HOW TO BUY SHARES
You may purchase shares of the Fund directly
from First Dominion Capital Corp. (the “Distributor”) or through brokers or dealers
who are authorized by the Distributor to sell shares of the Fund. Shares of the
Fund are also offered through financial supermarkets, advisers and consultants and
other investment professionals. You may request a copy of this prospectus by calling
(800) 527-9525. Investment professionals who offer shares of the Fund may require
the payment of fees from their individual clients, which may be different from those
described in this prospectus. For example, investment professionals may charge transaction
fees or set different minimum investment amounts. They may also have policies and
12
procedures that are different from those
contained in this prospectus. Investors should consult their investment professional
regarding its procedures for purchasing and selling shares of the Fund as the policies
and procedures may be different.
Share Class Alternatives
— The
Fund currently offers investors two different classes of shares through this prospectus:
Investor Shares charging a 0.25% 12b-1 fee and Institutional Shares, not charging
12b-1 fees.
The different classes of shares represent
investments in the same portfolio of securities, but the classes are subject to
different expenses and may have different share prices and minimum investment requirements.
When you buy shares be sure to specify the class of shares in which you choose to
invest. Because each share class has a different combination of sales charges, expenses
and other features, you should consult your financial advisor to determine which
class best meets your financial objectives.
Minimum Investments
— The minimum
initial investment for Investor Shares is $2,500. Institutional Shares are only
available to “qualified investors” with a minimum investment of at least $100,000.
Additional investments in Investor Shares must be in amounts of $100 or more. Institutional
Shares subsequent investments must be in amounts of $10,000 or more. The Company
may waive the minimum initial investment requirement for purchases made by directors,
officers and employees of the Company. The Company may also waive the minimum investment
requirement for purchases by its affiliated entities and certain related advisory
accounts and retirement accounts (such as IRAs). The Company may also change or
waive policies concerning minimum investment amounts at any time. The Fund retains
the right to refuse to accept an order.
Customer Identification Program
— Federal regulations require that the Company obtain certain personal information
about you when opening a new account. As a result, the Company must obtain the following
information for each person that opens a new account:
|
Name;
|
|
|
Date of birth
(for individuals);
|
13
|
|
Residential
or business street address (although post office boxes are still permitted for mailing);
and
|
|
|
Social security
number, taxpayer identification number, or other identifying number.
|
You may also be asked for a copy of your
driver’s license, passport, or other identifying document in order to verify
your identity. In addition, it may be necessary to verify your identity by cross
referencing your identification information with a consumer report or other electronic
database. Additional information may be required to open accounts for corporations
and other entities.
After an account is opened, the Company
may restrict your ability to purchase additional shares until your identity is verified.
The Company also may close your account or take other appropriate action if it is
unable to verify your identity within a reasonable time.
If your account is closed for this reason,
your shares will be redeemed at the NAV next calculated after the account
is closed.
Purchases By Mail —
For initial purchases,
the account application, which accompanies this prospectus, should be completed,
signed and mailed to the Transfer Agent at 8730 Stony Point Parkway, Suite 205,
Richmond, Virginia 23235, together with your check payable to the Fund. Please be
sure to specify which class of shares in which you wish to invest. For subsequent
purchases, include with your check the tear-off stub from a prior purchase confirmation,
or otherwise identify the name(s) of the registered owner(s) and social security
number(s).
Purchases by Wire
— You may
purchase shares by requesting your bank to transmit by wire directly to the Transfer
Agent. To invest by wire, please call the Company at (800) 527-9525 or the Transfer
Agent at (800) 628-4077 to advise the Company of your investment and to receive
further instructions. Your bank may charge you a small fee for this service. Once
you have arranged to purchase shares by wire, please complete and mail the account
application promptly to the Transfer Agent. This account application is required
to complete the Fund’s records. You will not have access to your shares until
the Fund’s records are complete. Once your account is opened, you may make
additional investments using the wire
14
procedure described above. Be sure to include
your name and account number in the wire instructions you provide
your bank.
General —
The Company reserves the
right, in its sole discretion, to withdraw all or any part of the offering of shares
of the Fund when, in the judgment of the Fund’s management, such withdrawal
is in the best interest of the Fund. An order to purchase Investor Shares is not
binding on, and may be rejected by, the Fund until it has been confirmed in writing
by the Fund and payment has been received.
Other Purchase Information
— You may purchase and redeem Fund shares, or exchange shares of the Fund for
those of another, by contacting any broker authorized by the Distributor to sell
shares of the Fund, by contacting the Fund at (800) 527-9525 or by contacting the
Transfer Agent at 8730 Stony Point Parkway, Suite 205, Richmond, Virginia 23235
or by telephoning (800) 628-4077. Brokers may charge transaction fees for the purchase
or sale of the Fund’s shares, depending on your arrangement with the broker.
HOW TO SELL SHARES
You may redeem your shares at any time and
in any amount by mail or telephone. You may also redeem Fund shares through authorized
broker-dealers. Brokers may charge transaction fees for the sale of Fund shares,
depending on your arrangement with the broker.
For your protection, the Transfer Agent
will not redeem your shares until it has received all information and documents
necessary for your request to be considered in “proper order.” The Transfer Agent
will promptly notify you if your redemption request is not in proper order. The
Transfer Agent cannot accept redemption requests which specify a particular date
for redemption or which specify any special conditions.
Your shares will be redeemed at the net
asset value per share next determined after receipt of a redemption request in good
order, less any deferred sales charge as applicable. Payment of redemption proceeds
will be made promptly, but no later than the seventh day following the receipt of
the request in proper order. The Company may suspend the right to redeem shares
for any period during which the NYSE is closed or the SEC determines that there
is an emergency. In such circumstances you may
15
withdraw your redemption request or permit
your request to be held for processing after the suspension is terminated.
Delivery of the proceeds of a redemption
of shares purchased and paid for by check shortly before the receipt of the redemption
request may be delayed until the Transfer Agent has completed collection of the
purchase check, which may take up to 15 days. Also, payment of the proceeds of a
redemption request for an account for which purchases were made by wire may be delayed
until a completed account application for the account is received to verify the
identity of the person redeeming the shares and to eliminate the need for backup
withholding.
Redemption By Mail —
To redeem shares
by mail, send a written request for redemption, signed by the registered owner(s)
exactly as the account is registered, to: Toreador International Fund, Attn: Redemptions,
8730 Stony Point Parkway, Suite 205, Richmond, VA 23235. Certain written requests
to redeem shares may require signature guarantees. For example, signature guarantees
may be required if you sell a large number of shares, if your address of record
on the account application has been changed within the last 30 days, or if you ask
that the proceeds be sent to a different person or address. Signature guarantees
are used to help protect you and the Fund. You can obtain a signature guarantee
from most banks or securities dealers, but not from a Notary Public. Please call
the Transfer Agent at (800) 628-4077 to learn if a signature guarantee is needed
or to make sure that it is completed appropriately in order to avoid any processing
delays. There is no charge to shareholders for redemptions by mail.
Redemption By Telephone —
You may
redeem your shares by telephone if you requested this service on your initial account
application. If you request this service at a later date, you must send a written
request along with a signature guarantee to the Transfer Agent. Once your telephone
authorization is in effect, you may redeem shares by calling the Transfer Agent
at (800) 628-4077. There is no charge for establishing this service, but the Transfer
Agent may charge your account a $10 service fee for each telephone redemption. The
Transfer Agent may change the charge for this service at any time without prior
notice. If it should become difficult to reach the Transfer Agent by telephone during
periods when market or economic conditions lead to an unusually large volume of
telephone requests, a shareholder may send a redemption request by
16
overnight
mail to the Transfer Agent at 8730 Stony Point Parkway, Suite 205, Richmond,
Virginia 23235.
Redemption
By Wire —
If you request that your redemption proceeds be wired to you, please
call your bank for instructions prior to writing or calling the Transfer Agent.
Be sure to include your name, Fund name, Fund account number, your account number
at your bank and wire information from your bank in your request to redeem by wire.
The Fund will
not be responsible for any losses resulting from unauthorized transactions (such
as purchases, sales or exchanges) if it follows reasonable security procedures designed
to verify the identity of the investor. You should verify the accuracy of your confirmation
statements immediately after you receive them.
NET ASSET VALUE
The Fund’s
share price, called the NAV per share, is determined as of the close of trading
on the New York Stock Exchange (“NYSE”) (generally, 4:00 p.m. Eastern time) on each
business day that the NYSE is open (the “Valuation Time”). As of the date of this
prospectus, the Fund has been informed that the NYSE observes the following holidays:
New Year’s Day, Martin Luther King Jr. Day, Presidents’ Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. NAV
per share is computed by adding the total value of the Fund’s investments and
other assets attributable to the Fund’s Investor or Institutional shares, subtracting
any liabilities attributable to the applicable class and then dividing by the total
number of the applicable classes’ shares outstanding. Due to the fact that
different expenses may be charged against shares of different classes of the Fund,
the NAV of the different classes may vary.
FAIR VALUE PRICING
The Fund’s
securities are valued at current market prices. Investments in securities traded
on a principal exchange (U.S. or foreign) and on the NASDAQ National Market System
are valued at the last reported sales
19
price on the exchange on which the securities
are traded as of the close of business on the last day of the period or, lacking
any sales, at the average of the bid and ask price on the valuation date. In cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated by or under the authority of the Fund’s Board of
Directors. Short-term debt securities (less than 60 days to maturity) are valued
at their fair market value using amortized cost. Securities traded in the over-the-counter
market are valued at the last available sale price in the over-the-counter market
prior to time of valuation. Securities for which market quotations are not readily
available are valued on a consistent basis at fair value as determined in good faith
by or under the direction of the Fund’s officers in a manner specifically authorized
by the Board of Directors of the Fund. Depositary Receipts will be valued at the
closing price of the instrument last determined prior to time of valuation unless
the Fund is aware of a material change in value. Securities for which such a value
cannot be readily determined will be valued at the closing price of the underlying
security adjusted for the exchange rate. Temporary investments in U.S. dollar denominated
short-term investments are valued at amortized cost, which approximates market value.
Portfolio securities which are primarily traded on foreign exchanges are generally
valued at the closing price on the exchange on which they are traded, and those
values are then translated into U.S. dollars at the current exchange rate.
Generally, trading in corporate bonds, U.S.
government securities and money market instruments is substantially completed each
day at various times before the scheduled close of the NYSE. The value of these
securities used in computing the NAV is determined as of such times.
The Company has a policy that contemplates
the use of fair value pricing to determine the NAV per share of the Fund when market
prices are unavailable as well as under special circumstances, such as: (i) if the
primary market for a portfolio security suspends or limits trading or price movements
of the security; and (ii) when an event occurs after the close of the exchange on
which a portfolio security is principally traded that is likely to have changed
the value of the security.
When the Company uses fair value pricing
to determine the NAV per share of the Fund, securities will not be priced on the
basis of quotations from the primary market in which they are traded, but rather
may be
20
priced by
another method that the Board believes accurately reflects fair value. Any method
used will be approved by the Board and results will be monitored to evaluate accuracy.
The Company’s policy is intended to result in a calculation of the Fund’s
NAV that fairly reflects security values as of the time of pricing. However, fair
values determined pursuant to the Company’s procedures may not accurately reflect
the price that the Fund could obtain for a security if it were to dispose of that
security as of the time of pricing.
FREQUENT TRADING
Frequent purchases
and redemptions of mutual fund shares may interfere with the efficient management
of the Fund’s portfolio by its Adviser, increase portfolio transaction costs,
and have a negative effect on the Fund’s long term shareholders. For example,
in order to handle large flows of cash into and out of the Fund, the Adviser may
need to allocate more assets to cash or other short-term investments or sell securities,
rather than maintaining full investment in securities selected to achieve the Fund’s investment objective. Frequent trading may cause the Fund to sell securities
at less favorable prices. Transaction costs, such as brokerage commissions and market
spreads, can detract from the Fund’s performance.
Because of
the potential harm to the Fund and its long-term shareholders, the Board has approved
policies and procedures that are intended to discourage and prevent excessive trading
and market timing abuses through the use of various surveillance techniques. Under
these policies and procedures, shareholders may not engage in more than four “round-trips” (a purchase and a redemption) within a rolling twelve month period. Shareholders
exceeding four round-trips will be investigated by the Fund and restricted possibly
from making additional investments in the Fund. The intent of the policies and procedures
is not to inhibit legitimate strategies, such as asset allocation, dollar cost averaging,
or similar activities that may nonetheless result in frequent trading of Fund shares.
For this reason, the Fund reserves the right to reject any exchange or purchase
of Fund shares with or without prior notice to the account holder. In cases where
surveillance of a particular account establishes what the Fund identifies as market
timing, the Fund will seek to block future purchases and exchanges of Fund shares
by that account. Where surveillance of a particular account indicates activity that
the Fund
21
believes could
be either abusive or for legitimate purposes, the Fund may permit the account holder
to justify the activity. The policies and procedures will be applied uniformly to
all shareholders and the Fund will not accommodate market timers.
The policies
apply to any account, whether an individual account or accounts with financial intermediaries
such as investment advisers, broker dealers or retirement plan administrators, commonly
called omnibus accounts, where the intermediary holds Fund shares for a number of
its customers in one account. Omnibus account arrangements permit multiple investors
to aggregate their respective share ownership positions and purchase, redeem and
exchange Fund shares without the identity of the particular shareholder(s) being
known to the Fund. Accordingly, the ability of the Fund to monitor and detect frequent
share trading activity through omnibus accounts is very limited and there is no
guarantee that the Fund will be able to identify shareholders who may be engaging
in frequent trading activity through omnibus accounts or to curtail such trading.
The Fund’s
policies provide for ongoing assessment of the effectiveness of current policies
and surveillance tools, and the Fund’s Board reserves the right to modify these
or adopt additional policies and restrictions in the future. Shareholders should
be aware, however, that any surveillance techniques currently employed by the Fund
or other techniques that may be adopted in the future, may not be effective, particularly
where the trading takes place through certain types of omnibus accounts. As noted
above, if the Fund is unable to detect and deter trading abuses, the Fund’s
performance, and its long term shareholders, may be harmed. In addition, shareholders
may be harmed by the extra costs and portfolio management inefficiencies that result
from frequent trading of Fund shares, even when the trading is not for abusive purposes.
GENERAL INFORMATION
Signature
Guarantees —
To help protect you and the Fund from fraud, signature guarantees
are required for: (1) all redemptions ordered by mail if you require that the check
be made payable to another person or that the check be mailed to an address other
than the one indicated on the account registration; (2) all requests to transfer
the registration of shares to another owner; and (3) all authorizations to establish
or change
22
telephone redemption service, other than
through your initial account application. Signature guarantees may be required for
certain other reasons. For example, a signature guarantee may be required if you
sell a large number of shares or if your address of record on the account has been
changed within the last thirty (30) days.
In the case of redemption by mail, signature
guarantees must appear on either: (1) the written request for redemption; or (2)
a separate instrument of assignment (usually referred to as a “stock power”) specifying
the total number of shares being redeemed. The Company may waive these requirements
in certain instances.
An original signature guarantee assures
that a signature is genuine so that you are protected from unauthorized account
transactions. Notarization is not an acceptable substitute. Acceptable guarantors
only include participants in the Securities Transfer Agents Medallion Program (STAMP2000).
Participants in STAMP2000 may include financial institutions such as banks, savings
and loan associations, trust companies, credit unions, broker-dealers and member
firms of a national securities exchange.
Proper Form —
Your order to buy shares
is in proper form when your completed and signed account application and check or
wire payment is received. Your written request to sell or exchange shares is in
proper form when written instructions signed by all registered owners, with a signature
guarantee if necessary, is received.
Small Accounts —
Due to the relatively
higher cost of maintaining small accounts, the Fund may deduct $50 per year (billed
quarterly) from your account or may redeem the shares in your account, if it has
a value of less than the required minimum investment at year end. If you bring your
account balance up to the required minimum, no account fee or involuntary redemption
will occur. The Company will not close your account if it falls below the required
minimum solely because of a market decline. The Company reserves the right to waive
this fee.
Automatic Investment Plan —
Existing
shareholders, who wish to make regular monthly investments in amounts of $100 or
more, may do so through the Automatic Investment Plan. Under the Automatic Investment
Plan, your designated bank or other financial institution debits a
23
pre-authorized amount from your account on or
about the 15th day of each month and applies the amount to the purchase of Fund
shares. To use this service, you must authorize the transfer of funds by completing
the Automatic Investment Plan section of the account application and sending a blank
voided check.
Exchange Privilege —
You may exchange
all or a portion of your shares in the Fund for shares of the same class of certain
other funds of the Company having different investment objectives, provided that
the shares of the fund you are exchanging into are registered for sale in your state
of residence. Your account may be charged $10 for a telephone exchange. An exchange
is treated as a redemption and purchase and may result in realization of a gain
or loss on the transaction. You won’t pay a deferred sales charge on an exchange;
however, when you sell the shares you acquire in an exchange, you will pay a deferred
sales charge based on the date you bought the original shares you exchanged.
Excessive trading can adversely impact Fund
performance and shareholders. Therefore, the Company reserves the right to temporarily
or permanently modify or terminate the Exchange Privilege. The Company also reserves
the right to refuse exchange requests by any person or group if, in the Company’s judgment, the Fund would be unable to invest the money effectively in accordance
with its investment objective and policies, or would otherwise potentially be adversely
affected. The Company further reserves the right to restrict or refuse an exchange
request if the Company has received or anticipates simultaneous orders affecting
significant portions of the Fund’s assets or detects a pattern of exchange
requests that coincides with a “market timing” strategy. Although the Company will
attempt to give you prior notice when reasonable to do so, the Company may modify
or terminate the Exchange Privilege at any time.
How to Transfer Shares —
If you wish
to transfer shares to another owner, send a written request to the Transfer Agent
at 8730 Stony Point Parkway, Suite 205, Richmond, VA 23235. Your request should
include: (i) the name of the Fund and existing account registration; (ii) signature(s)
of the registered owner(s); (iii) the new account registration, address, taxpayer
identification number and how dividends and capital gains are to be distributed;
(iv) any stock certificates which have been issued for the shares being transferred;
(v) signature guarantees (See “Signature
24
Guarantees”); and (vi) any additional documents
which are required for transfer by corporations, administrators, executors, trustees,
guardians, etc. If you have any questions about transferring shares, call the Transfer
Agent at (800) 628-4077.
Account Statements and Shareholder Reports
—
Each time you purchase, redeem or transfer shares of the Fund, you will receive
a written confirmation. You will also receive a year-end statement of your account
if any dividends or capital gains have been distributed, and an annual and a semi-annual
report.
Shareholder Communications —
The
Fund may eliminate duplicate mailings of portfolio materials to shareholders who
reside at the same address, unless instructed to the contrary. Investors may request
that the Fund send these documents to each shareholder individually by calling the
Fund at (800) 527-9525.
General —
The Fund will not be responsible
for any losses from unauthorized transactions (such as purchases, sales or exchanges)
if it follows reasonable security procedures designed to verify the identity of
the investor. You should verify the accuracy of your confirmation statements immediately
after you receive them.
DISTRIBUTION ARRANGEMENTS
The Fund is offered through financial supermarkets,
advisers and consultants, financial planners, brokers, dealers and other investment
professionals, and directly through the Fund’s distributor. Investment professionals
who offer shares may request fees from their individual clients. If you invest through
a third party, the policies and fees may be different than those described in this
prospectus. For example, third parties may charge transaction fees or set different
minimum investment amounts.
The Fund’s Board has approved this waiver and the
imposition of a 1.00% redemption fee to discourage market timing. If you are in
a category of investors who purchase Investor Shares through such programs, you
will be subject to a 1.00% redemption fee if you redeem your shares less than 90
calendar days after you purchase them. If this fee is imposed it would raise the
expenses of your shares. Such fees, when imposed, are credited directly to the assets
of the Fund to help defray the expenses to the Fund
25
of short-term trading activities. These
fees are never used to pay distribution or sales fees or expenses. The redemption
fee will not be assessed on certain types of accounts or under certain conditions.
Shares acquired through reinvestment of
dividends or capital gain distributions are not subject to a front-end or redemption
fee. In addition, the redemption fee on shares purchased without the payment of
a front-end sales charge and redeemed within 360 days of purchase may be waived
in certain circumstances. The redemption fee is computed based on a percentage of
the NAV at the time the shares were purchased, net of reinvested dividends and capital
gains distributions. The redemption fee would equal 2.00% of the offering price
and of the net amount invested.
The Fund will use the first-in, first-out
(“FIFO”) method to determine the 360 day holding period. Under this method, the
date of the redemption will be compared to the earliest purchase date of shares
held in the account. If this holding period is less than 360 days, the redemption
fee will be assessed. The redemption fee will be applied on redemptions of each
investment made by a shareholder that does not remain in the Fund for a 360 day
period from the date of purchase.
While the Fund makes every effort to collect
redemption fees, the Fund may not always be able to track short term trading effected
through accounts with financial intermediaries.
Rule 12b-1 Fees
— The Board
has adopted a Distribution Plan for the Fund’s Investor Class Shares. Pursuant
to the 12b-1 Plan, the Fund may finance from the assets of a particular class certain
activities or expenses that are intended primarily to result in the sale of shares
of such class. The Fund finances these distribution and service activities through
payments made to the Distributor. The fee paid to the Distributor is computed on
an annualized basis reflecting the average daily net assets of a class, up to a
maximum of 0.25% for Investor Class Share expenses. The Fund may pay Rule 12b-1
Fees for activities and expenses borne in the past in connection with the distribution
of its shares as to which no Rule 12b-1 Fee were paid because of the expense limitation.
Because these fees are paid out of a class’s assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost more than
paying other types of sales charges.
26
Shareholder Servicing
— The
Distributor is responsible for paying various shareholder servicing agents for performing
shareholder servicing functions and maintaining shareholder accounts. These agents
have written shareholder servicing agreements with the Distributor and perform these
functions on behalf of their clients who own shares of the Fund.
FINANCIAL HIGHLIGHTS
The Fund began operations on October 1,
1998 as the Third Millennium Russia Fund (the “Predecessor Fund”). These financial
highlights, presented through August 31, 2012, are those of the Predecessor Fund
and do not reflect the Fund’s operations since August 31, 2012.
The financial highlights table is intended
to help you understand the Fund’s (and the Predecessor Fund’s) financial
performance for the period of the Fund’s operations or the period since the
Fund began offering a particular class of shares. Certain information reflects financial
results for a single Fund share. The total return in the tables represent the rate
that an investor would have earned (or lost) on an investment in Investor and Institutional
shares of the Fund (and the Predecessor Fund) (assuming reinvestment of all dividends
and distributions). The financial highlights for the periods presented have been
audited by Tait, Weller & Baker LLP, independent registered public accounting
firm, whose unqualified report thereon, along with the Fund’s financial statements,
are included in the Fund’s Annual Report to Shareholders (the “Annual Report”)
and are incorporated by reference into the SAI. Additional performance information
for the Fund (and the Predecessor Fund) is included in the Annual Report. The Annual
Report and the SAI are available at no cost from the Fund at the address and telephone
number noted on the back page of this prospectus. The following information should
be read in conjunction with the financial statements and notes thereto.
27
|
TOREADOR
INTERNATIONAL FUND (formerly, the THIRD MILLENNIUM RUSSIA FUND)
|
|
FINANCIAL
HIGHLIGHTS
|
|
SELECTED
PER SHARE DATA THROUGHOUT EACH PERIOD
|
|
|
|
|
|
Investor Class (previously Class A Shares)
|
|
|
|
Year ended August 31,
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
value, beginning of period
|
|
|
|
$20.92
|
|
|
|
|
|
$19.22
|
|
|
|
|
|
$15.29
|
|
|
|
|
|
$47.18
|
|
|
|
|
|
$57.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income (loss)
(1)
|
|
|
|
(0.12)
|
|
|
|
|
|
(0.20)
|
|
|
|
|
|
(0.23)
|
|
|
|
|
|
(0.05)
|
|
|
|
|
|
(0.58)
|
|
|
Net realized and unrealized gain (loss)
on investments
and foreign currency transactions
|
|
|
|
(6.90)
|
|
|
|
|
|
1.90
|
|
|
|
|
|
4.31
|
|
|
|
|
|
(25.55)
|
|
|
|
|
|
(0.51)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from
investment activities
|
|
|
|
(7.02)
|
|
|
|
|
|
1.70
|
|
|
|
|
|
4.08
|
|
|
|
|
|
(25.60)
|
|
|
|
|
|
(1.09)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
(0.15)
|
|
|
|
|
|
(6.29)
|
|
|
|
|
|
(9.36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
distributions
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
(0.15)
|
|
|
|
|
|
(6.29)
|
|
|
|
|
|
(9.36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
in capital from redemption fees
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
value, end of period
|
|
|
|
$13.90
|
|
|
|
|
|
$20.92
|
|
|
|
|
|
$19.22
|
|
|
|
|
|
$15.29
|
|
|
|
|
|
$47.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
|
(33.56%)
|
|
|
|
|
|
8.84%
|
|
|
|
|
|
26.66%
|
|
|
|
|
|
(45.56%)
|
|
|
|
|
|
(4.86%)
|
|
|
Ratios/Supplemental
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio to average
net assets
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
3.18%
|
(C)
|
|
|
|
|
2.75%
|
|
|
|
|
|
2.75%
|
|
|
|
|
|
2.75%
|
|
|
|
|
|
2.75%
|
|
|
Expenses,
net
(B)
|
|
|
|
3.18%
|
(C)
|
|
|
|
|
2.75%
|
|
|
|
|
|
2.75%
|
|
|
|
|
|
2.75%
|
|
|
|
|
|
2.75%
|
|
|
Net
investment loss
|
|
|
|
(0.68%)
|
|
|
|
|
|
(0.85%)
|
|
|
|
|
|
(1.20%)
|
|
|
|
|
|
(0.33%)
|
|
|
|
|
|
(0.98%)
|
|
|
Portfolio
turnover rate
|
|
|
|
37.69%
|
|
|
|
|
|
54.05%
|
|
|
|
|
|
93.41%
|
|
|
|
|
|
53.64%
|
|
|
|
|
|
47.77%
|
|
|
Net assets,
end of period (000’s)
|
|
|
|
$10,885
|
|
|
|
|
|
$23,624
|
|
|
|
|
|
$29,868
|
|
|
|
|
|
$29,270
|
|
|
|
|
|
$78,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
*
|
|
Annualized
|
|
**
|
|
Not annualized
|
|
(A)
|
|
Management fee waivers and reimbursements of expenses reduced the expense ratio
and increased net investment income ratio by 0.95% for the year ended August 31,
2012; 0.27% for the year ended August 31, 2011, 0.46% for the year ended August
31, 2010; 0.55% for the year ended August 31, 2009 and 0.11% for the year ended
August 31, 2008.
|
|
(B)
|
|
Expense ratio - net reflects
the effect of the management fee waivers and custodian fee credits the Fund received.
|
|
(C)
|
|
Expense ratio includes expenses
incurred for changing investment advisors effective August 2, 2012 that are outside
the scope of the expense limitation agreement. Exclusion of these expenses from
the expense ratio would result in 0.43% reduction in the expense ratio for the year
ended August 31, 2012.
|
|
(1)
|
|
Per share amounts calculated using the
average number of shares outstanding.
|
29
|
TOREADOR
INTERNATIONAL FUND (formerly, the THIRD MILLENNIUM RUSSIA FUND)
|
|
FINANCIAL
HIGHLIGHTS
|
|
SELECTED
PER SHARE DATA THROUGHOUT EACH PERIOD
|
|
|
|
|
Class I Shares
|
|
|
Year ended August 31,
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
value, beginning of period
|
|
|
|
$22.30
|
|
|
|
|
|
$20.44
|
|
|
|
|
|
$16.25
|
|
|
|
|
|
$48.85
|
|
|
|
|
|
$59.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss)
(1)
|
|
|
|
(0.08)
|
|
|
|
|
|
(0.15)
|
|
|
|
|
|
(0.20)
|
|
|
|
|
|
0.05
|
|
|
|
|
|
(0.44)
|
|
|
Net
realized and unrealized gain (loss)
on investments and foreign currency transactions
|
|
|
|
(7.43)
|
|
|
|
|
|
2.01
|
|
|
|
|
|
4.54
|
|
|
|
|
|
(26.36)
|
|
|
|
|
|
(0.38)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from
investment activities
|
|
|
|
(7.51)
|
|
|
|
|
|
1.86
|
|
|
|
|
|
4.34
|
|
|
|
|
|
(26.31)
|
|
|
|
|
|
(0.82)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
(0.15)
|
|
|
|
|
|
(6.29)
|
|
|
|
|
|
(9.36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
distributions
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
(0.15)
|
|
|
|
|
|
(6.29)
|
|
|
|
|
|
(9.36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
value, end of period
|
|
|
|
$14.79
|
|
|
|
|
|
$22.30
|
|
|
|
|
|
$20.44
|
|
|
|
|
|
$16.25
|
|
|
|
|
|
$48.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
|
(33.68%)
|
|
|
|
|
|
9.10%
|
|
|
|
|
|
26.69%
|
|
|
|
|
|
(45.46%)
|
|
|
|
|
|
(4.21%)
|
|
|
Ratios/Supplemental
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio to average
net assets
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
2.93%
|
(C)
|
|
|
|
|
2.50%
|
|
|
|
|
|
2.50%
|
|
|
|
|
|
2.50%
|
|
|
|
|
|
2.50%
|
|
|
Expenses,
net
(B)
|
|
|
|
2.93%
|
(C)
|
|
|
|
|
2.50%
|
|
|
|
|
|
2.50%
|
|
|
|
|
|
2.50%
|
|
|
|
|
|
2.50%
|
|
|
Net
investment loss
|
|
|
|
(0.43%)
|
|
|
|
|
|
(0.60%)
|
|
|
|
|
|
(0.95%)
|
|
|
|
|
|
0.35%
|
|
|
|
|
|
(0.73%)
|
|
|
Portfolio
turnover rate
|
|
|
|
37.69%
|
|
|
|
|
|
54.05%
|
|
|
|
|
|
93.41%
|
|
|
|
|
|
53.64%
|
|
|
|
|
|
47.77%
|
|
|
Net assets,
end of period (000’s)
|
|
|
|
$620
|
|
|
|
|
|
$12,138
|
|
|
|
|
|
$17,274
|
|
|
|
|
|
$18,288
|
|
|
|
|
|
$20,469
|
|
30
|
*
|
|
Annualized
|
|
**
|
|
Not annualized
|
|
(A)
|
|
Management fee waivers and reimbursements of expenses reduced the expense ratio
and increased net investment income ratio by 0.95% for the year ended August 31,
2012; 0.27% for the year ended August 31, 2011, 0.46% for the year ended August
31, 2010; 0.55% for the year ended August 31, 2009 and 0.11% for the year ended
August 31, 2008.
|
|
(B)
|
|
Expense ratio - net reflects
the effect of the management fee waivers and custodian fee credits the Fund received.
|
|
(C)
|
|
Expense ratio includes expenses
incurred for changing investment advisors effective August 2, 2012 that are outside
the scope of the expense limitation agreement. Exclusion of these expenses from
the expense ratio would result in 0.43% reduction in the expense ratio for the year
ended August 31, 2012.
|
|
(1)
|
|
Per share amounts calculated using the
average number of shares outstanding.
|
31
FOR MORE INFORMATION
You will find more information about the
Fund in the following documents:
The Fund’s annual and semi-annual reports
will contain more information about the Fund and a discussion of the market conditions
and investment strategies that had a significant effect on the Fund’s performance
during the last fiscal year.
For more information about the Fund, you
may wish to refer to the Fund’s Statement of Additional Information (the “SAI”)
dated January 2, 2013, which is on file with the SEC and incorporated by reference
into this prospectus. You can obtain a free copy of the annual and semi-annual reports,
and the SAI by writing to The World Funds, Inc., 8730 Stony Point Parkway, Suite
205, Richmond, Virginia 23235, by calling toll free (800) 527-9525 or by e-mail
at: mail@ccofva.com. You may also obtain a free copy of the annual and semi-annual
reports from the Company’s website at: theworldfunds.com. General inquiries
regarding the Fund may also be directed to the above address or telephone number.
Information about the Company, including
the SAI, can be reviewed and copied at the SEC’s Public Reference Room, 100
F Street NE, Washington, D.C. Information about the operation of the Public Reference
Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information
regarding the Fund are available on the EDGAR Database on the SEC’s Internet
site at http://www.sec.gov, and copies of this information may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Commission’s Public Reference Section,
Washington D.C. 20549-0102.
(Investment Company Act File No. 811-8255)
32
|
THE WORLD
FUNDS, INC.
|
|
8730 STONY
POINT PARKWAY, SUITE 205
|
|
RICHMOND,
VIRGINIA 23235
|
|
(800) 527-9525
|
|
|
STATEMENT
OF ADDITIONAL INFORMATION
|
|
|
|
|
TOREADOR
INTERNATIONAL FUND
|
|
Investor
Shares
|
|
Institutional
Shares
|
|
|
|
January
2, 2013
|
|
This Statement
of Additional Information (“SAI”) is not a prospectus. It should be read
in conjunction with the current prospectuses for the Toreador International Fund
(the “Fund”), dated January 2, 2013, as listed below, as may be supplemented
or revised from time to time. You may obtain a prospectus of the Fund, free of charge,
by writing to The World Funds, Inc. at 8730 Stony Point Parkway, Suite 205, Richmond,
Virginia 23235 or by calling (800) 527-9525.
|
|
|
Current prospectus:
|
|
|
•
|
Investor Shares
|
|
|
•
|
Institutional
Shares
|
|
TABLE OF CONTENTS
|
|
|
|
|
|
PAGE
|
|
|
|
|
GENERAL INFORMATION
|
1
|
|
ADDITIONAL
INFORMATION ABOUT THE FUND’S INVESTMENTS
|
1
|
|
INVESTMENT
PROGRAMS
|
2
|
|
STRATEGIC
TRANSACTIONS
|
4
|
|
OTHER INVESTMENTS
|
7
|
|
INVESTMENT
RESTRICTIONS
|
8
|
|
DISCLOSURE
OF PORTFOLIO SECURITIES HOLDINGS
|
10
|
|
MANAGEMENT
OF THE COMPANY
|
12
|
|
PRINCIPAL
SECURITIES HOLDERS
|
17
|
|
ADVISER AND
ADVISORY AGREEMENT
|
17
|
|
MANAGEMENT-RELATED
SERVICES
|
19
|
|
PORTFOLIO
TRANSACTIONS
|
21
|
|
CAPITAL STOCK
AND DIVIDENDS
|
23
|
|
DISTRIBUTION
|
24
|
|
PLAN OF DISTRIBUTION
|
25
|
|
ADDITIONAL
INFORMATION ABOUT PURCHASES AND SALES
|
27
|
|
SPECIAL SHAREHOLDER
SERVICES
|
30
|
|
TAX STATUS
|
31
|
|
INVESTMENT
PERFORMANCE
|
33
|
|
FINANCIAL
INFORMATION
|
36
|
|
PROXY AND
CORPORATE ACTION VOTING
|
|
|
POLICIES
AND PROCEDURES
|
Appendix
A
|
|
GENERAL
INFORMATION
|
|
The World
Funds, Inc. (the “Company”) was organized as a Maryland corporation in
May, 1997. The Company is an open-end, management investment company (commonly known
as a “mutual fund”), registered under the Investment Company Act of 1940,
as amended (the “1940 Act”). This SAI relates to the Investor Shares and
Institutional Class Shares of the Toreador International Fund (the “Fund”).
The Fund is a separate investment portfolio or series of the Company. The Fund is
“non-diversified,” as that term is defined in the 1940 Act.
|
|
|
|
The Fund
began operations in June 1998 as the Third Millennium Russia Fund (the “Predecessor
Fund”). On August 2, 2012, the Board of Directors of the Fund approved a new interim
investment advisory agreement between the Company, on behalf of the Fund, and Toreador
Research & Trading, LLC (the “Adviser”). On October 10, 2012, the Fund’s
name and investment policies were changed. On December 27, 2012 shareholders of
the Fund approved the New Investment Advisory Contract between the Company, on behalf
of the Fund, and the Adviser. Certain of the financial information contained in
this SAI is that of the Predecessor Fund.
|
|
|
|
As of the
date of this SAI, the Fund is authorized to issue three classes of shares, although
only two classes are currently being offered to new investors: Investor Shares charging
a distribution (i.e., 12b-1) fee and Institutional Shares not charging any 12b-1
fees. The C Class Shares are currently closed to new purchases. Each class of shares
are substantially the same as they represent interests in the same portfolio of
securities and differ only to the extent that they bear different expenses.
|
|
|
|
ADDITIONAL
INFORMATION ABOUT THE FUND’S INVESTMENTS
|
|
The following
information supplements the discussion of the Fund’s investment objectives
and policies. The Fund’s investment objective and fundamental investment policies
may not be changed without approval by vote of a majority of the outstanding voting
shares of the Fund. As used in this SAI, a “majority of outstanding voting
shares” means the lesser of: (1) 67% of the voting shares of the Fund represented
at a meeting of shareholders at which the holders of 50% or more of the shares of
the Fund are represented; or (2) more than 50% of the outstanding voting shares
of the Fund. The investment programs, restrictions and the operating policies of
the Fund that are not fundamental policies can be changed by the Board of Directors
of the Company (the “Board”) without shareholder approval; except that
the Fund will give shareholders at least sixty (60) days’ prior notice of any
change with respect to its policy of investing, under normal circumstances, at least
80% of its net assets in securities of companies located outside of the United States.
|
|
|
Non-Diversification.
The Fund is non-diversified, as that term is defined in the 1940 Act, which
means that a relatively high percentage of assets of the Fund may be invested in
securities of a limited number of issuers. The value of the shares of the Fund may
be more susceptible to any single economic, political or regulatory occurrence than
the shares of a diversified investment company would be. The Fund intends to satisfy
the diversification requirements necessary to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the “Code”),
which requires that the Fund be diversified (i.e., that it will not invest more
than 5% of its assets in the securities of any one issuer) with respect to 50% of
its assets. The Internal Revenue Service requires that more than 50% of the Fund’s total assets must consist of the following per subchapter M of the Internal
Revenue Service Code:
|
|
|
•
|
cash
|
|
|
•
|
U.S. government
securities
|
|
|
•
|
Investments
in other mutual funds
|
|
|
•
|
Individual
securities that represent less than 5% of the total assets
|
|
|
•
|
No more than
25% of the value of the total assets is invested in one issuer
|
|
INVESTMENT
PROGRAMS
|
|
The following
discussion of investment techniques and instruments supplements, and should be read
in conjunction with, the investment information in the Fund’s prospectus. In
seeking to meet its investment objective, the Fund may invest in any type of security
whose characteristics are consistent with its investment program described below.
|
|
|
Common
Stock – Common stock represents an equity or ownership interest in an
issuer. In the event an issuer is liquidated or declares bankruptcy, the claims
of owners of bonds and preferred stock take precedence over the claims of those
who own common stock.
|
|
|
Preferred
Stock - Preferred stock is a class of capital stock that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
Most preferred stock is cumulative; if dividends are passed (not paid for any reason),
they accumulate and must be paid before common stock dividends. Passed dividend
on non-cumulative preferred stock is generally gone forever. Participating preferred
stock entitles its holders to share in profits above and beyond the declared dividend,
along with common shareholders, as distinguished from non-participating preferred,
which is limited to stipulated dividend. Adjustable rate preferred stock pays a
dividend that is adjustable, usually quarterly, based on changes in the Treasury
bill rate or other money market rates. Convertible preferred stock is exchangeable
for a given number of common shares and thus tends to be more volatile than non-convertible
preferred, which behaves more like a fixed-income bond.
|
|
|
Convertible
Securities - The Fund may invest in convertible securities. Traditional convertible
securities include corporate bonds, notes and preferred stocks that may be converted
into or exchanged for common stock or other equity securities, and other securities
that also provide an opportunity for equity participation. These securities are
convertible either at a stated price or a stated rate (that is, for a specific number
of shares of common stock or other equity securities). As with other fixed income
securities, the price of a convertible security generally varies inversely with
interest rates. While providing a fixed income stream, a convertible security also
affords the investor an opportunity, through its conversion feature, to participate
in the capital appreciation of the common stock into which it is convertible. As
the market price of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis and therefore may not experience market
value declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the price of a convertible security
tends to rise as a reflection of higher yield or capital appreciation. In such situations,
the price of a convertible security may be greater than the value of the underlying
common stock.
|
|
|
Warrants
- The Fund may invest in warrants. Warrants are options to purchase equity securities
at a specific price for a specific period of time. They do not represent ownership
of the securities, but only the right to buy them. Hence, warrants have no voting
rights, pay no dividends and have no rights with respect to the assets of the corporation
issuing them. The value of warrants is derived solely from capital appreciation
of the underlying equity securities. Warrants differ from call options in that the
underlying corporation issues warrants, whereas call options may be written by anyone.
|
|
|
Debentures
- Debentures are a general debt obligation backed only by the integrity of the borrower
and documented by an agreement called an Indenture. An unsecured bond is a debenture.
|
|
|
Illiquid
Securities - The Fund may hold up to 15% of its net assets in illiquid securities.
For this purpose, the term “illiquid securities” means securities that
cannot be disposed of within seven days in the ordinary course of business at approximately
the amount at which the Fund has valued the securities. Illiquid securities include
generally, among other things, certain written over-the-counter options, securities
or other liquid assets as cover for such options, repurchase agreements with maturities
in excess of seven days, certain loan participation interests and other securities
whose disposition is restricted under the federal securities laws.
|
|
|
Debt Securities
- The Fund may invest in debt securities. It generally will invest in debt securities
rated Baa or higher by Moody’s Investor Service, Inc. (“Moody’s”)
or BBB or higher by Standard & Poor’s Rating Group (“S&P”)
or foreign securities not subject to standard credit ratings, which the Adviser
believes are of comparable quality.
|
|
|
|
|
2
|
|
Debt securities
consist of bonds, notes, government and government agency securities, zero coupon
securities, convertible bonds, asset-backed and mortgage-backed securities, and
other debt securities whose purchase is consistent with the Fund’s investment
objective. The Fund’s investments may include international bonds that are
denominated in foreign currencies, including the European Currency Unit or “Euro.” International bonds are defined as bonds issued in countries other than the
United States. The Fund’s investments may include debt securities issued or
guaranteed by supranational organizations, corporate debt securities, and bank or
holding company debt securities.
|
|
|
Depositary
Receipts - Assets of the Fund may be invested on a global basis to take advantage
of investment opportunities both within the United States and other countries. The
Fund may buy foreign securities directly in their principal markets or indirectly
through the use of depositary receipts. The Fund may invest in sponsored and unsponsored
American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDR’s”),
and other similar depositary receipts. ADRs are issued by an American bank or trust
company and represent ownership of underlying securities of a foreign company. EDRs
are issued in Europe, usually by foreign banks, and represent ownership of either
foreign or domestic underlying securities. The foreign country may withhold taxes
on dividends or distributions paid on the securities underlying ADRs and EDRs, thereby
reducing the dividend or distribution amount received by shareholders.
|
|
|
Unsponsored
ADRs and EDRs are issued without the participation of the issuer of the underlying
securities. As a result, information concerning the issuer may not be as current
as for sponsored ADRs and EDRs. Holders of unsponsored ADRs generally bear all the
costs of the ADR facilities. The depositary of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from the
issuer of the deposited securities or to pass through voting rights to the holders
of such receipts in respect of the deposited securities. Therefore, there may not
be a correlation between information concerning the issuer of the security and the
market value of an unsponsored ADR.
|
|
|
Borrowing
– As required by the 1940 Act, the Fund must maintain continuous asset
coverage (total assets, including assets acquired with borrowed funds, less liabilities
exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value
of the Fund’s assets should fail to meet this 300% coverage test, the Fund,
within three days (not including Sundays and holidays), will reduce the amount of
the Fund’s borrowings to the extent necessary to meet this 300% coverage. Maintenance
of this percentage limitation may result in the sale of portfolio securities at
a time when investment considerations otherwise indicate that it would be disadvantageous
to do so. Investment strategies that either obligate the Fund to purchase securities
or require the Fund to segregate assets are not considered to be borrowing.
|
|
|
Strategic
Transactions.
The Fund may utilize a variety of investment strategies to hedge
various market risks (such as interest rates, currency exchange rates, and broad
specific equity or fixed-income market movements). Such strategies are generally
accepted as modern portfolio management and are regularly utilized by many mutual
funds and institutional investors. Techniques and instruments may change over time
as new instruments and strategies develop and regulatory changes occur.
|
|
|
In the
course of pursuing these investment strategies, the Fund may purchase and sell exchange-listed
and over-the-counter put and call options on securities, fixed-income indices and
other financial instruments, purchase and sell financial futures contracts and options
thereon, enter into various interest rate transactions such as swaps, caps, floors
or collars, and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies or
currency futures (collectively, all the above are called “Strategic Transactions”).
|
|
|
When conducted
outside the United States, Strategic Transactions may not be regulated as rigorously
as they are 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 could also be adversely affected by: (1) other complex foreign
political, legal and economic factors, (2) lesser availability than in the United
States of data on which to make trading decisions, (3) delays in the Fund’s
ability to act upon economic events occurring in foreign markets during non-business
hours in the United States, (4) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (5)
lower trading volume and liquidity.
|
|
|
|
|
3
|
|
|
Options.
The Fund may purchase and sell options as described herein.
|
|
|
Put
and Call Options.
A put option gives the purchaser of the option, upon payment
of a premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
The Fund may purchase a put option on a security to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument) against a substantial
decline in market value by giving the Fund the right to sell such instrument at
the option exercise price. Such protection is, of course, only provided during the
life of the put option when the Fund is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security’s
market price. By using put options in this manner, the Fund will reduce any profit
it might otherwise have realized in its underlying security by the premium paid
for the put option and by transaction costs.
|
|
|
A call
option, upon payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund’s purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund against
an increase in the price of the underlying instrument. When writing a covered call
option, the Fund, in return for the premium, gives up the opportunity to profit
from a market increase in the underlying security above the exercise price, but
conversely retains the risk of loss should the price of the security decline. If
a call option which the Fund has written expires, it will realize a gain in the
amount of the premium; however, such gain may be offset by a decline in the market
value of the underlying security during the option period. If the call option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security.
|
|
|
The premium
received is the market value of an option. The premium the Fund will receive from
writing a call option, or, which it will pay when purchasing a put option, will
reflect, among other things, the current market price of the underlying security,
the relationship of the exercise price to such market price, the historical price
volatility of the underlying security, the length of the option period, the general
supply and demand for credit conditions, and the general interest rate environment.
The premium received by the Fund for writing covered call options will be recorded
as a liability in its statement of assets and liabilities. This liability will be
adjusted daily to the option’s current market value, which will be the latest
sale price at the time at which the Fund’s net asset value (“NAV”) per share
is computed (currently, the close of regular trading on the New York Stock Exchange
(“NYSE”)), or, in the absence of such sale, the latest asked price. The liability
will be extinguished upon expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the underlying security upon the exercise of the option.
|
|
|
The premium
paid by the Fund when purchasing a put option will be recorded as an asset in its
statement of assets and liabilities. This asset will be adjusted daily to the option’s current market value, which will be the latest sale price at the time at
which the Fund’s NAV per share is computed, or, in the absence of such sale,
the latest bid price. The asset will be extinguished upon expiration of the option,
the selling (writing) of an identical option in a closing transaction, or the delivery
of the underlying security upon the exercise of the option.
|
|
|
The purchase
of a put option will constitute a short sale for federal tax purposes. The purchase
of a put at a time when the substantially identical security held long has not exceeded
the long term capital gain holding period could have adverse tax consequences. The
holding period of the long position will be cut off so that even if the security
held long is delivered to close the put, short term gain will be recognized. If
substantially identical securities are purchased to close the put, the holding period
of the securities purchased will not begin until the closing date. The holding period
of the substantially identical securities not delivered to close the short sale
will commence on the closing of the short sale.
|
|
|
The Fund
will purchase a call option only to close out a covered call option it has written.
It will write a put option only to close out a put option it has purchased. Such
closing transactions will be effected in order to realize a profit on an outstanding
call or put option, to prevent an underlying security from being called or put,
or, to permit the sale of the underlying security.
|
|
|
Furthermore,
effecting a closing transaction will permit the Fund to write another call option,
or purchase another put option, on the underlying security with either a different
exercise price or expiration date or both. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, or purchased
a put option, it will seek to effect a closing transaction prior to, or concurrently
with, the sale of the security. There is, of course,
|
|
|
|
4
|
|
no assurance
that the Fund will be able to effect such closing transactions at a favorable price.
If it cannot enter into such a transaction, it may be required to hold a security
that it might otherwise have sold, in which case it would continue to be at market
risk on the security. This could result in higher transaction costs, including brokerage
commissions. The Fund will pay brokerage commissions in connection with the writing
or purchase of options to close out previously written options. Such brokerage commissions
are normally higher than those applicable to purchases and sales of portfolio securities.
|
|
|
Options
written by the Fund will normally have expiration dates between three and nine months
from the date written. The exercise price of the options may be below, equal to,
or above the current market values of the underlying securities at the time the
options are written. From time to time, the Fund may purchase an underlying security
for delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering such security from its portfolio. In such cases, additional
brokerage commissions will be incurred.
|
|
|
The Fund will
realize a profit or loss from a closing purchase transaction if the cost of the
transaction is less or more than the premium received from the writing of the option;
however, any loss so incurred in a closing purchase transaction may be partially
or entirely offset by the premium received from a simultaneous or subsequent sale
of a different call or put option. Also, because increases in the market price of
a call option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to be
offset in whole or in part by appreciation of the underlying security owned by the
Fund.
|
|
|
An American
style put or call option may be exercised at any time during the option period while
a European style put or call option may be exercised only upon expiration or during
a fixed period prior thereto. The Fund is authorized to purchase and sell exchange-listed
options and over-the-counter options (“OTC options”). Exchange-listed options are
issued by a regulated intermediary such as the Options Clearing Corporation (“OCC”),
which guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
|
|
|
With certain
exceptions, OCC issued and exchange listed options generally settle by physical
delivery of the underlying security or currency, although cash settlement may become
available in the future. Index options and Eurocurrency instruments are cash settled
for the net amount, if any, by which the option is “in-the-money” (i.e., where the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised. Frequently, rather than taking or making delivery
of the underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting purchase or sale transactions that
do not result in ownership of the new option.
|
|
|
The Fund’s ability to close out its position as a purchaser or seller of an OCC or exchange-listed
put or call option is dependent, in part, upon liquidity of the option market. Among
the possible reasons for the absence of a liquid option market on an exchange are:
(1) insufficient trading interest in certain options; (2) restrictions on transactions
imposed by an exchange; (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying securities
including reaching daily price limits; (4) interruption of the normal operations
of the OCC or an exchange; (5) inadequacy of the facilities of an exchange or OCC
to handle current trading volume; or (6) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
|
|
|
The hours
of trading for listed options may not coincide with the hours during which the underlying
financial instruments are traded. To the extent that the option markets close before
the markets for the underlying financial instruments, significant price and rate
movements can take place in the underlying markets that cannot be reflected in the
option markets.
|
|
|
OTC options
are purchased from or sold to securities dealers, financial institutions or other
parties (“Counterparties”) through a direct bilateral agreement with the Counterparty.
In contrast to exchange-listed options, which generally have standardized terms
and performance mechanics, all the terms of an OTC option, including such terms
as method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Fund will only sell OTC options (other
than OTC currency options) that are subject to a buy-back
|
|
|
|
5
|
|
|
provision
permitting the Fund to require the Counterparty to sell the option back to the Fund
at a formula price within seven days.
|
|
|
Although
not required to do so, the Fund generally expects to enter into OTC options that
have cash settlement provisions. Unless the parties provide otherwise, there is
no central clearing or guaranty function in an OTC option.
|
|
|
As a result,
if the Counterparty fails to make or take delivery of the security, currency or
other instrument underlying an OTC option it has entered into with the Fund or fails
to make a cash settlement payment due in accordance with the terms of that option,
the Fund will lose any premium it paid for the option as well as any anticipated
benefit of the transaction. Accordingly, the Fund’s investment 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 Fund will engage in OTC option transactions
only with United States government securities dealers recognized by the Federal
Reserve Bank of New York as “primary dealers,” or broker dealers, domestic or foreign
banks or other financial institutions which have received (or the guarantors of
the obligation of which have received) a short-term credit rating of A-1 from S&P
or P-1 from Moody’s or an equivalent rating from any other nationally
recognized statistical rating organization (a “NRSRO”). The staff of the U.S. Securities
and Exchange Commission (the “SEC”) currently takes the position that OTC options
purchased by the Fund and portfolio securities “covering” the amount of the Fund’s obligation pursuant to an OTC option sold by it (the cost of the sell-back
plus the in-the-money amount, if any) are illiquid, and are subject to the Fund’s limitation on investing no more than 15% of its assets in illiquid securities.
|
|
|
If the
Fund sells a call option, the premium that it receives may serve as a partial hedge
against a decrease in the value of the underlying securities or instruments in its
portfolio. The premium may also increase the Fund’s income. The sale of put
options can also provide income.
|
|
|
The Fund
may purchase and sell call options on securities, including U.S. Treasury and agency
securities, mortgage-backed securities, corporate debt securities, and Eurocurrency
instruments (see “Eurocurrency Instruments” below for a description of such instruments)
that are traded in U.S. and foreign securities exchanges and in the over-the-counter
markets, and futures contracts. The Fund may purchase and sell call options on currencies.
All calls sold by the Fund must be “covered” (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will receive
the option premium to help protect it against loss, a call sold by the Fund exposes
the Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and may
require the Fund to hold a security or instrument which it might otherwise have
sold.
|
|
|
The Fund
may purchase and sell put options on securities including U.S. Treasury and agency
securities, mortgage-backed securities, foreign sovereign debt, corporate debt
securities, convertible securities, and Eurocurrency instruments (whether or not
the Fund holds the above securities in its portfolio), and futures contracts. The
Fund may not purchase or sell futures contracts on individual corporate debt securities.
The Fund may purchase and sell put options on currencies. The Fund will not sell
put options if, as a result, more than 50% of the Fund’s assets would be required
to be segregated to cover its potential obligations under such put options other
than those with respect to futures and options thereon. In selling put options,
there is a risk that the Fund may be required to buy the underlying security at
a disadvantageous price above the market price. For tax purposes, the purchase of
a put is treated as a short sale, which may cut off the holding period for the security.
Consequently, the purchase of a put is treated as generating gain on securities
held less than three months or short term capital gain (instead of long term) as
the case may be.
|
|
|
Options
on Securities Indices and Other Financial Indices.
The Fund may also purchase
and sell call and put options on securities indices and other financial indices.
By doing so, the Fund can achieve many of the same objectives that 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. For example,
an option on an index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the index upon which the option
is based exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option. This amount of cash is equal to the excess of
the closing price of the index over the exercise price of the option, which also
may be multiplied by a formula value.
|
|
|
|
6
|
|
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 any 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.
|
|
|
Futures.
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures as a hedge against anticipated interest rate or
currency market changes and for risk management purposes. The use of futures for
hedging is intended to protect the Fund from (1) the risk that the value of its
portfolio of investments in a foreign market may decline before it can liquidate
its interest, or (2) the risk that a foreign market in which it proposes to invest
may have significant increases in value before it actually invests in that market.
In the first instance, the Fund will sell a future based upon a broad market index
which it is believed will move in a manner comparable to the overall value of securities
in that market. In the second instance, the Fund will purchase the appropriate index
as an “anticipatory” hedge until it can otherwise acquire suitable direct investments
in that market. As with the hedging of foreign currencies, the precise matching
of financial futures on foreign indices and the value of the cash or portfolio securities
being hedged may not have a perfect correlation. The projection of future market
movement and the movement of appropriate indices is difficult, and the successful
execution of this short-term hedging strategy is uncertain.
|
|
|
Regulatory
policies governing the use of such hedging techniques require the Fund to provide
for the deposit of initial margin and the segregation of suitable assets to meet
its obligations under futures contracts. Futures are generally bought and sold on
the commodities exchanges where they are listed with payment of initial and variation
margin as described below. The sale of a futures contract creates a firm obligation
by the Fund, as seller, to deliver to the buyer the specific type of financial instrument
called for in the contract at a specific future time for a specified price (or,
with respect to index futures and Eurocurrency instruments, the net cash amount).
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the premium
paid to assume a position in a futures contract and obligates the seller to deliver
such position.
|
|
|
The Fund’s use of financial futures and options thereon will in all cases be consistent
with applicable regulatory requirements, particularly the rules and regulations
of the Commodity Futures Trading Commission. The Fund will use such techniques only
for bona fide hedging, risk management (including duration management) or other
portfolio management purposes. Typically, maintaining a futures contract or selling
an option thereon requires the Fund to deposit 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) with a financial intermediary
as security for its obligations. Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market value
of the contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part of
the Fund. If the Fund exercises an option on a futures contract, it will be obligated
to post initial margin (and potential subsequent variation margin) for the resulting
futures position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction, but there can be no assurance that the
position can be offset prior to settlement at an advantage price or that delivery
will occur.
|
|
|
The Fund
will not enter into a futures contract or related option (except for closing transactions)
if immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund’s
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. The segregation requirements with respect to futures
contracts and options thereon are described below.
|
|
|
Currency
Transactions.
The Fund may engage in currency transactions with counterparties
in order to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value. Currency transactions include forward currency
contracts, exchange-listed currency futures, exchange-listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date of
the contract between the parties, at a specified price. These contracts are traded
in the interbank market and conducted directly between currency traders (usually
large, commercial banks) and their
|
|
|
|
7
|
|
customers.
A forward foreign currency contract generally has no deposit requirement or commissions
charges. A currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies. Currency swaps operate similarly to an
interest rate swap (described below). The Fund may enter into currency transactions
with counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody’s,
respectively, or that have an equivalent rating from a NRSRO, or (except for OTC
currency options) are determined to be of equivalent credit quality by the Fund’s investment adviser.
|
|
|
Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction that
is not anticipated. Furthermore, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the particular
time the Fund is engaging in proxy hedging (see “Proxy Hedging,” below). If the
Fund enters into a currency hedging transaction, it will comply with the asset segregation
requirements described below. Cross currency hedges may not be considered “directly
related” to the Fund’s principal business of investing in stock or securities
(or options and futures thereon), resulting in gains there from not qualifying under
the “less than 30% of gross income” test of Subchapter M of the Internal Revenue
Code of 1986, as amended (the “Code”).
|
|
|
Currency
transactions are also 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 the
Fund if it is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges the Fund has entered into to be rendered useless, resulting
in full currency exposure and transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures generally.
Furthermore, 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. Although forward foreign currency contracts and currency
futures tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result should the value
of such currency increase.
|
|
|
The Fund’s dealing in forward currency contracts and other currency transactions such
as futures, options on futures, options on currencies and swaps will be limited
to hedging involving either specific transactions (“Transaction Hedging”) or portfolio
positions (“Position Hedging”).
|
|
|
Transaction
Hedging.
Transaction Hedging occurs when the Fund enters into a currency transaction
with respect to specific assets or liabilities. These specific assets or liabilities
generally arise in connection with the purchase or sale of the Fund’s portfolio
securities or the receipt of income there from.
|
|
|
The Fund
may use transaction hedging to preserve the United States dollar price of a security
when they enter into a contract for the purchase or sale of a security denominated
in a foreign currency. The Fund will be able to protect itself against possible
losses resulting from changes in the relationship between the U.S. dollar and foreign
currencies during the period between the date the security is purchased or sold
and the date on which payment is made or received by entering into a forward contract
for the purchase or sale, for a fixed amount of dollars, of the amount of the foreign
currency involved in the underlying security transactions.
|
|
|
Position
Hedging.
Position hedging is entering into a currency transaction with respect
to portfolio security positions denominated or generally quoted in that currency.
The Fund may use position hedging when the Fund’s investment adviser believes
that the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar. The Fund may enter into a forward foreign currency contract
to sell, for a fixed amount of dollars, the amount of foreign currency approximating
the value of some or all of its portfolio securities denominated in such foreign
currency. The precise matching of the forward foreign currency contract amount and
the value of the portfolio securities involved may not have a perfect correlation
since the future value of the securities hedged will change as a consequence of
market movements between the date the forward contract is entered into and the date
it
|
|
|
|
|
8
|
|
matures.
The projection of short-term currency market movement is difficult, and the successful
execution of this short-term hedging strategy is uncertain.
|
|
|
The Fund
will not enter into a transaction to hedge currency exposure to an extent greater,
after netting all transactions intended wholly or partially to offset other transactions,
than the aggregate market value (at the time of entering into the transaction) of
the securities held in its portfolio that are denominated or generally quoted in
or currently convertible into such currency, other than with respect to proxy hedging
as described below.
|
|
|
Cross
Hedging.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or expects to have portfolio
exposure.
|
|
|
Proxy
Hedging.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund’s
portfolio is exposed is difficult to hedge or to hedge against the U.S. dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or currencies
in which some or all of the Fund’s portfolio securities are or are expected
to be denominated, and buying U.S. dollars. The amount of the contract would not
exceed the value of the Fund’s securities denominated in linked currencies.
For example, if the investment adviser considers that the Swedish krona is linked
to the euro, the Fund holds securities denominated in Swedish krona and the investment
adviser believes that the value of Swedish krona will decline against the U.S. dollar,
the investment adviser may enter into a contract to sell euros and buy U.S. dollars.
|
|
|
Combined
Transactions.
The Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency transactions
(including forward foreign 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 or when the
investment adviser believes that it is in the Fund’s best interests 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 investment 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.
|
|
|
Eurocurrency
Instruments.
The Fund may make investments in Eurocurrency instruments. Eurocurrency
instruments are futures contracts or options thereon which are linked to the London
Interbank Offered Rate (“LIBOR”) or to the interbank rates offered in other financial
centers. Eurocurrency futures contracts enable purchasers to obtain a fixed rate
for the lending of funds and sellers to obtain a fixed rate for borrowings. The
Fund might use Eurocurrency futures contracts and options thereon to hedge against
changes in LIBOR and other interbank rates, to which many interest rate swaps and
fixed income instruments are linked.
|
|
|
Segregated
and Other Special Accounts.
In addition to other requirements, many transactions
require the Fund to segregate liquid high grade assets with its custodian to the
extent Fund obligations are not otherwise “covered” through the ownership of the
underlying security, financial instruments or currency. In general, either the full
amount of any obligation by the Fund to pay or deliver securities or assets must
be covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or liquid
high grade securities at least equal to the current amount of the obligation must
be segregated with the custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer necessary
to segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid high
grade securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to own
portfolio securities which correlate with the index or segregate liquid high grade
assets equal to the excess of the index value over the exercise price industry
or other on a current basis. A put option written by the Fund requires the Fund
to segregate liquid, high grade assets equal to the exercise price. A currency contract
which obligates the Fund to buy or sell currency will generally requires the Fund
to hold an amount of that currency or liquid securities denominated in that currency
equal to the Fund’s obligations or to segregate liquid high grade assets equal
to the amount of the Fund’s obligation.
|
|
|
|
9
|
|
|
OTC options
entered into by the Fund, including those on securities, currency, financial instruments
or indices and OCC issued and exchange-listed index options, will generally provide
for cash settlement. As a result, when the Fund sells these instruments it will
only segregate an amount of assets equal to its accrued net obligations, as there
is no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non cash-settled
put, the same as an OCC guaranteed listed option sold by the Fund, or in-the-money
amount plus any sell-back formula amount in the case of a cash-settled put or call.
In addition, when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option expires
or is closed out, cash or cash equivalents equal in value to such excess. OCC issued
and exchange-listed options sold by the Fund generally settle with physical delivery,
and the Fund will segregate an amount of liquid assets equal to the full value of
the option. OTC options settling with physical delivery, or with an election of
either physical delivery or cash settlement will be treated the same as other options
settling with physical delivery.
|
|
|
In the
case of a futures contract or an option thereon, the Fund must deposit initial margin
and possible daily variation margin in addition to segregating sufficient liquid
assets. Such assets may consist of cash, cash equivalents, liquid debt securities
or other liquid assets.
|
|
|
With respect
to swaps, the Fund will accrue the net amount of the excess, if any, of its obligations
over its entitlements with respect to each swap on a daily basis and will segregate
an amount of cash or liquid high grade securities having a value equal to the accrued
excess. Caps, floors and collars require segregation of assets with a value equal
to the Fund’s net obligation, if any.
|
|
|
Strategic
Transactions may be covered by other means when consistent with applicable regulatory
policies. The Fund may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding obligation
in related options and Strategic Transactions. For example, the Fund could purchase
a put option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Fund. Moreover, instead of segregating assets,
if the Fund holds a futures or forward contract, it could purchase a put option
on the same futures or forward contract with a strike price as high or higher than
the price of the contract held. Other Strategic Transactions may also be offered
in combinations.
|
|
|
If the
offsetting transaction terminates at the time of or after the primary transaction,
no segregation is required, but if it terminates prior to such time, liquid assets
equal to any remaining obligation would need to be segregated.
|
|
|
The Fund’s activities involving Strategic Transactions may be limited by the requirements
of Subchapter M of the Code for qualification as a regulated investment company.
|
|
|
In addition
to the foregoing, the Fund is authorized to borrow money as a temporary measure
for extraordinary or emergency purposes in amounts not in excess of 5% of the value
of the Fund’s total assets. This borrowing is not subject to the foregoing
300% asset coverage requirement.
|
|
|
Borrowing
may subject the Fund to interest costs, which may exceed the interest received on
the securities purchased with the borrowed funds. The Fund may borrow at times to
meet redemption requests rather than sell portfolio securities to raise the necessary
cash. Borrowing can involve leveraging when securities are purchased with the borrowed
money.
|
|
|
|
OTHER INVESTMENTS
|
|
|
Initial
Public Offerings - The Fund may participate in the initial public offering (“IPO”) market, and a portion of the Fund’s returns may be attributed to IPO
investments; the impact on the Fund’s performance of IPO investments will be
magnified if the Fund has a small asset base. Although the IPO market in recent
years has been strong, there is no guarantee that it will continue to be so or that
suitable IPO’s will be available and, as the Fund’s assets grow, there
is no guarantee that the impact of IPO investing will produce positive performance.
|
|
|
|
|
10
|
|
European
Currency - Many European countries have adopted a single European currency, the
Euro. On January 1, 1999, the Euro became legal tender for all countries participating
in the Economic and Monetary Union (“EMU”). A new European Central Bank
has been created to manage the monetary policy of the new unified region. On the
same date, the exchange rates were irrevocably fixed between the EMU member countries.
|
|
|
Due to
this change and its impact on the European capital markets in which the Fund may
invest, the Fund may face additional risks. These risks, which include, but are
not limited to, volatility of currency exchange rates as a result of the conversion,
uncertainty as to capital market reaction, conversion costs that may affect issuer
profitability and creditworthiness, and lack of participation by some European countries,
may increase the volatility of the Fund’s net asset value per share.
|
|
|
Miscellaneous
- The Board may, in the future, authorize the Fund to invest in securities other
than those listed in this SAI and in the prospectus, provided that such investments
would be consistent with the Fund’s investment objective and that such investments
would not violate the Fund’s fundamental investment policies or restrictions.
|
|
|
|
INVESTMENT
RESTRICTIONS
|
|
Fundamental
Investment Policies and Restrictions – In addition to its investment objective,
the Fund has adopted the following fundamental investment restrictions which cannot
be changed without approval by vote of a “majority of the outstanding voting
securities” of the Fund. All other investment policies and practices described
in the prospectus are not fundamental, meaning that the Board may change them without
the approval of shareholders. As a matter of fundamental policy, the Fund may not:
|
|
1.
|
As to 50%
of its assets, purchase the securities of any issuer (other than obligations issued
or guaranteed as to principal and interest by the government of the United States
or any agency or instrumentality thereof), if as a result of such purchase, more
than 5% of its total assets would be invested in the securities of such issuer.
|
|
|
|
|
2.
|
Purchase
stock or securities of an issuer (other than the obligations of the United States
or any agency or instrumentality thereof), if such purchase would cause the Fund
to own more than 10% of any class of the outstanding voting securities of such issuer
or more than 10% of any class of the outstanding stock or securities of such issuer.
|
|
|
|
|
3.
|
Act as
an underwriter of securities of other issuers, except that the Fund may invest up
to 10% of the value of its total assets (at the time of investment) in portfolio
securities which the Fund might not be free to sell to the public without registration
of such securities under the Securities Act of 1933, as amended, or any foreign
law restricting distribution of securities in a country of a foreign issuer.
|
|
|
|
|
4.
|
Buy or
sell commodities or commodity contracts, provided that the Fund may utilize not
more than 1% of its assets for deposits or commissions required to enter into forward
foreign currency contracts, and financial futures contracts for hedging purposes
as described in the prospectus. (Such deposits or commissions are not required for
forward foreign currency contracts).
|
|
|
|
|
5.
|
Borrow
money except for temporary or emergency purposes and then only in an amount not
in excess of 5% of the lower of value or cost of its total assets, in which case
the Fund may pledge, mortgage or hypothecate any of its assets as security for such
borrowing but not to an extent greater than 5% of its total assets. Notwithstanding
the foregoing, to avoid the untimely disposition of assets to meet redemptions,
the Fund may borrow up to 33 1/3%, of the value of its assets to meet redemptions,
provided that it may not make other investments while such borrowings are outstanding.
|
|
|
|
|
6.
|
Make loans,
except that the Fund may (1) lend portfolio securities; and (2) enter into repurchase
agreements secured by U.S. government securities.
|
|
7.
|
Invest
more than 25% of its total assets in securities of one or more issuers having their
principal business activities in the same industry, provided that there is no limitation
with respect to investments in obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities.
|
|
|
|
|
8.
|
Invest
in securities of other investment companies except by purchase in the open market
involving only customary broker’s commissions, or as part of a merger, consolidation,
or acquisition of assets.
|
|
|
|
|
9.
|
Invest in
interests in oil, gas, or other mineral explorations or development programs.
|
|
|
|
|
10.
|
Issue senior
securities.
|
|
|
|
|
11.
|
Participate
on a joint or a joint and several basis in any securities trading account.
|
|
|
|
|
12.
|
Purchase
or sell real estate (except that the Fund may invest in (i) securities of companies
which deal in real estate or mortgages, and (ii) securities secured by real estate
or interests therein, and that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund’s ownership of securities).
|
|
|
|
|
13.
|
Invest in
companies for the purpose of exercising control.
|
|
|
|
|
14.
|
Purchase
securities on margin, except that it may utilize such short-term credits as may
be necessary for clearance of purchases or sales of securities.
|
|
|
|
|
15.
|
Engage in
short sales.
|
|
In applying
the fundamental policy and restriction concerning concentration set forth above
(i.e., not investing more than 25% of total assets in one industry):
|
|
1.
|
Investments in certain categories of companies will not be considered to be investments
in a particular industry. Examples of these categories include:
|
|
|
|
|
|
|
(i)
|
financial
service companies will be classified according to the end users of their services,
for example, automobile finance, bank finance and diversified finance will each
be considered a separate industry;
|
|
|
|
|
|
|
(ii)
|
technology
companies will be divided according to their products and services, for example,
hardware, software, information services and outsourcing, or telecommunications
will each be a separate industry; and
|
|
|
|
|
|
|
(iii)
|
utility
companies will be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry.
|
|
Non-Fundamental
Policies and Restrictions - In addition to the fundamental policies and investment
restrictions described above, and the various general investment policies described
in the prospectus and elsewhere in this SAI, the Fund will be subject to the following
investment restrictions, which are considered non-fundamental and may be changed
by the Board without shareholder approval. As a matter of non-fundamental policy,
the Fund may not:
|
|
1.
|
Hold more
than 15% of its net assets in illiquid securities.
|
|
In addition,
the Fund shall:
|
|
|
Except
with respect to the Fund’s investment restriction concerning borrowing, if
a percentage restriction on investment or utilization of assets as set forth under
“Investment Restrictions” and “Investment Programs” above is
adhered to at the time an investment is made, a later change in percentage resulting
from changes in the value or the total cost of the Fund’s assets will not be
considered a violation of the restriction.
|
|
|
|
|
12
|
|
DISCLOSURE
OF PORTFOLIO SECURITIES HOLDINGS
|
|
The Company
maintains written policies and procedures regarding the disclosure of its portfolio
holdings to ensure that disclosure of information about portfolio securities is
in the best interests of the Fund’s shareholders. The Board reviews these policies
and procedures on an annual basis. Compliance will be periodically assessed by the
Board in connection with a report from the Company’s Chief Compliance Officer.
In addition, the Board has reviewed and approved the list below of entities that
may receive portfolio holdings information prior to and more frequently than the
public disclosure of such information (i.e., “non-standard disclosure”).
The Board has also delegated authority to the Company’s President and to senior
management at the Company’s administrator, Commonwealth Shareholder Services,
Inc. (“CSS”), to provide such information in certain circumstances (see
below). The Board is notified of, and reviews any requests for non-standard disclosure
approved by the Company’s President and/or senior management at CSS. CSS reports
quarterly to the Board regarding the implementation of such policies and procedures.
|
|
|
The Company
is required by the SEC to file its complete portfolio holdings schedule with the
SEC on a quarterly basis. This schedule is filed with the Company’s annual
and semi-annual reports on Form N-CSR for the second and fourth fiscal quarters
and on Form N-Q for the first and third fiscal quarters. The portfolio holdings
information provided in these reports is as of the end of the quarter in question.
Form N-CSR must be filed with the SEC no later than ten (10) calendar days after
the Company transmits its annual or semi-annual report to its shareholders. Form
N-Q must be filed with the SEC no later than sixty (60) calendar days after the
end of the applicable quarter.
|
|
|
The Company’s service providers which have contracted to provide services to the Company
and its funds, including, for example, the custodian and the Fund accountants, and
which require portfolio holdings information in order to perform those services,
may receive non-standard disclosure. Non-standard disclosure of portfolio holdings
information may also be provided to a third-party when the Company has a legitimate
business purpose for doing so. The Company has the following ongoing arrangements
with certain third parties to provide the Fund’s full portfolio holdings:
|
|
1.
|
to the
Company’s auditors within sixty (60) days after the applicable fiscal period
for use in providing audit opinions;
|
|
|
|
|
2.
|
to financial
printers within sixty (60) days after the applicable fiscal period for the purpose
of preparing Company regulatory filings;
|
|
|
|
|
3.
|
to rating
agencies on a monthly basis for use in developing a rating for the Fund; and
|
|
|
|
|
4.
|
to the
Company’s administrator, custodian, transfer agent and accounting services
provider on a daily basis in connection with their providing services to the Fund.
|
|
The Company
currently has no other arrangements for the provision of non-standard disclosure
to any party or shareholder.
|
|
|
Other than
the non-standard disclosure discussed above, if a third-party requests specific,
current information regarding the Fund’s portfolio holdings, the Company will
refer the third-party to the latest regulatory filing.
|
|
|
Non-standard
disclosure of portfolio holdings may only be made pursuant to a written request
that has been approved by the Board. The Board has authorized the President of the
Company and senior management at CSS to consider and approve such written requests
for non-standard disclosure; provided that, they promptly report any such approval
to the Board.
|
|
|
All of
the arrangements above are subject to the policies and procedures adopted by the
Board to ensure such disclosure is for a legitimate business purpose and is in the
best interests of the Fund and its shareholders. There may be instances where the
interests of the Fund’s shareholders respecting the disclosure of information
about portfolio holdings may conflict or appear to conflict with the interests of
the Adviser, any principal underwriter for the Company or an affiliated person of
the Company (including such affiliated person’s investment adviser or principal
|
|
|
|
|
13
|
|
|
underwriter).
In such situations, the conflict must be disclosed to the Board, and the Board must
be afforded the opportunity to determine whether or not to allow such disclosure.
|
|
|
Affiliated
persons of the Company who receive non-standard disclosure are subject to restrictions
and limitations on the use and handling of such information pursuant to a Code of
Ethics, including requirements to maintain the confidentiality of such information,
pre-clear securities trades and report securities transactions activity, as applicable.
Affiliated persons of the Company and third party service providers of the Company
receiving such non-standard disclosure will be instructed that such information
must be kept confidential and that no trading on such information should be allowed.
|
|
|
Neither
the Company, the Fund, the Adviser nor any affiliate thereof receives compensation
or other consideration in connection with the non-standard disclosure of information
about portfolio securities.
|
|
|
|
MANAGEMENT
OF THE COMPANY
|
|
|
Board
Responsibilities.
The management and affairs of the Company and its series,
including the Fund described in this SAI, are overseen by the Directors. The Board
has approved contracts, as described in this SAI, under which certain companies
provide essential management services to the Company.
|
|
|
Like most
mutual funds, the day-to-day business of the Company, including the management of
risk, is performed by third party service providers, such as the Adviser, Distributor
and Administrator. The Directors are responsible for overseeing the Company’s
service providers and, thus, have oversight responsibility with respect to risk
management performed by those service providers. Risk management seeks to identify
and address risks, i.e., events or circumstances that could have material adverse
effects on the business, operations, shareholder services, investment performance
or reputation of the Fund. The Fund and its service providers employ a variety of
processes, procedures and controls to identify various of those possible events
or circumstances, to lessen the probability of their occurrence and/or to mitigate
the effects of such events or circumstances if they do occur. Each service provider
is responsible for one or more discrete aspects of the Company’s business (e.g.,
the Adviser is responsible for the day-to-day management of the Fund’s portfolio
investments) and, consequently, for managing the risks associated with that business.
The Board has emphasized to the Fund’s service providers the importance of
maintaining vigorous risk management.
|
|
|
The Directors’ role in risk oversight begins before the inception of a Fund, at which time
the Fund’s Adviser presents the Board with information concerning the investment
objectives, strategies and risks of the Fund, as well as proposed investment limitations
for the Fund. Additionally, the Fund’s Adviser provides the Board with an overview
of, among other things, their investment philosophies, brokerage practices and compliance
infrastructures. Thereafter, the Board continues its oversight function as various
personnel, including the Company’s Chief Compliance Officer, as well as personnel
of the Adviser and other service providers, such as the Fund’s independent
accountants, make periodic reports to the Audit Committee or to the Board with respect
to various aspects of risk management. The Board and the Audit Committee oversee
efforts by management and service providers to manage risks to which the Fund may
be exposed.
|
|
|
The Board
is responsible for overseeing the nature, extent and quality of the services provided
to the Fund by the Adviser and receives information about those services at its
regular meetings. In addition, on an annual basis, in connection with its consideration
of whether to renew the Advisory Agreement with the Adviser, the Board meets with
the Adviser to review such services. Among other things, the Board regularly considers
the Adviser’s adherence to the Fund’s investment restrictions and compliance
with various Fund policies and procedures and with applicable securities regulations.
The Board also reviews information about the Fund’s investments.
|
|
|
The Company’s Chief Compliance Officer reports regularly to the Board to review and discuss
compliance issues. At least annually, the Company’s Chief Compliance Officer
provides the Board with a report reviewing the adequacy and effectiveness of the
Company’s policies and procedures and those of its service providers, including
the Adviser. The report addresses the operation of the policies and procedures of
the Company and each service provider since the date of the last report; any material
changes to the policies and procedures since the date of the
|
|
|
|
14
|
|
last report; any recommendations for material
changes to the policies and procedures; and any material compliance matters since
the date of the last report.
The Board receives reports from the Fund’s service providers regarding operational risks and risks related to the valuation
and liquidity of portfolio securities. Regular reports are made to the Board concerning
investments for which market quotations are not readily available. Annually, the
independent registered public accounting firm reviews with the Audit Committee its
audit of the Fund’s financial statements, focusing on major areas of risk encountered
by the Fund and noting any significant deficiencies or material weaknesses in the
Fund’s internal controls. Additionally, in connection with its oversight function,
the Board oversees Fund management’s implementation of disclosure controls
and procedures, which are designed to ensure that information required to be disclosed
by the Company in its periodic reports with the SEC are recorded, processed, summarized,
and reported within the required time periods. The Board also oversees the Company’s internal controls over financial reporting, which comprise policies and procedures
designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of the Company’s financial statements.
From their review of these reports and discussions
with the Adviser, the Chief Compliance Officer, the independent registered public
accounting firm and other service providers, the Board and the Audit Committee learn
in detail about the material risks of the Fund, thereby facilitating a dialogue
about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks
that may affect the Fund can be identified and/or quantified, that it may not be
practical or cost-effective to eliminate or mitigate certain risks, that it may
be necessary to bear certain risks (such as investment-related risks) to achieve
the Fund’s goals, and that the processes, procedures and controls employed
to address certain risks may be limited in their effectiveness. Moreover, reports
received by the Directors as to risk management matters are typically summaries
of the relevant information. Most of the Fund’s investment management and business
affairs are carried out by or through the Fund’s Adviser, Sub-Adviser and other
service providers, each of which has an independent interest in risk management
but whose policies and the methods by which one or more risk management functions
are carried out may differ from the Fund’s and each other’s in the setting
of priorities, the resources available or the effectiveness of relevant controls.
As a result of the foregoing and other factors, the Board’s ability to monitor
and manage risk, as a practical matter, is subject to limitations.
Directors and Officers.
There are
four members of the Board of Directors, three of whom are not interested persons
of the Company, as that term is defined in the 1940 Act (“Independent Directors”). John Pasco, III, an interested person of the Company, serves as Chairman
of the Board. The Company does not have a lead Independent Director. The Board has
determined its leadership structure is appropriate given the specific characteristics
and circumstances of the Company. The Board made this determination in consideration
of, among other things, the fact that the Independent Directors constitute a super-majority
(75%) of the Board, the fact that the chairperson of each Committee of the Board
is an independent Director, the amount of assets under management in the Company,
and the number of funds (and classes of shares) overseen by the Board. The Board
also believes that its leadership structure facilitates the orderly and efficient
flow of information to the Independent Directors from fund management.
The Board of Directors has three standing
committees: the Audit Committee, Governance and Nominating Committee, and Pricing
and Brokerage Committee. Each Committee is chaired by an Independent Director and
composed of all of the Independent Directors.
Set forth below are the names, year of birth,
position with the Company, length of term of office, and the principal occupations
and other directorships held during at least the last five years of each of the
persons currently serving as a Director or Officer of the Company.
Name,
Address and
Year Born
|
Position(s)
Held with
Company and
Tenure
|
Number
of Funds
in
Company
Overseen
|
Principal
Occupation(s)
During the Past Five (5)
Years
|
Other
Directorships
by Directors
and Number of
Funds in the
Complex
|
15
|
|
|
|
|
Overseen
|
|
Interested Directors:
|
* John Pasco,
III
(1)
8730 Stony Point
Parkway
Suite 205
Richmond, VA 23235
(1945)
|
Chairman,
Director and
President since
May, 1997
|
4
|
Treasurer
and Director of Commonwealth Shareholder Services, Inc. (“CSS”), the Company’s Administrator, since 1985; President and Director of First Dominion Capital
Corp. (“FDCC”), the Company’s underwriter; President and Director
of Commonwealth Fund Services, Inc., the Company’s Transfer and Disbursing
Agent since 1987; President and Treasurer of Commonwealth Capital Management, Inc.
since 1983 ; President of Commonwealth Capital Management, LLC, the adviser to the
Fund and the adviser to the Satuit Capital Small Cap Fund series of the Company,
from December, 2000 to October, 2007; President and Director of Commonwealth Fund
Accounting, Inc., which provides bookkeeping services to the Company; and Chairman,
Trustee of The World Insurance Trust, a registered investment company, since May,
2002. Mr. Pasco is a certified public accountant.
|
World Funds
Trust – 2 Funds; and American Growth Fund – 2 Funds
|
|
Non-Interested Directors:
|
Samuel Boyd,
Jr.
8730 Stony Point
Parkway
Suite 205
Richmond, VA 23235
(1940)
|
Director since
May, 1997
|
4
|
Retired. Manager
of the Customer Services Operations and Accounting Division of the Potomac Electric
Power Company from August,1978 until April, 2005; a Trustee of The World Insurance
Trust, a registered investment company, since May, 2002; a Trustee of Satuit Capital
Management Trust, a registered investment company, since October, 2002 and a Trustee
of Janus Advisors Series Trust, a registered investment company, from 2003 to 2005.
|
T Satuit Capital
Management Trust 1 Fund;
|
William E.
Poist
8730 Stony Point
Parkway
Suite 205
Richmond, VA 23235
(1939)
|
Director since
May, 1997
|
4
|
Financial
and Tax Consultant through his firm Management Funds Consulting for Professionals
since 1974; a Trustee of Satuit Capital Management Trust, a registered investment
company, since November, 2003; and a Trustee of The World Insurance Trust, a registered
investment company, since May, 2002. Mr. Poist is a certified public accountant.
|
Satuit Capital
Management Trust 1 Fund;
|
Paul M. Dickinson
8730 Stony Point
Parkway
Suite 205
Richmond, VA 23235
(1947)
|
Director since
May, 1997
|
4
|
President
of Alfred J. Dickinson, Inc. Realtors since April, 1971; a Trustee of Satuit Capital
Management Trust, a registered investment company, since November, 2003 and Trustee
of The World Insurance Trust, a registered investment company, since May, 2002.
|
Satuit Capital
Management Trust 1 Fund;
|
|
Officers:
|
|
Karen M. Shupe
|
Secretary
|
N/A
|
Managing Director,
Commonwealth
|
N/A
|
16
8730 Stony
Point
Parkway
Suite 205
Richmond, VA 23235
(1964)
|
since 2005
and
Treasurer since
June, 2006
|
|
Shareholder
Services, since 2003. Financial Reporting Manager, Commonwealth Shareholder Services,
Inc. from 2001 to 2003.
|
|
Lauren Jones
8730 Stony Point
Parkway
Suite 205
Richmond, VA 23235
(1982)
|
Assistant
Secretary since
February, 2010
|
N/A
|
Relationship
Manager, Commonwealth Shareholder Services, since 2006. Account Manager, Insider
NYC Event Planning from 2004-2005.
|
N/A
|
David D. Jones,
Esq.
395 Sawdust Road,
Suite 2137
The Woodlands, TX
77380
(1957)
|
Chief
Compliance
Officer since
June, 2008
|
N/A
|
Managing Member,
Drake Compliance, LLC, a regulatory consulting firm, since 2004. Principal Attorney,
David Jones & Assoc., P.C., a law firm, since 1998.
|
N/A
|
|
(1)
|
Mr.
Pasco is considered to be an “interested person” as that term is defined in the
1940 Act. Mr. Pasco is an interested person of the Company because: (1) he is an
officer of the Company; (2) he owns Commonwealth Capital Management, LLC, which
serves as the investment adviser to the European Equity Fund series of the Company;
(3) he owns First Dominion Capital Corp. (“FDCC”), the principal underwriter of
the Company; and (4) he owns or controls several of the Company’s service providers,
including Commonwealth Shareholder Services, Inc., the Company’s Administrator,
FDCC, the Company’s underwriter, and Commonwealth Fund Services, Inc., the
Company’s Transfer and Disbursing Agent.
|
Individual Director Qualifications
The Board has concluded that each of the
Directors should serve on the Board because of his ability to review and understand
information about the Fund provided to him by management, to identify and request
other information he may deem relevant to the performance of his duties, to question
management and other service providers regarding material factors bearing on the
management and administration of the Fund, and to exercise his business judgment
in a manner that serves the best interests of the Fund’s shareholders. The
Board has concluded that each of the Directors should serve as a Director based
on his own experience, qualifications, attributes and skills as described below.
The Board has concluded that Mr. Pasco should
serve as Director because of the experience he has gained in his various roles with
the Company’s administrator, principal underwriter, transfer agent, and accounting
services agent, his knowledge of the financial services industry, and the experience
he has gained serving as Director of the Company since 1997.
The Board has concluded that Mr. Boyd should
serve as Director because of his background in accounting, the experience he gained
serving as the Manager of the Customer Services Operations and Accounting Division
of a large power company, his knowledge of the financial services industry, and
the experience he has gained serving as Director of the Company since 1997.
The Board has concluded that Mr. Poist should
serve as Director because of the experience he gained as a certified public accountant
and as the President of a financial and tax consulting business, his knowledge of
the financial services industry, and the experience he has gained serving as Director
of the Company since 1997.
The Board has concluded that Mr. Dickinson
should serve as Director because of the business experience he gained as the President
of a real estate company, his knowledge of the financial services industry, and
the experience he has gained serving as Director of the Company since 1997.
In its periodic assessment of the effectiveness
of the Board, the Board considers the complementary individual skills and experience
of the individual Directors primarily in the broader context of the Board’s
overall composition so
17
that the Board, as a body, possesses the
appropriate (and appropriately diverse) skills and experience to oversee the business
of the funds. Moreover, references to the qualifications, attributes and skills
of individual Directors are made pursuant to requirements of the Securities and
Exchange Commission, do not constitute holding out of the Board or any Director
as having any special expertise or experience, and shall not be deemed to impose
any greater responsibility or liability on any such person or on the Board by reason
thereof.
Each Director serves for an indefinite term
and until the earlier of the Company’s next meeting of shareholders and the
election and qualification of his successor; or until the date a Director dies,
resigns or is removed in accordance with the Company’s Articles of Incorporation
and By-laws. Each officer holds office at the pleasure of the Board and serves for
a period of one year, or until his successor is duly elected and qualified.
The Company has a standing Audit Committee
of the Board composed of Messrs. Boyd, Poist and Dickinson. The functions of the
Audit Committee are to meet with the Company’s independent auditors to review
the scope and findings of the annual audit, discuss the Company’s accounting
policies, discuss any recommendations of the independent auditors with respect to
the Company’s management practices, review the impact of changes in accounting
standards on the Company’s financial statements, recommend to the Board the
selection of independent auditors, and perform such other duties as may be assigned
to the Audit Committee by the Board. During its most recent fiscal year ended August
31, 2012, the Audit Committee met four times.
The Company has a standing Governance and
Nominating Committee of the Board composed of Messrs. Boyd, Poist and Dickinson.
The Governance and Nominating Committee is responsible for the selection and nomination
of candidates to serve as directors of the Company. Although the Governance and
Nominating Committee expects to be able to find an adequate number of qualified
candidates to serve as directors, the Nominating Committee is willing to consider
nominations received from shareholders. Shareholders wishing to submit a nomination
should do so by notifying the Secretary of the Company, in writing, at the address
listed on the cover of this SAI. During its most recent fiscal year ended August
31, 2012, the Governance and Nominating Committee met four times.
The Company has a standing Pricing and Brokerage
Committee of the Board composed of Messrs. Boyd, Poist and Dickinson. The Pricing
and Brokerage Committee, under procedures established by the Board, reviews the
application of the Company’s valuation procedures and brokerage policies and
procedures and makes certain determinations in accordance with the procedures. During
its most recent fiscal year ended August 31, 2012, the Pricing and Brokerage Committee
met four times.
As of December 31, 2012, the directors beneficially
owned the following dollar range of equity securities in the Fund:
|
Name of
Director
|
Dollar
range of equity securities in
the Fund
|
Aggregate
dollar range of equity
securities in all funds of the
Company overseen by
the
directors
|
|
John Pasco,
III
|
None
|
None
|
|
Samuel Boyd,
Jr.
|
None
|
None
|
|
Paul M Dickinson
|
None
|
$10,001-$50,000
|
|
William E.
Poist
|
None
|
$10,001-$50,000
|
For the fiscal year ended August 31, 2012,
the directors received the following compensation from the Company:
Name of
Director and
position held
|
Aggregate
compensation
from the Fund for fiscal
year ended August 31,
2012
(1)
|
Pension
or retirement
benefits accrued as
part of Fund expenses
|
Total compensation
from
the Company
|
|
John Pasco,
III, Chairman
|
$-0-
|
N/A
|
$-0-
|
|
Samuel Boyd,
Jr., Director
|
$3,600
|
N/A
|
$12,650
|
|
Paul M Dickinson,
Director
|
$3,600
|
N/A
|
$12,650
|
18
|
William E.
Poist, Director
|
$3,600
|
N/A
|
$12,650
|
|
(1)
|
This
amount represents the aggregate amount of compensation paid to the directors by
the Fund for service on the Board for the Fund’s fiscal year ended August 31,
2012.
|
|
|
|
|
(2)
|
This
amount represents the aggregate amount of compensation paid to the directors by
all funds of the Company for the fiscal year ended August 31, 2012. The Company
consisted of a total of four funds as of August 31, 2012.
|
Sales Loads - No front-end or contingent
deferred sales charges are applied to purchase of Fund shares by current or former
directors, officers, employees or agents of the Company, the Adviser, FDCC, and
by the members of their immediate families. These sales waivers are in place because
of the nature of the investor and in recognition of the reduced sales effort required
to attract such investments.
Code of Ethics - The Fund, the Adviser and
the principal underwriter have each adopted a Code of Ethics, pursuant to Rule 17j-1
under the 1940 Act that permit investment personnel, subject to their particular
code of ethics, to invest in securities, including securities that may be purchased
or held by the Fund, for their own accounts. The Codes of Ethics are on file with,
and can be reviewed and copied at the SEC Public Reference Room in Washington, D.C.
In addition, the Codes of Ethics are also available on the EDGAR Database on the
SEC’s Internet website at http://www.sec.gov.
Proxy Voting Policies - The Company is required
to disclose information concerning the Fund’s proxy voting policies and procedures
to shareholders. The Board has delegated to the Adviser responsibility for decisions
regarding proxy voting for securities held by the Fund. The Adviser will vote such
proxies in accordance with its proxy policies and procedures, which have been reviewed
by the Board, and which are found in Appendix A. Any material changes to the proxy
policies and procedures will be submitted to the Board for approval. Information
regarding how the Fund voted proxies relating to portfolio securities for the most
recent 12-month period ending June 30 is available (1) without charge, upon request
by calling 800-527-9525 and (2) on the SEC’s website at http://www.sec.gov.
PRINCIPAL
SECURITIES HOLDERS
As of December 31, 2012, the following persons
were record owners (or to the knowledge of the Company, beneficial owners) of 5%
or more of the shares of Investor Shares of the Fund. Persons who owned of record
or beneficially more than 25% of the Fund’s outstanding shares may be deemed
to control the Fund within the meaning of the 1940 Act.
|
Charles Schwab
|
|
308,047.255
|
|
48.55
|
%
|
|
101 Montgomery
Street
|
|
|
|
|
|
|
San Francisco,
CA 94104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NFSC
|
|
68,042.786
|
|
10.72
|
%
|
|
7330 S. 37
th
Street
|
|
|
|
|
|
|
Lincoln, NE
68103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ameritrade,
Inc.
|
|
95,763.077
|
|
15.09
|
|
|
P.O. Box 2226
|
|
|
|
|
|
|
Omaha, NE
68103
|
|
|
|
|
|
As of December 31, 2012, the following persons
were record owners (or to the knowledge of the Company, beneficial owners) of 5%
or more of the shares of Institutional Shares of the Fund.
|
Names and
Addresses
|
|
Number
of shares
|
|
Percent
of Class
|
|
NFSC
|
|
17,178.475
|
|
45.71%
|
|
200 Seaport
Boulevard ZE7B
|
|
|
|
|
|
Boston, MA
02210
|
|
|
|
|
19
|
Pershing,
LLC
|
|
19,995.192
|
|
53.10%
|
|
Jersey City,
NJ 07303
|
|
|
|
|
As of December 31, 2012, the directors and
officers of the Company as a group owned less than 1% of the Fund’s outstanding
Investor or Institutional shares of the Fund.
ADVISER AND
ADVISORY AGREEMENT
Toreador Research & Trading, LLC, located
at 7493 North Ingram, Suite 104, Fresno, CA 93711 (the “Adviser”) manages
the investments of the Fund. The Adviser is registered as an adviser under the Advisers
Act of 1940, as amended. The Adviser is a privately held, limited liability company.
On August 2, 2012, the Board of Directors
of The World Funds, Inc. (the “Board”) approved Toreador Research &
Trading, LLC (“Toreador”) to act as interim investment adviser to the
Fund under SEC Rule 15a-4 of the Investment Company Act of 1940. On August 23-24,
2012, at a regular Board meeting, the Board considered a proposed two (2) year investment
advisory agreement between the Fund and Toreador. The two (2) year investment advisory
agreement (the “New Advisory Agreement”) between the Fund and Toreador
was approved by shareholders at a special meeting of shareholders called on December
27, 2012 to consider the agreement.
Under the New Advisory Agreement, the Adviser,
subject to the supervision of the directors, provides a continuous investment program
for the Fund, including investment research and management with respect to securities,
investments and cash equivalents, in accordance with the Fund’s investment
objective, policies, and restrictions as set forth in the prospectus and this SAI.
The Adviser is responsible for effecting all security transactions on behalf of
the Fund, including the allocation of principal business and portfolio brokerage
and the negotiation of commissions. The Adviser also maintains books and records
with respect to the securities transactions of the Fund and furnishes to the directors
such periodic or other reports as the directors may request.
Pursuant to the terms of the New Advisory
Agreement, the Adviser pays all expenses incurred by it in connection with its activities
thereunder, except the cost of securities (including brokerage commissions, if any)
purchased for the Fund. The services furnished by the Adviser under the New Advisory
Agreement are not exclusive, and the Adviser is free to perform similar services
for others.
For its services under the New Advisory
Agreement, the Adviser is entitled to a fee which is calculated daily and paid monthly
at an annual rate of 1.15% on the average daily net assets of the Fund.
The Predecessor Adviser received the following
fees for investment advisory services to the Fund for each of the years set forth
below ending on August 31.
Year
|
Earned
|
Waived
|
2010
|
1,006,090
|
262,109
|
2011
|
878,638
|
137,707
|
2012
|
346,083
|
187,916
|
In the interest of limiting the Fund’s
expenses, the Adviser has entered into a contractual expense limitation agreement
with the Company. Pursuant to the agreement, the Adviser has agreed to waive or
limit their fees and/or assume other expenses until December 31, 2013 so that the
ratio of net expenses is limited to 2.00% and 1.75% for the Fund’s Investor
Shares’ and Institutional Shares’ average daily net assets, respectively.
This limit does not apply to interest, taxes, brokerage commissions, acquired fund
fees, other expenditures capitalized in accordance with
20
generally accepted accounting principles
or other extraordinary expenses not incurred in the ordinary course of business.
The Adviser will be entitled to reimbursement of fees waived or expenses reimbursed
pursuant to the agreement. The total amount of reimbursement recoverable by the
Adviser (the “Reimbursement Amount”) is the sum of all fees previously
waived or reimbursed by the Adviser to the Fund during any of the previous three
(3) years, less any reimbursement previously paid by the Fund to the Adviser with
respect to any waivers, reductions, and payments made with respect to the Fund.
The Reimbursement Amount may not include any additional charges or fees, such as
interest accruable on the Reimbursement Amount. Such reimbursement must be authorized
by the Board. As of August 31, 2012, there are no recoverable expense reimbursements
or fee waivers.
Portfolio Managers
Mr. Paul Blinn, portfolio manager, is jointly
responsible for the day-to-day management of the Fund’s portfolio, including
stock selection, investment monitoring and trading. Mr. Blinn has 20 years of capital
market experience, during which time he had oversight and direct responsibility
for the discretionary trading and risk management of large and complex portfolios
of cash and derivative securities using numerous arbitrage strategies that sought
to exploit pricing discrepancies identified by statistical models. He acquired this
experience as an Executive Director at UBS, a global financial firm, and its predecessor
banks from 1985 to 2000, and, most recently, as a Vice President of a leading option
market maker and then a Senior Equity derivatives trader for a hedge fund from 2000
to 2005. Mr. Blinn graduated with honors from The University of Texas at Austin
with a BBA in Finance.
Mr. Resendes, portfolio manager, is jointly
responsible for the day-to-day management of the Fund’s portfolio, including
stock selection and investment monitoring. Mr. Resendes, co-founder of the Applied
Finance Group, has over 17 years of capital market experience and has spent the
past 12 years in the area of equity research and valuation. Mr. Resendes has been
an adjunct professor of finance at DePaul University in Chicago, and is a frequently
cited source for publications such as Forbes, The Wall Street Journal, and CBS MarketWatch.com,
among others. Mr. Resendes was co-portfolio manager of an equity hedge fund sponsored
by AFG from 1998 to 1999. He graduated Phi Beta Kappa from The University of California,
Berkeley with a BS in Finance and received his MBA from the University of Chicago.
MANAGEMENT-RELATED
SERVICES
Administration - Pursuant to an Administrative
Services Agreement with the Company (the “Administrative Agreement”),
Commonwealth Shareholder Services, Inc. (“CSS”), 8730 Stony Point Parkway,
Suite 205, Richmond, Virginia 23235, serves as administrator of the Fund and supervises
all aspects of the operation of the Fund except those performed by the Adviser.
John Pasco, III, Chairman of the Board, is the sole owner of CSS. CSS provides certain
administrative services and facilities for the Fund, including preparing and maintaining
certain books, records, and monitoring compliance with state and federal regulatory
requirements.
CSS, as administrative agent for the Fund,
provides shareholder, recordkeeping, administrative and blue-sky filing services.
For such administrative services, CSS received 0.20% of average daily net assets.
As provided in the Administrative Agreement, CSS received fees of $51,552, $123,274
and $141,926 for the fiscal years ended August 31, 2012, 2011 and 2010, respectively,
from the Predecessor Fund.
Custodian and Accounting Services - Pursuant
to a Custodian Agreement and the Accounting Agency Agreement with the Company, Brown
Brothers Harriman (“BBH”), acts as the custodian of the Fund’s securities
and cash and as the Fund’s accounting services agent. With the consent of the
Company, BBH has designated The Depository Trust Company of New York (“DTC”) as its agent to secure a portion of the assets of the Fund. BBH is authorized
to appoint other entities to act as sub-custodians to provide for the custody of
foreign securities acquired and held by the Fund outside the U.S. Such appointments
are subject to appropriate review by the Company’s Board. As the accounting
services agent of the Fund, BBH maintains and keeps current the books, accounts,
records, journals or other records of original entry relating to the Fund’s
business.
Transfer Agent - Pursuant to a Transfer
Agent Agreement with the Company, Commonwealth Fund Services, Inc. (“CFSI”
or the “Transfer Agent”) acts as the Company’s transfer and dividend
disbursing agent. CFSI is located at
21
8730 Stony Point Parkway, Suite 205, Richmond,
Virginia 23235. John Pasco, III, Chairman of the Board, is the sole owner of CFSI.
Therefore, CFSI may be deemed to be an affiliate of the Company and CSS.
CFSI provides certain shareholder and other
services to the Company, including furnishing account and transaction information
and maintaining shareholder account records. CFSI is responsible for processing
orders and payments for share purchases. CFSI mails proxy materials (and receives
and tabulates proxies), shareholder reports, confirmation forms for purchases and
redemptions and prospectuses to shareholders. CFSI disburses income dividends and
capital distributions and prepares and files appropriate tax-related information
concerning dividends and distributions to shareholders.
For its services as transfer agent, CFSI
receives per account fees and transaction charges plus out-of-pocket expenses against
a minimum fee.
Distributor - First Dominion Capital Corp.
(“FDCC” or the “Distributor”), located at 8730 Stony Point Parkway,
Suite 205, Richmond, Virginia 23235, serves as the principal underwriter and national
distributor for shares of the Fund pursuant to a Distribution Agreement (the “Distribution
Agreement”). John Pasco, III, Chairman of the Board, owns 100% of FDCC, and
is its President, Treasurer and a Director. Therefore, FDCC may be deemed to be
an affiliate of the Company and CSS. FDCC is registered as a broker-dealer and is
a member of the Financial Industry Regulatory Authority. The offering of the Fund’s shares is continuous.
The Distributor received the following compensation
as a result of the sale of the Predecessor Fund’s shares:
Fiscal
years ended
August 31st
|
Net
underwriting
discounts and
commissions
|
Compensation
on redemptions
and repurchases
|
Brokerage
commissions
|
Other
compensation(1)
|
2010
|
$11,284
|
$22,665
|
None
|
$105,761
|
2011
|
$ 942
|
$ 5,137
|
None
|
$ 96,592
|
2012
|
$ 1,593
|
$ 1,684
|
None
|
$ 50,583
|
(1) Fees received pursuant to the Predecessor
Fund’s Distribution (12b-1) and servicing fees.
Independent Registered Public Accounting
Firm - The Company’s independent registered public accounting firm, Tait, Weller
& Baker LLP, audit the Company’s annual financial statements, assists
in the preparation of certain reports to the SEC, and prepares the Company’s
tax returns. Tait, Weller & Baker LLP is located at 1818 Market Street, Suite
2400, Philadelphia, Pennsylvania 19103.
PORTFOLIO
TRANSACTIONS
It is the policy of the Adviser, in placing
orders for the purchase and sale of the Fund’s securities, to seek to obtain
the best price and execution for securities transactions, taking into account such
factors as price, commission, where applicable, (which is negotiable in the case
of U.S. national securities exchange transactions but which is generally fixed in
the case of foreign exchange transactions), size of order, difficulty of execution
and the skill required of the executing broker/dealer. After a purchase or sale
decision is made by the Adviser, the Adviser arranges for execution of the transaction
in a manner deemed to provide the best price and execution for the Fund.
Exchange-listed securities are generally
traded on their principal exchange, unless another market offers a better result.
Securities traded only in the over-the-counter market may be executed on a principal
basis with primary market makers in such securities, except for fixed price offerings
and except where the Fund may obtain better prices or executions on a commission
basis or by dealing with other than a primary market maker.
22
The Adviser, when placing transactions,
may allocate a portion of the Fund’s brokerage to persons or firms providing
the Adviser with investment recommendations, statistical, research or similar services
useful to the Adviser’s investment decision-making process. The term “investment
recommendations or statistical, research or similar services” means: (1) advice
as to the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of securities;
and (2) furnishing analysis and reports concerning issuers, industries, securities,
economic factors and trends, and portfolio strategy.
Such services are one of the many ways the
Adviser can keep abreast of the information generally circulated among institutional
investors by broker-dealers. While this information is useful in varying degrees,
its value is indeterminable. Such services received on the basis of transactions
for the Fund may be used by the Adviser for the benefit of other clients, and the
Fund may benefit from such transactions effected for the benefit of other clients.
For the fiscal year ended August 31, 2012,
the Predecessor Fund did not pay any commissions on brokerage transactions directed
to brokers pursuant to an agreement or understanding whereby the broker provides
research or other brokerage services to the Adviser.
The Adviser may be authorized, when placing
portfolio transactions for the Fund, to pay a brokerage commission in excess of
that which another broker might have charged for executing the same transaction
solely on account of the receipt of research, market or statistical information.
Except for implementing the policy stated
above, there is no intention to place portfolio transactions with particular brokers
or dealers or groups thereof.
The directors of the Company have adopted
policies and procedures governing the allocation of brokerage to affiliated brokers.
The Adviser has been instructed not to place transactions with an affiliated broker-dealer,
unless that broker-dealer can demonstrate to the Company that the Fund will
receive: (1) a price and execution no less favorable than that available from unaffiliated
persons; and (2) a price and execution equivalent to that which that broker-dealer
would offer to unaffiliated persons in a similar transaction. The directors review
all transactions which have been placed pursuant to those policies and procedures
at its meetings.
When two or more clients managed by the
Adviser are simultaneously engaged in the purchase or sale of the same security,
the transactions are allocated in a manner deemed equitable to each client. In some
cases this procedure could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. In other cases, however, the ability to
participate in volume transactions will be beneficial to the Fund. The Board believes
that these advantages, when combined with the other benefits available because of
the Adviser’s organization, outweigh the disadvantages that may exist from
this treatment of transactions.
The Predecessor Fund paid brokerage commissions
of $70,971, $101,002 and $157,762 for the fiscal years ended August 31, 2012, 2011
and 2010, respectively.
The Fund may execute brokerage or other
agency transactions through registered broker-dealer affiliates of either the Fund,
the Adviser or the Distributor for a commission in conformity with the 1940 Act,
the 1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act,
affiliated broker-dealers are permitted to receive and retain compensation for effecting
portfolio transactions for the Fund on an exchange if a written contract is in effect
between the affiliate and the Fund expressly permitting the affiliate to receive
and retain such compensation. These rules further require that commissions paid
to the affiliate by the Fund for exchange transactions not exceed “usual and
customary” brokerage commissions. The rules define “usual and customary” commissions to include amounts which are “reasonable and fair compared
to the commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of time.” The Board, including those who are not “interested persons”, has
adopted procedures for evaluating the reasonableness of commissions paid to affiliates
and review these procedures periodically.
For the fiscal years ended August 31, 2010,
2011 and 2012 the Predecessor Fund paid no brokerage commissions on portfolio transactions
effected by affiliated brokers.
23
Securities of “Regular Broker-Dealers.” The Fund is required to identify any securities of its “regular brokers
and dealers” (as such term is defined in the 1940 Act) which the Fund may hold
at the close of its most recent fiscal year. As of August 31, 2012, the Predecessor
Fund did not hold any securities of “regular broker-dealers.”
Portfolio Turnover - Average annual portfolio
turnover rate is the ratio of the lesser of sales or purchases to the monthly average
value of the portfolio securities owned during the year, excluding from both the
numerator and the denominator all securities with maturities at the time of acquisition
of one year or less. A higher portfolio turnover rate involves greater transaction
expenses to a fund and may result in the realization of net capital gains, which
would be taxable to shareholders when distributed. The Adviser makes purchases and
sales for the Fund’s portfolio whenever necessary, in the Adviser’s opinion,
to meet the Fund’s objective. Under normal market conditions, the Adviser anticipates
that the average annual portfolio turnover rate of the Fund will be less than 100%.
CAPITAL STOCK
AND DIVIDENDS
The Company is authorized to issue 1,500,000,000
shares of common stock, with a par value of $0.01 per share. The Company has presently
allocated 50,000,000 shares to the Fund, and has further reclassified those shares
as follows: Twenty Million (20,000,000) shares for Investor Shares of the series;
Fifteen Million (15,000,000) shares for Institutional Shares of the series.
The Articles of Incorporation of the Company
authorizes the Board to classify or re-classify any unissued shares into one or
more series or classes of shares. Each series or class shall have such preference,
conversion or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, terms and conditions of redemption and other characteristics as
the Board may determine.
Shares have no preemptive rights and only
such conversion or exchange rights as the Board may grant in their discretion. When
issued for payment as described in the prospectuses, shares will be fully paid and
non-assessable. Each class of shares in the Fund (i.e., Investor and Institutional
shares) bear pro-rata the same expenses and are entitled equally to the Fund’s
dividends and distributions except as follows. Each class will bear the expenses
of any distribution and/or service plans applicable to such class. In addition,
each class may incur differing transfer agency fees and may have different sales
charges. Standardized performance quotations are computed separately for each class
of shares. The differences in expenses paid by the respective classes will affect
their performances.
Shareholders are entitled to one vote for
each full share held, and a proportionate fractional vote for each fractional share
held, and will vote in the aggregate, and not by series or class, except as otherwise
expressly required by law or when the Board determines that the matter to be voted
on affects the interest of shareholders of a particular series or class. Shares
of the Fund do not have cumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of Directors can elect all of
the directors if they choose to do so. In such event, the holders of the remaining
shares will not be able to elect any person to the Board. Shares will be maintained
in open accounts on the books of CFSI.
Upon the Company’s liquidation, all
shareholders of a series would share pro-rata in the net assets of such series available
for distribution to shareholders of the series, but, as shareholders of such series,
would not be entitled to share in the distribution of assets belonging to any other
series.
A shareholder will automatically receive
all income dividends and capital gain distributions in additional full and fractional
shares of the Fund at its net asset value as of the date of payment unless the shareholder
elects to receive such dividends or distributions in cash. The reinvestment date
normally precedes the payment date by about seven days although the exact timing
is subject to change. Shareholders will receive a confirmation of each new transaction
in their account. The Company will confirm all account activity, transactions made
as a result of the Automatic Investment Plan described below. Shareholders may rely
on these statements in lieu of stock certificates.
Rule 18f-3 Plan - The Board has adopted
a Rule 18f-3 Multiple Class Plan on behalf of the Company for the benefit of each
of its series. The key features of the Rule 18f-3 Plan are as follows: (i) shares
of each class of the Fund represent an equal pro rata interest in the Fund and generally
have identical voting, dividend, liquidation, and other
24
rights, preferences, powers, restrictions,
limitations qualifications, terms and conditions, except that each class bears certain
specific expenses and has separate voting rights on certain matters that relate
solely to that class or in which the interests of shareholders of one class differ
from the interests of shareholders of another class; (ii) subject to certain limitations
described in the prospectus, shares of a particular class of the Fund may be exchanged
for shares of the same class of another Fund. At present, the Fund offers Investor
Shares charging a front-end sales charge and charging a distribution (i.e., 12b-1)
and service fee; Institutional Shares charging no front-end sales charge, charging
a deferred sales charge of 1.00% to shareholders who sell their shares within
PLAN OF DISTRIBUTION
The Fund has a Plan of Distribution for
the Fund’s Investor Shares and a Distribution and Service Plan for the Fund’s Class C Shares (each a “12b-1 Plan” and, together, the “12b-1
Plans”) under which it may finance certain activities primarily intended to
sell shares, provided the categories of expenses are approved in advance by the
Board and the expenses paid under the 12b-1 Plans were incurred within the preceding
12 months and accrued while the 12b-1 Plans are in effect.
The Fund’s Investor and Class C shares
have adopted a Distribution Plan (the “Plan”) in accordance with Rule
12b-1 under the 1940 Act. Payments for distribution expenses under the 12b-1 Plans
are subject to Rule 12b-1 under the 1940 Act. Rule 12b-1 defines distribution expenses
to include the cost of “any activity which is primarily intended to result
in the sale of shares issued by the Company.” For Investor Shares, the Plan
provides that the Fund will pay a fee to the Distributor at an annual rate of 0.25%
of the Fund’s Investor Shares’ average daily net assets. For Class C Shares,
the Plan provides that the Fund will pay a fee to the distributor at an annual rate
of 1.00% of Class C Shares’ average daily net assets, of which 0.75% represents
distribution 12b-1 fees and 0.25% represents shareholder servicing fees. The fees
are paid to the Distributor as reimbursement for expenses incurred for distribution-related
activity. For the year ended August 31, 2012, $50,583 was incurred in distribution
and shareholder servicing fees by the Predecessor Fund.
Under the Class C Shares’ 12b-1 Plan,
payments by the Company (i) for distribution expenses may not exceed the annualized
rate of 0.75% of the average daily net assets attributable to the Fund’s outstanding
Class C Shares, and (ii) to an institution (a “Service Organization”)
for shareholder support services may not exceed the annual rate of 0.25% of the
average daily net assets attributable to the Fund’s outstanding Class C Shares
which are owned of record or beneficially by that institution’s customers for
whom the institution is the dealer of record or shareholder of record or with whom
it has a servicing relationship.
Shareholder servicing fees are paid to Service
Organizations for providing one or more of the following services to Class C Shareholders:
(i) aggregating and processing purchase and redemption requests and placing net
purchase and redemption orders with the Distributor; (ii) processing dividend payments
from the Fund; (iii) providing sub-accounting services with respect to Class C Shares
or the information necessary for sub-accounting services; (iv) providing periodic
mailings to customers; (v) providing customers with information as to their positions
in Class C Shares; (vi) responding to customer inquiries; and (vii) providing a
service to invest the assets of customers in Class C Shares.
The Company understands that Service Organizations
may charge fees to their customers who are the beneficial owners of Class C Shares,
in connection with their accounts with such Service Organizations. Any such fees
would be in addition to any amounts which may be received by an institution under
the 12b-1 Plan. Under the terms of each servicing agreement entered into with the
Company, Service Organizations are required to provide to their customers a schedule
of any fees that they may charge in connection with customer investments in Class
C Shares.
ADDITIONAL
INFORMATION ABOUT PURCHASES AND SALES
Purchasing Shares
- You may purchase shares
of the Fund directly from FDCC. You may also buy shares through accounts with brokers
or dealers and other institutions (“authorized institutions”) that are
authorized to place trades in Fund shares for their customers. If you invest through
an authorized institution, you will have to follow its
25
procedures. You will also generally have
to address your correspondence or questions regarding the Fund to your authorized
institution.
The offering price per share for the Fund’s Investor and Institutional Shares is equal to the NAV next determined after
the Fund or authorized institution receives your purchase order, plus any applicable
sales charge.
Authorized institutions may charge their
customers a processing or service fee in connection with the purchase or redemption
of Fund shares. The amount and applicability of such a fee is determined and disclosed
to its customers by each individual authorized institution. Processing or service
fees typically are fixed, nominal dollar amounts and are in addition to the sales
and other charges described in the prospectuses and statements of additional information.
Your authorized institution will provide you with specific information about any
processing or service fees you will be charged.
Your authorized institution is responsible
for transmitting all subscription and redemption requests, investment information,
documentation and money to the Fund on time. Certain authorized institutions have
agreements with the Fund that allow them to enter confirmed purchase or redemption
orders on behalf of clients and customers. Under this arrangement, the authorized
institution must send your order to the Fund by the time they price their shares
on the following day. If your authorized institution fails to do so, it may be responsible
for any resulting fees or losses.
The Fund reserves the right to reject any
purchase order and to suspend the offering of shares of the Fund. Under certain
circumstances the Company or the Adviser may waive the minimum initial investment
for purchases by officers, directors, and employees of the Company and its affiliated
entities and for certain related advisory accounts and retirement accounts (such
as IRAs). The Fund may also change or waive policies concerning minimum investment
amounts at any time.
Exchange Privilege
- Shareholders may exchange
their shares for shares of any other series of the Company, provided the shares
of the fund the shareholder is exchanging into are registered for sale in the shareholder’s state of residence. Each account must meet the minimum investment requirements.
A written request must have been completed and be on file with the Transfer Agent.
Also, to make an exchange, an exchange order must comply with the requirements for
a redemption or repurchase order and must specify the value or the number of shares
to be exchanged. An exchange will take effect as of the next determination of the
Fund’s NAV per share (usually at the close of business on the same day). The
Transfer Agent will charge the shareholder’s account a $10 service fee each
time there is a telephone exchange. The Company reserves the right to limit the
number of exchanges or to otherwise prohibit or restrict shareholders from making
exchanges at any time, without notice, should the Company determine that it would
be in the best interest of its shareholders to do so. For tax purposes, an exchange
constitutes the sale of the shares of the fund from which you are exchanging and
the purchase of shares of the fund into which you are exchanging. Consequently,
the sale may involve either a capital gain or loss to the shareholder for federal
income tax purposes. The exchange privilege is available only in states where it
is legally permissible to do so.
If you request the exchange of the total
value of your account from one fund to another, we will reinvest any declared but
unpaid income dividends and capital gain distributions in the new fund at its net
asset value. Backup withholding and information reporting may apply. Information
regarding the possible tax consequences of an exchange appears in the tax section
in this SAI.
If a substantial number of shareholder sell
their shares of the Fund under the exchange privilege, within a short period, the
Fund may have to sell portfolio securities that it would otherwise have held, thus
incurring additional transactional costs. Increased use of the exchange privilege
may also result in periodic large inflows of money. If this occurs, it is the Fund’s general policy to initially invest in short-term, interest-bearing money
market instruments.
However, if the Adviser believes that attractive
investment opportunities (consistent with the Fund’s investment objective and
policies) exist immediately, then it will invest such money in portfolio securities
in an orderly a manner as is possible.
26
The proceeds from the sale of shares of
the Fund may not be available until the third business day following the sale. The
fund you are seeking to exchange into may also delay issuing shares until that third
business day. The sale of Fund shares to complete an exchange will be effected at
net asset value of the Fund next computed after your request for exchange is received
in proper form.
Eligible Benefit Plans
- An eligible benefit
plan is an arrangement available to the employees of an employer (or two or more
affiliated employers) having not less than ten employees at the plan’s inception,
or such an employer on behalf of employees of a trust or plan for such employees,
their spouses and their children under the age of 21 or a trust or plan for such
employees, which provides for purchases through periodic payroll deductions or otherwise.
There must be at least five initial participants with accounts investing or invested
in shares of one or more of the Funds and/or certain other funds.
The initial purchase by the eligible benefit
plan and prior purchases by or for the benefit of the initial participants of the
plan must aggregate not less than $5,000 and subsequent purchases must be at least
$50 per account and must aggregate at least $250. Purchases by the eligible benefit
plan must be made pursuant to a single order paid for by a single check or federal
funds wire and may not be made more often than monthly. A separate account will
be established for each employee, spouse or child for which purchases are made.
The requirements for initiating or continuing purchases pursuant to an eligible
benefit plan may be modified and the offering to such plans may be terminated at
any time without prior notice.
You may redeem shares of the Fund at any
time and in any amount by mail or telephone. The Fund will use reasonable procedures
to confirm that instructions communicated by telephone are genuine and, if the procedures
are followed, will not be liable for any losses due to unauthorized or fraudulent
telephone transactions.
The Fund’s procedure is to redeem shares
at the NAV next determined after the Fund, Transfer Agent or Authorized Institution
receives the redemption request in proper order. Payment will be made promptly,
but no later than the seventh day following the receipt of the redemption request
in proper order. The Board may suspend the right of redemption or postpone the date
of payment during any period when (a) trading on the New York Stock Exchange is
restricted as determined by the SEC or such exchange is closed for other than weekends
or holidays, (b) the SEC has by order permitted such suspension, or (c) an emergency,
as defined by rules of the SEC, exists during which time the sale of Fund shares
or valuation of securities held by the Fund are not reasonably practicable.
SPECIAL SHAREHOLDER
SERVICES
As described briefly in the prospectus,
the Fund offers the following shareholder services:
Regular Account - A regular account allows
a shareholder to make voluntary investments and/or withdrawals at any time. Regular
accounts are available to individuals, custodians, corporations, trusts, estates,
corporate retirement plans and others. You may use the account application provided
with the prospectus to open a regular account.
Telephone Transactions - You may redeem
shares or transfer into another fund by telephone if you request this service on
your initial account application. If you do not elect this service at that time,
you may do so at a later date by sending a written request and signature guarantee
to the Transfer Agent.
The Company employs reasonable procedures
designed to confirm the authenticity of your telephone instructions and, if it does
not, it may be liable for any losses caused by unauthorized or fraudulent transactions.
As a result of this policy, a shareholder that authorizes telephone redemption bears
the risk of losses, which may result from unauthorized or fraudulent transactions
which the Company believes to be genuine. When you request a telephone redemption
or transfer, you will be asked to respond to certain questions. The Company has
designed these questions to confirm your identity as a shareholder of record.
Your cooperation with these procedures will
protect your account and the Fund from unauthorized transactions.
Automatic Investment Plan - The Automatic
Investment Plan allows shareholders to make automatic monthly investments into their
account. Upon request, the Transfer Agent will withdraw a fixed amount each month
from a
27
shareholder’s checking account and
apply that amount to additional shares. This feature does not require you to make
a commitment for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Automatic Investment Plan as desired by notifying
the Transfer Agent. To receive more information, please call the offices of the
Company at (800) 527-9525 or the Transfer Agent at (800) 628-4077. Any shareholder
may utilize this feature.
Retirement Plans - Shares of the Fund are
available for purchase in connection with the following tax-deferred prototype retirement
plans:
|
1.
|
|
Individual
Retirement Accounts (IRAs). IRAs are available for use by individuals with compensation
for services rendered who wish to use shares of the Fund as a funding medium for
individual retirement savings. IRAs include traditional IRAs, Roth IRAs and Rollover
IRAs.
|
|
|
|
|
|
2.
|
|
Simplified
Employee Pension Plans (SEPs). SEPs are a form of retirement plan for sole proprietors,
partnerships and corporations.
|
For information about eligibility requirements
and other matters concerning these plans and to obtain the necessary forms to participate
in these plans, please call the Company at (800) 527-9525. Each plan’s custodian
charges nominal fees in connection with plan establishment and maintenance. These
fees are detailed in the plan documents. You may wish to consult with your attorney
or other tax adviser for specific advice concerning your tax status and plans.
TAX STATUS
Distributions of Net Investment Income -
The Fund receives income generally in the form of dividends and interest on its
investments. This income, less expenses incurred in the operation of the Fund, constitutes
the Fund’s net investment income from which dividends may be paid to you. Any
distributions by the Fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
A portion of the net investment income distributions
may be treated as qualified dividend income (eligible for the reduced maximum rate
to individuals of 15% ( lower rates apply to individuals in lower tax brackets))
to the extent the Fund receives qualified dividend income. Qualified dividend income
is, in general, dividend income from taxable domestic corporations and certain foreign
corporations (i.e., foreign corporations incorporated in a possession of the United
States and in certain countries with a comprehensive tax treaty with the United
States, or the stock of which is readily tradable on an established securities market
in the United States) subject to certain holding period requirements by the Fund
and shareholders. Absent further legislation, the maximum rates applicable to qualified
dividend income will cease to apply to taxable years beginning after December 31,
2010.
Distributions of Capital Gains - The Fund
may derive capital gains and losses in connection with sales or other dispositions
of its portfolio securities. Distributions from net short-term capital gains will
be taxable to you as ordinary income. Distributions from net long-term capital gains
will be taxable to you as long-term capital gain, regardless of how long you have
held your shares in the Fund. Any net capital gains realized by the Fund generally
will be distributed once each year, and may be distributed more frequently, if necessary,
in order to reduce or eliminate excise or income taxes on the Fund.
Effect of Foreign Investments on Distributions
- Most foreign exchange gains realized on the sale of securities are treated as
ordinary income by the Fund. Similarly, foreign exchange losses realized by the
Fund on the sale of securities are generally treated as ordinary losses by the Fund.
These gains, when distributed, will be taxable
to you as ordinary dividends, and any losses will reduce the Fund’s ordinary
income otherwise available for distribution to you. This treatment could increase
or reduce the Fund’s ordinary income distributions to you, and may cause some
or all of the Fund’s previously distributed income to be classified as a return
of capital.
28
The Fund may be subject to foreign withholding
taxes on income from certain of its foreign securities. If more than 50% of the
Fund’s total assets at the end of the fiscal year are invested in securities
of foreign corporations, the Fund may elect to pass-through to you your pro rata
share of foreign taxes paid by the Fund. If this election is made, the year-end
statement you receive from the Fund will show more taxable income than was actually
distributed to you. However, you will be entitled to either deduct your share of
such taxes in computing your taxable income or (subject to limitations) claim a
foreign tax credit for such taxes against your U.S. federal income tax. The Fund
will provide you with the information necessary to complete your individual income
tax return if it makes this election.
Information on the Tax Character of Distributions
- The Fund will inform you of the amount of your ordinary income dividends and capital
gains distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each calendar
year. If you have not held Fund shares for a full year, the Fund may designate and
distribute to you, as ordinary income or capital gain, a percentage of income that
is not equal to the actual amount of such income earned during the period of your
investment in the Fund.
Election to be Taxed as a Regulated Investment
Company - The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, has qualified as such for its most recent
fiscal year, and intends to so qualify during the current fiscal year. As a regulated
investment company, the Fund generally does not pay federal income tax on the income
and gains they distribute to you. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, the Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income and
gains, and distributions to you will be taxed as ordinary dividend income to the
extent of such Fund’s earnings and profits.
Distribution Requirements - To avoid federal
excise taxes, the Internal Revenue Code requires the Fund to distribute to you,
by December 31st of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31st; and 100% of any undistributed
amounts from the prior year. The Fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to avoid
these excise taxes, but can give no assurances that its distributions will be sufficient
to eliminate all taxes.
Redemption of Fund Shares - Redemptions
and exchanges of Fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your Fund shares, or exchange your Fund shares for shares
of a different series of the Company, the IRS will require that you report a gain
or loss on your redemption or exchange. If you hold your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss and will be long-term
or short-term, generally depending on how long you hold your shares. Any loss incurred
on the redemption or exchange of shares held for six months or less will be treated
as a long-term capital loss to the extent of any long-term capital gains distributed
to you by the Fund on those shares.
All or a portion of any loss that you realize
upon the redemption of your Fund shares will be disallowed to the extent that you
buy other shares in such Fund (through reinvestment of dividends or otherwise) within
30 days before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you purchase.
FINANCIAL
INFORMATION
You can receive free copies of reports,
request other information and discuss your questions about the Fund by contacting
the Fund directly at:
THE WORLD
FUNDS, INC.
8730 Stony Point Parkway, Suite 205
Richmond, Virginia 23235
Telephone: (800) 527-9525
e-mail:
mail@ccofva.com
29
The Annual Report, for the Predecessor Fund,
for the fiscal year ended August 31, 2012 has been filed with the SEC. The financial
statements contained in the Annual Report are incorporated by reference into this
SAI. The financial statements and financial highlights for the Predecessor Fund
included in the Annual Report have been audited by the Fund’s independent registered
public accounting firm, Tait, Weller & Baker LLP whose report thereon also
appears in such Annual Report and is also incorporated herein by reference. No other
parts of the Annual Report are incorporated by reference herein. The financial statements
in such Annual Report have been incorporated herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
30
Appendix A
TOREADOR RESEARCH
& TRADING, LLC
Proxy and Corporate Action Voting
Policies and Procedures
I. POLICY.
Toreador Research & Trading, LLC (the
“Adviser”) acts as a discretionary investment adviser for various clients,
including clients governed by the Employee Retirement Income Security Act of 1974
(“ERISA”) and registered open-end management investment companies (i.e.,
“mutual funds”). The Adviser is registered with the U.S. Securities and
Exchange Commission (the “SEC”) as an investment adviser pursuant to the
Investment Advisers Act of 1940, as amended (the “Advisers Act”). Some
of the Adviser’s clients have delegated to the Adviser the authority to vote
proxies or act with respect to corporate actions that may arise with respect to
securities held within such client’s investment portfolio. Corporate actions
may include, for example and without limitation, tender offers or exchanges, bankruptcy
proceedings, and class actions. The Adviser’s authority to vote proxies or
act with respect to other corporate actions is established through the delegation
of discretionary authority under its investment advisory agreements. Therefore,
unless a client (including a “named fiduciary” under ERISA) specifically
reserves the right, in writing, to vote its own proxies or to take shareholder action
with respect to other corporate actions requiring shareholder actions, the Adviser
will vote all proxies and act on all other actions in a timely manner as part of
its full discretionary authority over client assets in accordance with these policies
and procedures.
When voting proxies or acting with respect
to corporate actions on behalf of clients, the Adviser’s utmost concern is
that all decisions be made solely in the best interests of the client (and for ERISA
accounts, plan beneficiaries and participants, in accordance with the letter and
spirit of ERISA). The Adviser will act in a prudent and diligent manner intended
to enhance the economic value of the assets in the client’s account.
II. PURPOSE.
The purpose of these policies and procedures
is to memorialize the procedures and policies adopted by the Adviser to enable it
to comply with its fiduciary responsibilities to clients and the requirements of
Rule 206(4)-6 under the Advisers Act. These policies and procedures also reflect
the fiduciary standards and responsibilities set forth by the Department of Labor
for ERISA accounts.
III. PROCEDURES.
The Adviser is ultimately responsible for
ensuring that all proxies received are voted in a timely manner and in a manner
consistent with the Adviser’s determination of the client’s best interests.
Although many proxy proposals may be voted in accordance with the Guidelines described
in Section V below, some proposals require special consideration which may dictate
that the Adviser makes an exception to the Guidelines.
The Adviser is also responsible for ensuring
that all corporate action notices or requests which require shareholder action that
are received are addressed in a timely manner and consistent action is taken across
all similarly situated client accounts.
A. Conflicts of Interest.
Where a proxy proposal raises a material
conflict between the Adviser’s interests and a client’s interest, including
a mutual fund client, the Adviser will resolve such a conflict in the manner described
below:
31
|
1.
|
|
Vote
in Accordance with the Guidelines. To the extent that the Adviser has little or
no discretion to deviate from the Guidelines with respect to the proposal in question,
the Adviser shall vote in accordance with such pre-determined voting policy.
|
|
|
|
|
|
2.
|
|
Obtain
Consent of Clients. To the extent that the Adviser has discretion to deviate from
the Guidelines with respect to the proposal in question, the Adviser will disclose
the conflict to the relevant clients and obtain their consent to the proposed vote
prior to voting the securities. The disclosure to the client will include sufficient
detail regarding the matter to be voted on and the nature of the conflict so that
the client will be able to make an informed decision regarding the vote. If a client
does not respond to such a conflict disclosure request or denies the request, the
Adviser will abstain from voting the securities held by that client’s account.
|
|
|
|
|
|
3.
|
|
Client
Directive to Use an Independent Third Party. Alternatively, a client may, in writing,
specifically direct the Adviser to forward all proxy matters in which the Adviser
has a conflict of interest regarding the client’s securities to an identified
independent third party for review and recommendation. Where such independent third
party’s recommendations are received on a timely basis, the Adviser will vote
all such proxies in accordance with such third party’s recommendation. If the
third party’s recommendations are not timely received, the Adviser will abstain
from voting the securities held by that client’s account.
|
The Adviser will review the proxy proposal
for conflicts of interest as part of the overall vote review process. All material
conflicts of interest so identified will be addressed as described above in this
Section III, A.
B. Limitations.
In certain circumstances, in accordance
with a client’s investment advisory agreement (or other written directive)
or where the Adviser has determined that it is in the client’s best interest,
the Adviser will not vote proxies received.
The following are certain circumstances
where the Adviser will limit its role in voting proxies:
|
1.
|
|
Client
Maintains Proxy Voting Authority. Where a client specifies in writing that it will
maintain the authority to vote proxies itself or that it has delegated the right
to vote proxies to a third party, the Adviser will not vote the securities and will
direct the relevant custodian to send the proxy material directly to the client.
If any proxy material is received by the Adviser for such account, it will promptly
be forwarded to the client or specified third party.
|
|
|
|
|
|
2.
|
|
Terminated
Account. Once a client account has been terminated in accordance with its investment
advisory agreement, the Adviser will not vote any proxies received after the termination
date. However, the client may specify in writing that proxies should be directed
to the client (or a specified third party) for action.
|
|
|
|
|
|
3.
|
|
Limited
Value. If the Adviser determines that the value of a client’s economic interest
or the value of the portfolio holding is indeterminable or insignificant, the Adviser
may abstain from voting a client’s proxies. The Adviser also will not vote
proxies received for securities which are no longer held by the client’s account.
In addition, the Adviser generally will not vote securities where the economic value
of the securities in the client account is less than $500.
|
|
|
|
|
|
4.
|
|
Securities
Lending Programs. When securities are out on loan, they are transferred into the
borrower’s name and are voted by the borrower, in its discretion. However,
where the Adviser determines that a proxy vote (or other shareholder action) is
materially important to the client’s account, the Adviser may recall the security
for the purposes of voting.
|
|
|
|
|
|
5.
|
|
Unjustifiable
Costs. In certain circumstances, after doing a cost-benefit analysis, the Adviser
may abstain from voting where the cost of voting a client’s proxy would exceed
any anticipated benefits from the proxy proposal.
|
|
|
|
|
|
IV.
|
|
RECORD KEEPING.
|
32
In accordance with Rule 204-2 under the
Advisers Act, the Adviser will maintain for the time periods set forth in the Rule:
(i) these proxy voting procedures and policies, and all amendments thereto; (ii)
all proxy statements received regarding client securities (provided however, that
the Adviser may rely on the proxy statement filed on EDGAR as its records); (iii)
a record of all votes cast on behalf of clients; (iv) records of all written client
requests for proxy voting information; (v) a copy of any written response made by
the Adviser to any written or oral client request for proxy voting information;
(vi) any documents prepared by the Adviser that were material to making a decision
on how to vote or that memorialized the basis for the decision; and (vii) all records
relating to requests made to clients regarding conflicts of interest in voting the
proxy.
The Adviser will describe in its Form ADV,
Part II (or other brochure fulfilling the requirement of Rule 204-3 under the Advisers
Act) its proxy voting policies and procedures and will inform clients how they may
obtain information on how the Adviser voted proxies with respect to the clients’ portfolio securities. The Adviser will also provide to each mutual fund client
a copy of its policies and procedures. Clients may obtain information on how their
securities were voted or a copy of the policies and procedures by written request
addressed to the Adviser.
The Adviser will coordinate with all mutual
fund clients to assist in the provision of all information required to be filed
by such mutual funds on Form N-PX. Form N-PX will provide information concerning
each matter relating to a portfolio security considered at any shareholder meeting
with respect to which a mutual fund was entitled to vote. Each Form N-PX will need
to be filed no later than August 31st of each year, and will cover all proxy votes
with respect to which a mutual fund was entitled to vote for the period July 1st
through June 30th. The Adviser shall maintain and provide the following information
concerning any shareholder meetings with respect to which a mutual fund they manage
was entitled to vote:
|
|
•
|
|
the name of
the issuer of the portfolio security;
|
|
|
•
|
|
the exchange
ticker symbol of the portfolio security(1);
|
|
|
•
|
|
the CUSIP
number of the portfolio security(1);
|
|
|
•
|
|
the shareholder
meeting date;
|
|
|
•
|
|
a brief description
of the matter voted on;
|
|
|
•
|
|
whether the
matter was put forward by the issuer or a shareholder;
|
|
|
•
|
|
whether the
mutual fund voted;
|
|
|
•
|
|
how the mutual
fund cast its vote; and
|
|
|
•
|
|
whether the
mutual fund cast its vote for or against management.
|
V. GUIDELINES.
Each proxy issue will be considered individually.
The following guidelines are a partial list to be used in voting proposals contained
in the proxy statements, but will not be used as rigid rules.
A. Oppose.
The Adviser will generally vote against
any management proposal that clearly has the effect of restricting the ability of
shareholders to realize the full potential value of their investment. Proposals
in this category would include:
|
1.
|
|
Issues regarding
the issuer’s board entrenchment and anti-takeover measures such as the following:
|
|
|
|
|
|
a.
|
|
Proposals
to stagger board members’ terms;
|
|
|
|
|
|
b.
|
|
Proposals
to limit the ability of shareholders to call special meetings;
|
|
|
|
|
|
c.
|
|
Proposals
to require super majority votes;
|
|
|
|
|
|
d.
|
|
Proposals
requesting excessive increases in authorized common or preferred shares where management
provides no explanation for the use or need of these additional shares;
|
|
|
|
|
|
e.
|
|
Proposals
regarding “fair price” provisions;
|
33
|
f.
|
|
Proposals
regarding “poison pill” provisions; and
|
|
|
|
|
|
g.
|
|
Permitting
“green mail”.
|
|
|
|
|
|
2.
|
|
Providing
cumulative voting rights.
|
|
|
|
|
|
B.
|
|
Approve.
|
Routine proposals are those which do not
change the structure, bylaws, or operations of the corporation to the detriment
of the shareholders. Given the routine nature of these proposals, proxies will nearly
always be voted with management. Traditionally, these issues include:
|
1.
|
|
Election
of independent accountants recommended by management, unless seeking to replace
if there exists a dispute over policies.
|
|
|
|
|
|
2.
|
|
Date
and place of annual meeting.
|
|
|
|
|
|
3.
|
|
Limitation
on charitable contributions or fees paid to lawyers.
|
|
|
|
|
|
4.
|
|
Ratification
of directors’ actions on routine matters since previous annual meeting.
|
|
|
|
|
|
5.
|
|
Confidential
voting. Confidential voting is most often proposed by shareholders as a means of
eliminating undue management pressure on shareholders regarding their vote on proxy
issues. The Adviser will generally vote to approve these proposals as shareholders
can later divulge their votes to management on a selective basis if a legitimate
reason arises.
|
|
|
|
|
|
6.
|
|
Limiting
directors’ liability.
|
|
|
|
|
|
7.
|
|
Eliminate
preemptive rights. Preemptive rights give current shareholders the opportunity to
maintain their current percentage ownership through any subsequent equity offerings.
These provisions are no longer common in the U.S., and can restrict management’s
ability to raise new capital.
|
|
|
|
|
|
8.
|
|
The
Adviser will generally vote to approve the elimination of preemptive rights, but
will oppose the elimination of listed preemptive rights, e.g., on proposed issues
representing more than an acceptable level of total dilution.
|
|
|
|
|
|
9.
|
|
Employee Stock
Purchase Plans.
|
|
|
|
|
|
10.
|
|
Establish
40 1(k) Plans.
|
|
|
|
|
|
C.
|
|
Case-By-Case.
|
The Adviser will review each issue in this
category on a case-by-case basis. Voting decisions will he made based on the financial
interest of the client involved. These matters include proposals to:
|
1.
|
|
Pay directors
solely in stock;
|
|
|
|
|
|
2.
|
|
Eliminate
director’s mandatory retirement policy;
|
|
|
|
|
|
3.
|
|
Rotate annual
meeting location or date;
|
|
|
|
|
|
4.
|
|
Changes in
the state of incorporation;
|
|
|
|
|
|
5.
|
|
Social and
corporate responsibility issues;
|
34
|
6.
|
|
Option and
stock grants to management and directors; and
|
|
|
|
|
|
7.
|
|
Allowing
indemnification of directors and/or officers after reviewing the applicable laws
and extent of protection requested.
|
|
|
|
|
|
D.
|
|
Investment
Company Issues.
|
From time to time the Adviser will have
to vote shares of investment company securities that may be held in a client’s
account. These matters generally include proposals to:
|
1.
|
|
Elect directors
or trustees;
|
|
|
|
|
|
2.
|
|
Ratify or
approve independent accountants;
|
|
|
|
|
|
3.
|
|
Approve a
new investment adviser or sub-adviser;
|
|
|
|
|
|
4.
|
|
Approve a
change to an investment advisory fee;
|
|
|
|
|
|
5.
|
|
Approve a
Distribution (i.e., Rule 12b-1) Plan;
|
|
|
|
|
|
6.
|
|
Approve a
change in a fundamental investment objective, policy or limitation;
|
|
|
|
|
|
7.
|
|
Approve a
change in the state of incorporation; and
|
|
|
|
|
|
8.
|
|
Approve a
plan of reorganization or merger.
|
The Adviser will generally vote with management’s recommendation on the election of directors and trustees, the approval of
independent accountants, the approval of a change in a fundamental investment objective,
policy or limitation, and the approval of a change in the state of incorporation.
On the approval of a new investment adviser or sub-adviser, approval of a change
in investment advisory fee, approval of a distribution (i.e., Rule 12b-1) plan,
or the approval of a plan of reorganization or merger, the Adviser will review each
issue on a case-by-case basis. Voting decisions will be made based on the financial
interest of the client involved.
|
|
|
|
(1)
|
|
The
exchange ticker symbol and CUSIP number may be difficult to obtain for certain portfolio
securities, such as foreign issuers. Accordingly, such information may be omitted
if it’s not available through reasonably practicable means.
|
35
CKX Lands (AMEX:CKX)
Gráfico Histórico do Ativo
De Mai 2024 até Jun 2024
CKX Lands (AMEX:CKX)
Gráfico Histórico do Ativo
De Jun 2023 até Jun 2024
