the fact that the Fund
may have to bear part or all of the expense of registering
such security, any potential sale of such security by or to
another investor as well as traditional methods of private
security analysis.
Following the calculation of security values
in terms of the currency in which the market quotation used is
expressed ("local currency"), the valuing agent will calculate
these values in terms of United States dollars on the basis of
the conversion of the local currencies (if other than U.S.)
into U.S. dollars at the rates of exchange prevailing at the
value time as determined by the valuing agent.
Trading in securities on European and Far
Eastern securities exchanges and over-the-counter markets is
normally completed well before the close of business on each
business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading
generally or in a particular country or countries may not take
place on all business days in New York. Furthermore, trading
takes place in Japanese markets on certain Saturdays and in
various foreign markets on days which are not business days in
New York and on which a Fund's net asset value is not
calculated. Each Fund generally calculates net asset value per
share, and therefore effects sales, redemptions and
repurchases of its shares, as of the regular close of the
Exchange on each day on which the Exchange is open. Such
calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio
securities used in such calculation. If events materially
affecting the value of such securities occur between the time
when their price is determined and the time when that Fund's
net asset value is calculated, such securities will be valued
at fair value as determined in good faith by the Board of
Directors.
ADDITIONAL INFORMATION
Experts
The financial statements and schedules of
investments of Tweedy, Browne Global Value Fund and Tweedy,
Browne American Value Fund at March 31, 1997 and for each of
the periods indicated therein appearing in this Statement of
Additional Information have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts
in accounting and auditing.
Other Information
The Corporation employs Boston Safe Deposit
and Trust Company as custodian and First Data Investor
Services Group, Inc. as transfer agent for both the Global
Fund and the American Fund.
The Prospectus and the Statement of
Additional Information omit certain information contained in
the Registration Statement which the Corporation has filed
with the SEC under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further
information with respect to the Funds and the securities
offered hereby. The Registration Statement is available for
inspection by the public at the SEC in Washington, D.C.
Financial Statements
The Funds' Annual Report for the fiscal
year ended March 31, 1997 is included
herein.
<PAGE>
A-1
APPENDIX A
The following is a description of the
ratings given by Moody's and S&P to corporate and municipal
bonds.
Ratings of Municipal and Corporate Bonds
S&P:
Debt rated AAA has the highest rating
assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and
differs from the highest rated issues only in small degree.
Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. Debt rated
BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category
than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded
as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major exposures to adverse conditions.
Debt rated BB has less near-term
vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for
debt subordinated to senior debt that is assigned an actual or
implied BBB-rating. Debt rated B has a greater vulnerability
to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable
vulnerability to default, and is dependent upon favorable
business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event
of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay
principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned and actual or
implied B or B- rating. The rating CC typically is applied to
debt subordinated to senior debt that is assigned an actual or
implied CCC rating. The rating C typically is applied to debt
subordinated to senior debt which is assigned an actual or
implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt
service payments are continued. The rating C1 is reserved for
income bonds on which no interest is being paid. Debt rated D
is in payment default. The D rating category is used when
interest payments or principal payments are not made on the
date due even if the applicable grace period had not expired,
unless S&P believes that such payments will be made during
such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
Bonds which are rated Aaa are judged to be
of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Bonds which are
rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long term risks appear somewhat larger than in Aaa
securities. Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Bonds which are rated Baa are considered as
medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain
protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during other good
and bad times over the future. Uncertainty of position
characterizes bonds in this class. Bonds which are rated B
generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may
be small.
Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be
present elements of danger with respect to principal or
interest. Bonds which are rated Ca represent obligations which
are speculative to a high degree. Such issues are often in
default or have other marked shortcomings. Bonds which are
rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
