U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No.
------ -----
JANUS ADVISER
(Exact Name of Registrant as Specified in Charter)
100 FILLMORE STREET, DENVER, COLORADO 80206-4928
(Address of Principal Executive Offices)
303-333-3863
(Registrant's Telephone Number, Including Area Code and Telephone Number)
KELLEY ABBOTT HOWES
JANUS ADVISER
100 FILLMORE STREET, DENVER, COLORADO 80206-4928
(Name and Address of Agent for Service)
COPY TO: GEOFFREY R.T. KENYON, ESQ.
GOODWIN PROCTER LLP
Exchange Place, Boston, Massachusetts 02109
----------
Title of securities being registered: shares of beneficial interest, $.001 par
value per share.
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
No filing fee is required because an indefinite number of shares of a
Predecessor Issuer (within the meaning of Rule 24f-2(b)) have previously been
registered pursuant to Section 24(f) of the Investment Company Act of 1940, as
amended.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
JANUS ADVISER
CONTENTS OF REGISTRATION STATEMENT ON FORM N-14
This Registration Statement consists of the following papers and documents:
Cover Sheet
Notice of Special Meeting
Table of Contents
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
(VONTOBEL LOGO)
FOR SHAREHOLDERS OF ONE OR MORE OF THE FOLLOWING FUNDS:
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
August XX, 2003
Dear Shareholder:
The enclosed proxy statement describes the plan to reorganize Vontobel U.S.
Value Fund and Vontobel International Equity Fund into similar funds that are
being created by Janus. As a shareholder, we are requesting your vote on these
proposals.
Under this arrangement, Janus Capital Management LLC will become the
investment adviser of the new Funds and assume supervisory responsibility for
the Funds' investment activities. Vontobel Asset Management, Inc., as
subadviser, will maintain portfolio management responsibility and continue to
manage the Funds according to our managers' individual styles and strengths.
As Vontobel will continue to manage your assets under this arrangement,
shareholders will primarily benefit from reduced fund expenses, enhanced
servicing options, and by gaining access to Janus' wider variety of investment
products and disciplines.
To realize the full benefit of these proposals, we are asking shareholders
to approve a tax-free reorganization of their Fund into a series of a newly
created Delaware statutory trust. Once approved, the reorganization involves two
basic steps:
- First, each Vontobel fund will transfer all of its assets and liabilities
to the corresponding Janus fund.
- Simultaneously, the corresponding Janus fund will open an account for
you, crediting it with shares that are equivalent in value to your
investment in your Vontobel fund at the time of the reorganization.
YOUR FUND'S BOARD OF DIRECTORS BELIEVES THE PROPOSED REORGANIZATION IS IN
THE BEST INTEREST OF SHAREHOLDERS AND HAS [UNANIMOUSLY] RECOMMENDED THAT
SHAREHOLDERS VOTE "FOR" THE REORGANIZATION.
Please take the time to review the proxy statement and cast your vote. The
changes we are requesting are important to the Funds and to you as a
shareholder. Should you have any questions, please feel free to call our proxy
solicitor at 1-800 .
Sincerely,
John Pasco, III
Chairman, Vontobel Funds
YOUR VOTE IS IMPORTANT. To vote, simply fill out the enclosed proxy card(s) and
return it in the postage-paid envelope. Additional voting options are also
outlined on the card. If we do not hear from you, our proxy solicitor, xxxx, may
contact you.
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2003
TO THE SHAREHOLDERS: Vontobel Funds, Inc., a Maryland corporation
("Vontobel Funds" or the "Company"), will hold a special meeting (the "Special
Meeting") of shareholders of Vontobel U.S. Value Fund and Vontobel International
Equity Fund (each an "Existing Fund" and collectively, the "Existing Funds") at
its offices, 1500 Forest Avenue, Suite 223, Richmond, Virginia 23229, on
, 2003 at 10:00 a.m. Eastern time, for the purposes of considering and
acting upon a proposal to approve the Agreement and Plan of Reorganization,
dated , 2003, which provides for the reorganization of each Existing
Fund into a corresponding series of Janus Adviser (the "Trust"), a Delaware
statutory trust.
Shareholders of record of the Existing Funds as of the close of business on
, 2003 are entitled to notice of, and to vote at, the Special Meeting
or any adjournment.
The persons named as proxies will vote in their discretion on any other
business that may properly come before the Special Meeting or any adjournments
or postponements thereof.
The Shareholders of each Existing Fund will vote separately on the
Agreement and Plan of Reorganization. In the event that the necessary quorum to
transact business or the vote required for an Existing Fund to approve the
Agreement and Plan of Reorganization is not obtained at the Special Meeting, the
persons named as proxies may propose one or more adjournments to permit further
solicitation of proxies. Any such adjournment as to a matter will require the
affirmative vote of the holders of a majority of the shares of the applicable
Existing Fund entitled to vote at the Special Meeting and present in person or
by proxy at the Special Meeting. The persons named as proxies will vote in favor
of such adjournment if they determine that such adjournment and additional
solicitation are reasonable and in the interests of shareholders.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
THE AGREEMENT AND PLAN OF REORGANIZATION.
By Order of the Board of Directors
--------------------------------------
F. Byron Parker, Jr.
Secretary
, 2003
PROXY STATEMENT
OF
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
EACH A SERIES OF VONTOBEL FUNDS, INC.
1500 FOREST AVENUE, SUITE 223
RICHMOND, VIRGINIA 23229
1-800-527-9500
PROSPECTUS FOR INVESTOR SHARES,
CLASS A SHARES AND CLASS C SHARES
OF
JANUS ADVISER -- U.S. VALUE FUND
JANUS ADVISER -- INTERNATIONAL EQUITY FUND
EACH A SERIES OF JANUS ADVISER
100 FILLMORE STREET
DENVER, COLORADO 80206-4928
1-800-525-3713
This Prospectus/Proxy Statement is being furnished to shareholders of
Vontobel U.S. Value Fund and Vontobel International Equity Fund (each, an
"Existing Fund" and collectively the "Existing Funds") in connection with a
special meeting (the "Special Meeting") of shareholders to approve an Agreement
and Plan of Reorganization with respect to each Existing Fund (the "Plan").
Under the Plan, shareholders of each Existing Fund will receive shares of
substantially similar funds that are being created by the Janus organization,
called Janus Adviser -- U.S. Value Fund and Janus Adviser -- International
Equity Fund, respectively (each, a "Successor Fund" and collectively, the
"Successor Funds"). The shares of the applicable Successor Fund received by each
shareholder will be equal in total value to their holdings in the Existing Fund
as of the closing date of the reorganization contemplated by the Plan (the
"Reorganization"). Janus Capital Management LLC ("Janus") will be the investment
adviser of the Successor Funds and Vontobel Asset Management, Inc. ("Vontobel"),
the investment adviser of the Existing Funds, will continue to have day-to-day
portfolio management responsibility as subadviser of the Successor Funds. Janus,
which as of June 30, 2003, sponsored 61 mutual funds with approximately $150
billion in assets under management, is one of the largest mutual fund sponsors
in the United States. The Reorganization will offer shareholders continuity in
portfolio management while giving them access to Janus' experience and resources
in managing and distributing mutual funds.
After the Reorganization is complete, the Existing Funds will be dissolved.
The Reorganization is expected to be effective on or about September , 2003.
This Prospectus/Proxy Statement, which you should read carefully and retain
for future reference, sets forth concisely information that you should know
about the Existing Funds, the Successor Funds and the Reorganization. Copies of
the Prospectus of the Existing Funds, dated May 1, 2003, the preliminary
Prospectus of the Successor Funds and the Existing Funds' most recent Annual
Report to Shareholders have been included in the envelope with this
Prospectus/Proxy Statement and are incorporated by reference.
A Statement of Additional Information, dated , 2003 relating to
the Reorganization has been filed with the SEC and is incorporated by reference
in this Prospectus/Proxy Statement. A copy of such Statement of Additional
Information is available upon request and without charge by calling Janus at
1-800-525-3713 or by contacting your financial intermediary.
Additional information relating to the Existing Funds and Vontobel Funds,
Inc. ("Vontobel Funds") is contained in the Statement of Additional Information
of Vontobel Funds, dated May 1, 2003 and additional information relating to the
Successor Funds and Janus Adviser (the "Trust") is contained in the Trust's
preliminary Statement of Additional Information. Each of these documents has
been filed with the Securities
and Exchange Commission ("SEC"). You can obtain a free copy of these documents
by calling Janus at 1-800-525-3713 or by contacting your financial intermediary.
The SEC maintains a web site (http://www.sec.gov) that contains the
Statement of Additional Information of Vontobel Funds, dated May 1, 2003, and
the Trust's preliminary Statement of Additional Information together with other
information regarding the Existing Funds and the Successor Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Proxy Statement is , 2003.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
SYNOPSIS.................................................... 1
The Reorganization........................................ 1
Investment Objectives and Policies........................ 2
Fees and Expenses......................................... 3
Distribution and Purchase Procedures, Exchange Rights and
Redemption Procedures.................................. 10
Principal Risk Factors.................................... 13
THE REORGANIZATION.......................................... 15
The Plan.................................................. 15
Reasons for the Reorganization............................ 15
Federal Income Tax Consequences........................... 16
COMPARATIVE INFORMATION ABOUT THE EXISTING AND SUCCESSOR
FUNDS..................................................... 17
Comparative Information on Shareholder Rights............. 17
Comparative Information on Investment Restrictions........ 20
Capitalization............................................ 24
Comparison of Investment Advisory Arrangements............ 25
MANAGEMENT OF THE TRUST..................................... 30
VOTING MATTERS.............................................. 34
General Information....................................... 34
Voting Rights and Required Vote........................... 35
Share Ownership........................................... 36
</Table>
i
PROXY STATEMENT
OF
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
EACH A SERIES OF VONTOBEL FUNDS, INC.
1500 FOREST AVENUE, SUITE 223
RICHMOND, VIRGINIA 23229
1-800-527-9500
PROSPECTUS FOR INVESTOR SHARES,
CLASS A SHARES AND CLASS C SHARES
OF
JANUS ADVISER -- U.S. VALUE FUND
JANUS ADVISER -- INTERNATIONAL EQUITY FUND
EACH A SERIES OF JANUS ADVISER
100 FILLMORE STREET
DENVER, COLORADO 80206-4928
1-800-525-3713
SYNOPSIS
THE REORGANIZATION
At a meeting held on , 2003, the Board of Directors of Vontobel
Funds [unanimously] approved the Plan and concluded that the Reorganization is
in the best interests of the shareholders of the Existing Funds.
Under the Plan, each Existing Fund will transfer all of its assets to the
applicable Successor Fund in exchange for shares of the Successor Fund and the
Successor Fund's assumption of all known liabilities of the Existing Fund. Each
Existing Fund will then distribute these shares of the corresponding Successor
Fund to its shareholders in exchange for their shares of the Existing Fund. Each
shareholder of each Existing Fund will receive full and fractional shares of the
corresponding Successor Fund equal in value to the total value of his or her
shares of the Existing Fund as of the closing date of the Reorganization, which
is expected to be September , 2003. Existing Vontobel Class A shareholders who
purchased their shares without a sales charge will receive Investor Class Shares
of the corresponding Successor Fund, existing Vontobel Class A shareholders who
purchased their shares with a sales charge will receive Class A Shares of the
corresponding Successor Fund, and existing Vontobel Class C shareholders will
receive Class C Shares of the corresponding Successor Fund. The Plan provides
that Janus will bear all costs and expenses of the Reorganization, including the
costs and expenses incurred in the preparation and mailing of this
Prospectus/Proxy Statement.
The implementation of the Reorganization is subject to a number of
conditions set forth in the Plan. Among the significant conditions (which may
not be waived) is the receipt by each fund of an opinion of counsel to the
effect that the Reorganization will be treated as a tax-free transaction to the
Existing Funds and their shareholders.
This description of the Reorganization is qualified by reference to the
full text of the Plan, which is attached as Appendix A.
INVESTMENT OBJECTIVES AND POLICIES
VONTOBEL U.S. VALUE FUND AND JANUS ADVISER -- U.S. VALUE FUND
The investment objective of both Janus Adviser -- U.S. Value Fund and
Vontobel U.S. Value Fund is long-term capital appreciation. Both funds have
substantially similar investment policies, strategies and restrictions.
Both funds seek to achieve their investment objective by investing in a
non-diversified portfolio consisting primarily of equity securities. Janus
Adviser -- U.S. Value Fund seeks to achieve its objective by investing, under
normal circumstances, at least 80% of its net assets in equity securities of
companies that are traded on U.S. exchanges or quoted on an established
over-the-counter market. This policy may be changed upon 60 days' advance notice
to shareholders of the fund. Vontobel U.S. Value Fund seeks to achieve its
objective by investing, under normal market conditions, at least 65% of its net
assets in equity securities of companies that are traded on U.S. exchanges.
Equity securities consist of common stocks and securities convertible into
common stocks, such as warrants, rights, convertible bonds, debentures or
convertible preferred stock. Each fund may also invest in debt securities and
cash equivalents, such as overnight repurchase agreements and short-term U.S.
Government securities. Debt securities include obligations of governments,
instrumentalities and corporations.
VONTOBEL INTERNATIONAL EQUITY FUND AND JANUS ADVISER -- INTERNATIONAL EQUITY
FUND
The investment objective of Janus Adviser -- International Equity Fund is
to seek long-term capital appreciation. The investment objective of Vontobel
International Equity Fund is to seek capital appreciation. Both funds have
substantially similar investment policies, strategies and restrictions.
Both funds seek to achieve their investment objective by investing in a
diversified portfolio consisting primarily of equity securities. Under normal
circumstances, each fund will invest at least 80% of its net assets in equity
securities of issuers that are located outside of the United States, or that
derive a significant portion of their business or profits outside of the United
States. This policy may be changed upon 60 days' advance notice to shareholders
of Janus Adviser -- International Equity Fund. Each fund intends to diversify
its investments among countries. Each fund will generally invest most of its
assets in equity securities of countries that are generally considered to have
developed markets, such as, but not limited to, the United Kingdom, the eleven
euro-zone countries (France, Germany, Italy, Spain, Portugal, Finland, Ireland,
Belgium, the Netherlands, Luxembourg and Austria), Switzerland, Norway, Japan,
Hong Kong, Australia, and Singapore. The portfolio manager of each fund will
decide when and how much to invest in each of these markets. Each fund may also
invest in equity securities issued by companies in "developing countries" or
"emerging markets," such as, but not limited to, Taiwan, Malaysia, Indonesia,
and Brazil, that are included in Morgan Stanley Capital International's Emerging
Markets Free Index.
The funds will primarily hold securities listed on a securities exchange or
quoted on an established over-the-the counter market. Each fund may make limited
investments in "thinly traded" securities. The securities each fund purchases
may not always be purchased on the principal market for the issuer's securities.
For example, Depositary Receipts may be purchased if trading conditions make
them more attractive than the underlying security.
In addition to common stocks and securities that are convertible into
common stocks, each fund may invest in shares of closed-end investment companies
that invest in securities that are consistent with each fund's objective and
strategies. By investing in other investment companies, each fund indirectly
pays a portion of the expenses and brokerage costs of those companies as well as
its own expenses. Also, federal securities laws impose limits on such
investments, which may affect the ability of a fund to purchase those
investments.
Each fund has the authority to enter into forward contracts to purchase or
sell foreign currencies, purchase and write covered call options on foreign
currencies and enter into contracts for the purchase or sale for future delivery
of foreign currencies.
2
FEES AND EXPENSES
VONTOBEL U.S. VALUE FUND AND JANUS ADVISER -- U.S. VALUE FUND
This table discloses the fees and expenses that you may pay if you buy and
hold shares of either fund. The information shown below with respect to Janus
Adviser -- U.S. Value Fund is based upon estimated annualized gross expenses the
fund expects to incur during its initial fiscal year. All expenses are shown
without the effect of expense offset arrangements or custodial fee credits.
THERE WILL NOT BE ANY FEES PAYABLE IN CONNECTION WITH THE REORGANIZATION.
SHAREHOLDER FEES (fees paid directly from your investment)
JANUS ADVISER -- U.S. VALUE FUND INVESTOR SHARES --
VONTOBEL U.S. VALUE FUND CLASS A SHARES (SOLD WITHOUT SALES CHARGE)(1)
<Table>
<Caption>
PRO FORMA --
JANUS ADVISER -- VONTOBEL JANUS ADVISER --
U.S. VALUE FUND U.S. VALUE FUND U.S. VALUE FUND
INVESTOR SHARES CLASS A SHARES INVESTOR SHARES
---------------- --------------- ----------------
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)............ None None None
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or redemption proceeds).................. None 2.00%(2) None
Maximum sales charge (load) imposed on reinvested
dividends and distributions.................... None None None
Redemption fees.................................. None None None
Exchange fees.................................... None None None
</Table>
- ---------------
(1) If you purchase through a financial intermediary, that financial
intermediary may charge you a separate or additional fee for purchases and
sales of shares.
(2) Investors who purchased the Existing Fund's Class A Shares without a
front-end sales charge are subject to a 2.00% contingent deferred sales
charge if they redeem their shares within 360 days of purchase.
JANUS ADVISER -- U.S. VALUE FUND CLASS A SHARES --
VONTOBEL U.S. VALUE FUND CLASS A SHARES (SOLD WITH SALES CHARGE)(1)
<Table>
<Caption>
PRO FORMA --
JANUS ADVISER -- VONTOBEL JANUS ADVISER --
U.S. VALUE FUND U.S. VALUE FUND U.S. VALUE FUND
CLASS A SHARES CLASS A SHARES CLASS A SHARES
---------------- --------------- ----------------
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)............ 5.75%(2) 5.75%(3) 5.75%(2)
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or redemption proceeds).................. None None None
Maximum sales charge (load) imposed on reinvested
dividends and distributions.................... None None None
Redemption fees.................................. None None None
Exchange fees.................................... None None None
</Table>
- ---------------
(1) If you purchase through a financial intermediary, that financial
intermediary may charge you a separate or additional fee for purchases and
sales of shares.
(2) Sales charges may be waived for certain investors.
3
(3) Reduced rates apply to purchases of Existing Fund Class A Shares over
$50,000, and a sales charge is waived for certain classes of investors.
JANUS ADVISER -- U.S. VALUE FUND CLASS C SHARES --
VONTOBEL U.S. VALUE FUND CLASS C SHARES(1)
<Table>
<Caption>
PRO FORMA --
JANUS ADVISER -- VONTOBEL JANUS ADVISER --
U.S. VALUE FUND U.S. VALUE FUND U.S. VALUE FUND
CLASS C SHARES CLASS C SHARES CLASS C SHARES
---------------- --------------- ----------------
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)............ 1.00%(2) None 1.00%(2)
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or redemption proceeds).................. 1.00%(3) 2.00%(4) 1.00%(3)
Maximum sales charge (load) imposed on reinvested
dividends and distributions.................... None None None
Redemption fees.................................. None None None
Exchange fees.................................... None None None
</Table>
- ---------------
(1) If you purchase through a financial intermediary, that financial
intermediary may charge you a separate or additional fee for purchases and
sales of shares.
(2) Sales charges may be waived for certain investors.
(3) A contingent deferred sales charge of 1.00% applies on Successor Fund Class
C Shares redeemed within 18 months of purchase.
(4) A deferred sales charge of 2.00% is imposed on the proceeds of Existing Fund
Class C Shares redeemed within 2 years of purchase. The charge is a
percentage of the net asset value at the time of purchase.
4
VONTOBEL INTERNATIONAL EQUITY FUND AND JANUS ADVISER -- INTERNATIONAL EQUITY
FUND
This table discloses the fees and expenses that you may pay if you buy and
hold shares of either fund. The information shown below with respect to Janus
Adviser -- International Equity Fund is based upon estimated annualized gross
expenses the fund expects to incur during its initial fiscal year. All expenses
are shown without the effect of expense offset arrangements or custodial fee
credits. THERE WILL NOT BE ANY FEES PAYABLE IN CONNECTION WITH THE
REORGANIZATION.
SHAREHOLDER FEES (fees paid directly from your investment)
JANUS ADVISER -- INTERNATIONAL EQUITY FUND INVESTOR SHARES --
VONTOBEL INTERNATIONAL EQUITY FUND CLASS A SHARES (SOLD WITHOUT SALES CHARGE)(1)
<Table>
<Caption>
PRO FORMA --
JANUS ADVISER -- VONTOBEL JANUS ADVISER --
INTERNATIONAL INTERNATIONAL INTERNATIONAL
EQUITY FUND EQUITY FUND EQUITY FUND
INVESTOR SHARES CLASS A SHARES INVESTOR SHARES
---------------- -------------- ----------------
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)............. None None None
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or redemption proceeds)................... None 2.00%(2) None
Maximum sales charge (load) imposed on reinvested
dividends and distributions..................... None None None
Redemption fees................................... 1.00%(3) None 1.00%(3)
Exchange fees..................................... None None None
</Table>
- ---------------
(1) If you purchase through a financial intermediary, that financial
intermediary may charge you a separate or additional fee for purchases and
sales of shares.
(2) Investors who purchased the Existing Fund's Class A Shares without a
front-end sales charge are subject to a 2.00% contingent deferred sales
charge if they redeem their shares within 360 days of purchase.
(3) Investor Shares that are held for three months or less are subject to a
redemption fee of 1% of the amount redeemed. The redemption fee may be
waived in certain circumstances. For shares of the Successor Fund held
through certain intermediaries, the redemption fee will be charged in
generally the same manner as for shares held directly with the Successor
Fund. However, the intermediaries' methods for tracking and calculating the
fee may differ in some respect from the Successor Funds'.
JANUS ADVISER -- INTERNATIONAL EQUITY FUND CLASS A SHARES --
VONTOBEL INTERNATIONAL EQUITY FUND CLASS A SHARES (SOLD WITH SALES CHARGE)(1)
<Table>
<Caption>
PRO FORMA --
JANUS ADVISER -- VONTOBEL JANUS ADVISER --
INTERNATIONAL INTERNATIONAL INTERNATIONAL
EQUITY FUND EQUITY FUND EQUITY FUND
CLASS A SHARES CLASS A SHARES CLASS A SHARES
---------------- -------------- ----------------
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)............. 5.75%(2) 5.75%(3) 5.75%(2)
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or redemption proceeds)................... None None None
Maximum sales charge (load) imposed on reinvested
dividends and distributions..................... None None None
Redemption fees................................... None None None
Exchange fees..................................... None None None
</Table>
5
- ---------------
(1) If you purchase through a financial intermediary, that financial
intermediary may charge you a separate or additional fee for purchases and
sales of shares.
(2) Sales charges may be waived for certain investors.
(3) Reduced rates apply to purchases of Existing Fund Class A Shares over
$50,000, and a sales charge is waived for certain classes of investors.
JANUS ADVISER -- INTERNATIONAL EQUITY FUND CLASS C SHARES --
VONTOBEL INTERNATIONAL EQUITY FUND CLASS C SHARES(1)
<Table>
<Caption>
PRO FORMA --
JANUS ADVISER -- VONTOBEL JANUS ADVISER --
INTERNATIONAL INTERNATIONAL INTERNATIONAL
EQUITY FUND EQUITY FUND EQUITY FUND
CLASS C SHARES CLASS C SHARES CLASS C SHARES
---------------- -------------- ----------------
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)............. 1.00%(2) None 1.00%(2)
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or redemption proceeds)................... 1.00%(3) 2.00%(4) 1.00%(3)
Maximum sales charge (load) imposed on reinvested
dividends and distributions..................... None None None
Redemption fees................................... None None None
Exchange fees..................................... None None None
</Table>
- ---------------
(1) If you purchase through a financial intermediary, that financial
intermediary may charge you a separate or additional fee for purchases and
sales of shares.
(2) Sales charges may be waived for certain investors.
(3) A contingent deferred sales charge of 1.00% applies on Successor Fund Class
C Shares redeemed within 18 months of purchase.
(4) A deferred sales charge of 2.00% is imposed on the proceeds of Existing Fund
Class C Shares redeemed within 2 years of purchase. The charge is a
percentage of the net asset value at the time of purchase.
6
ANNUAL FUND OPERATING EXPENSES
The following comparative fee tables show the annual fund operating
expenses (as a percentage of net assets) for the Existing Fund as of December
31, 2002 and the estimated annual fund operating expenses for the Successor
Fund.
VONTOBEL U.S. VALUE FUND AND JANUS ADVISER -- U.S. VALUE FUND
<Table>
<Caption>
TOTAL ANNUAL TOTAL ANNUAL
FUND FUND
OPERATING OPERATING
DISTRIBUTION EXPENSES EXPENSES
MANAGEMENT (12B-1) OTHER WITHOUT TOTAL WITH
FUND FEE FEES(1) EXPENSES WAIVERS WAIVERS WAIVERS
- ---- ---------- ------------ -------- ------------ ------- ------------
Vontobel U.S. Value Fund
Class A Shares............ 0.98% None 0.76% 1.74% None 1.74%
Janus Adviser -- U.S. Value
Fund Investor Shares...... 0.96% 0.25% 0.60%(2) 1.81% 0.56% 1.25%
Janus Adviser -- U.S. Value
Fund Class A Shares....... 0.96% 0.25% 0.50%(2) 1.71% 0.56% 1.15%
Vontobel U.S. Value Fund
Class C Shares(3)......... 0.98% 1.00%(4) 0.76% 2.74% None 2.74%
Janus Adviser -- U.S. Value
Fund Class C Shares....... 0.96% 1.00%(5) 0.50%(2) 2.46% 0.56% 1.90%
</Table>
- ---------------
(1) Because the 12b-1 fee is charged as an ongoing fee, long-term shareholders
may pay more than the economic equivalent of the maximum front-end sales
charges permitted by the National Association of Securities Dealers, Inc.
(2) Janus has contractually agreed to waive each Successor Fund's total
operating expenses (excluding brokerage commissions, interest, taxes and
extraordinary expenses) to the levels indicated until at least [ ].
Expense information has been restated to reflect estimated fees.
(3) Class C Shares of the Existing Fund have not been outstanding for a full
fiscal year; therefore annual expenses are estimated.
(4) The Existing Fund has approved separate Plans of Distribution for the
Existing Fund's Class C Shares pursuant to Rule 12b-1 of the Investment
Company Act of 1940, as amended (the "1940 Act"), providing for the payment
of distribution and service fees to the distributor of the Existing Fund.
Class C Shares of the Existing Fund pay a maximum distribution and service
fee of 1.00% of average daily net assets. Of this amount, 0.75% represents
distribution 12b-1 fees payable under the Existing Fund's Class C Rule 12b-1
Plan and 0.25% represents shareholder servicing fees.
(5) Under a distribution and shareholder servicing plan adopted in accordance
with Rule 12b-1 under the 1940 Act, Class C Shares of the Successor Fund may
pay the distributor of the Successor Fund a fee at an annual rate of up to
1.00% of the average daily net assets of Class C Shares of the Successor
Fund. Up to 0.75% of this fee is for distribution services and up to 0.25%
of this fee is for shareholder account services.
7
EXAMPLE
To illustrate the effect of operating expenses, assume that each fund's
annual return is 5% and that it had total operating expenses described in the
table above. For every $10,000 invested in each fund, the following amounts of
total expenses would have been paid if an investor closed his or her account at
the end of each of the following time periods:
<Table>
<Caption>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- ------ ------- ------- --------
Vontobel U.S. Value Fund Class A Shares(1)......... $742 $1,091 $1,464 $2,509
Janus Adviser -- U.S. Value Fund Investor Shares... $184 $ 569 $ 980 $2,127
Janus Adviser -- U.S. Value Fund Class A
Shares(1)........................................ $739 $1,083 $1,450 $2,478
Vontobel U.S. Value Fund Class C Shares............ $477 $ 850 $1,450 $3,070
Janus Adviser -- U.S. Value Fund Class C
Shares(2)(3)..................................... $447 $ 859 $1,397 $2,868
</Table>
- ---------------
(1) With respect to Vontobel U.S. Value Fund Class A Shares and Janus Adviser --
U.S. Value Fund Class A Shares, the above example assumes the payment of the
maximum initial sales charge of 5.75% at the time of purchase. The sales
charge varies depending upon the amount of fund shares that an investor
purchases. Accordingly, your actual expenses may vary.
(2) Assumes the payment of the maximum initial sales charge of 1.00% at the time
of purchase. The sales charge may be waived for certain investors, which
would reduce the expenses for those investors.
(3) A contingent deferred sales charge of 1.00% applies on Class C Shares of the
Existing Fund redeemed within 18 months of purchase.
The purpose of these tables is to assist an investor in understanding the
various types of costs and expenses that an investor in the combined fund will
bear, whether directly or indirectly. The assumption in this example of a 5%
annual return is required by regulations of the SEC applicable to all mutual
funds. THE INFORMATION IN THE PREVIOUS TABLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR
RETURNS MAY BE GREATER OR LESS THAN THOSE SHOWN AND MAY CHANGE.
VONTOBEL INTERNATIONAL EQUITY FUND AND JANUS ADVISER -- INTERNATIONAL EQUITY
FUND
<Table>
<Caption>
TOTAL ANNUAL
TOTAL ANNUAL FUND
DISTRIBUTION FUND OPERATING OPERATING
MANAGEMENT (12B-1) OTHER EXPENSES TOTAL EXPENSES
FUND FEE FEES(1) EXPENSES WITHOUT WAIVERS WAIVERS WITH WAIVERS
- ---- ---------- ------------ -------- --------------- ------- ------------
Vontobel International Equity Fund
Class A Shares................... 1.00% None 1.44% 2.44% [ ] [ ]%
Janus Adviser -- International
Equity Fund Investor Shares...... 0.99% 0.25% 1.26%(2) 2.50% 1.15% 1.35%
Janus Adviser -- International
Equity Fund Class A Shares....... 0.99% 0.25% 1.16%(2) 2.40% 1.15% 1.25%
Vontobel International Equity Fund
Class C Shares(3)................ 1.00% 1.00%(4) 1.44% 3.44% [ ] [ ]%
Janus Adviser -- International
Equity Fund Class C Shares....... 0.99% 1.00%(5) 1.16%(2) 3.15% 1.15 2.00%
</Table>
- ---------------
(1) Because the 12b-1 fee is charged as an ongoing fee, long-term shareholders
may pay more than the economic equivalent of the maximum front-end sales
charges permitted by the National Association of Securities Dealers, Inc.
(2) Janus has contractually agreed to waive each Successor Fund's total
operating expenses (excluding brokerage commissions, interest, taxes and
extraordinary expenses) to the levels indicated until at least [ ].
Expense information has been restated to reflect estimated fees.
8
(3) Class C Shares of the Existing Fund have not been outstanding for a full
fiscal year; therefore annual expenses are estimated.
(4) The Existing Fund has approved separate Plans of Distribution for the
Existing Fund's Class C Shares pursuant to Rule 12b-1 of the 1940 Act,
providing for the payment of distribution and service fees to the
distributor of the Existing Fund. Class C Shares of the Existing Fund pay a
maximum distribution and service fee of 1.00% of average daily net assets.
Of this amount, 0.75% represents distribution 12b-1 fees payable under the
Existing Fund's Class C Rule 12b-1 Plan and 0.25% represents shareholder
servicing fees.
(5) Under a distribution and shareholder servicing plan adopted in accordance
with Rule 12b-1 under the 1940 Act, Class C Shares of the Successor Fund may
pay the distributor of the Successor Fund a fee at an annual rate of up to
1.00% of the average daily net assets of Class C Shares of the Successor
Fund. Up to 0.75% of this fee is for distribution services and up to 0.25%
of this fee is for shareholder account services.
EXAMPLE
To illustrate the effect of operating expenses, assume that each fund's
annual return is 5% and that it had total operating expenses described in the
table above. For every $10,000 invested in each fund, the following amounts of
total expenses would have been paid if an investor closed his or her account at
the end of each of the following time periods:
<Table>
<Caption>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- ------ ------- ------- --------
Vontobel International Equity Fund Class A
Shares(1)........................................ $808 $1,292 $1,801 $3,192
Janus Adviser -- International Equity Fund Investor
Shares........................................... $253 $ 779 $1,331 $2,836
Janus Adviser -- International Equity Fund Class A
Shares(1)........................................ $804 $1,280 $1,782 $3,154
Vontobel International Equity Fund Class C
Shares........................................... $547 $1,056 $1,788 $3,721
Janus Adviser -- International Equity Fund Class C
Shares(2)(3)..................................... $515 $1,062 $1,733 $3,523
</Table>
- ---------------
(1) With respect to Vontobel International Equity Fund Class A Shares and Janus
Adviser -- International Equity Fund Class A Shares, the above example
assumes the payment of the maximum initial sales charge of 5.75% at the time
of purchase. The sales charge varies depending upon the amount of fund
shares that an investor purchases. Accordingly, your actual expenses may
vary.
(2) Assumes the payment of the maximum initial sales charge of 1.00% at the time
of purchase. The sales charge may be waived for certain investors, which
would reduce the expenses for those investors.
(3) A contingent deferred sales charge of 1.00% applies on Class C Shares of the
Existing Fund redeemed within 18 months of purchase.
The purpose of these tables is to assist an investor in understanding the
various types of costs and expenses that an investor in the combined fund will
bear, whether directly or indirectly. The assumption in this example of a 5%
annual return is required by regulations of the SEC applicable to all mutual
funds. THE INFORMATION IN THE PREVIOUS TABLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR
RETURNS MAY BE GREATER OR LESS THAN THOSE SHOWN AND MAY CHANGE.
9
DISTRIBUTION AND PURCHASE PROCEDURES, EXCHANGE RIGHTS AND REDEMPTION PROCEDURES
The following charts highlight the purchase, redemption and exchange
features of each Existing Fund as compared to such features that will apply to
Shares of the corresponding Successor Fund:
VONTOBEL U.S. VALUE FUND AND JANUS ADVISER -- U.S. VALUE FUND
<Table>
<Caption>
PURCHASE, REDEMPTION AND
EXCHANGE FEATURES(1) VONTOBEL U.S. VALUE FUND JANUS ADVISER -- U.S. VALUE FUND
- ------------------------ ------------------------ --------------------------------
Minimum initial
purchase/Additional
investments........... $2,500/$50 $2,500/$100
($500 minimum initial purchase for
UGMA/UTMA, IRAs and certain other
tax-deferred accounts)
Purchases............... By telephone, mail or wire, or through Investor Shares: by Internet,
the Automatic Investment Plan telephone, mail or wire, or through
the Automatic Monthly Investment
Program
Class A and Class C Shares: only
through institutional channels such as
retirement plans, mutual fund
"supermarkets" and other financial
intermediaries and through the
systematic purchase plan
Redemptions............. By telephone, mail or wire; Investor Shares: by Internet,
shareholders electing to redeem shares telephone, mail or wire, or through
by telephone will be charged a $10 fee the systematic redemption program;
for each such redemption request shareholders electing to redeem shares
by wire transfer will be charged $8
for each such request
Class A and Class C Shares: only
through institutional channels such as
retirement plans, brokers, bank trust
departments, financial advisers and
other financial intermediaries
Exchange privileges..... Yes, with two other Vontobel funds; Yes, each class of Shares will have
account may be charged $10 for a exchange privileges with the same
telephone exchange class of other Janus funds to the
extent such class is available;
automatic exchange programs available
</Table>
- ---------------
(1) Explanations of each of the services available through the Successor Fund
can be found in the preliminary prospectus that accompanies this
prospectus/proxy statement.
The Existing Fund calculates its net asset value per share (NAV) once each
business day at the regularly-scheduled close of normal trading on the New York
Stock Exchange (normally, 4:00 p.m. Eastern time). Similarly, the Successor Fund
will calculate its NAV at the close of regular trading on the New York Stock
Exchange.
10
VONTOBEL INTERNATIONAL EQUITY FUND AND JANUS ADVISER -- INTERNATIONAL EQUITY
FUND
<Table>
<Caption>
PURCHASE, REDEMPTION AND
EXCHANGE FEATURES(1) VONTOBEL INTERNATIONAL EQUITY FUND JANUS ADVISER -- INTERNATIONAL EQUITY FUND
- ------------------------ ---------------------------------- ------------------------------------------
Minimum initial
purchase/Additional
investments........... $2,500/$50 $2,500/$100 ($500 minimum initial purchase
for UGMA/UTMA, IRAs and certain other
tax-deferred accounts)
Purchases............... By telephone, mail or wire, or through Investor Shares: by Internet, telephone,
the Automatic Investment Plan mail or wire, or through the Automatic
Monthly Investment Program
Class A and Class C Shares: only through
institutional channels such as retirement
plans, mutual fund "supermarkets" and
other financial intermediaries and through
the systematic purchase plan
Redemptions............. By telephone, mail or wire; Investor Shares: by Internet, telephone,
shareholders electing to redeem shares mail or wire, or through the systematic
by telephone will be charged a $10 fee redemption program; shareholders electing
for each such redemption request to redeem shares by wire transfer will be
charged $8 for each such request
Class A and Class C Shares: only through
institutional channels such as retirement
plans, brokers, bank trust departments,
financial advisers and other financial
intermediaries
Exchange privileges..... Yes, with two other Vontobel funds; Yes, each class of Shares will have
account may be charged $10 for a exchange privileges with the same class of
telephone exchange other Janus funds to the extent such class
is available; automatic exchange programs
available
</Table>
- ---------------
(1) Explanations of each of the services available through the Successor Fund
can be found in the preliminary prospectus that accompanies this
prospectus/proxy statement.
The Existing Fund calculates its net asset value per share (NAV) once each
business day at the regularly-scheduled close of normal trading on the New York
Stock Exchange (normally, 4:00 p.m. Eastern time). Similarly, the Successor Fund
will calculate its NAV at the close of regular trading on the New York Stock
Exchange.
11
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS FOR THE SUCCESSOR FUNDS
INVESTOR SHARES
Under distribution and shareholder servicing plans adopted in accordance
with Rule 12b-1 under the 1940 Act for Investor Shares of each Successor Fund
(the "Investor Shares Plan"), Investor Shares of each Successor Fund may pay
Janus Distributors LLC ("Janus Distributors"), the Successor Funds' distributor,
a fee at an annual rate of up to 0.25% of the average daily net assets of
Investor Shares of a Successor Fund. Under the terms of the Investor Shares
Plan, each Successor Fund is authorized to make payments to Janus Distributors
for remittance to retirement plan service providers, brokers, bank trust
departments, financial advisers and other financial intermediaries, as
compensation for distribution services performed by such entities for investors
in Investor Shares of the Successor Fund. Because 12b-1 fees are paid out of the
Successor Funds' assets on an ongoing basis, they will increase the cost of your
investment and may cost you more than paying other types of sales charges.
CLASS A SHARES
Under distribution and shareholder servicing plans adopted in accordance
with Rule 12b-1 under the 1940 Act for Class A Shares (the "Class A Plan"),
Class A Shares of each Successor Fund may pay Janus Distributors a fee at an
annual rate of up to 0.25% of the average daily net assets of Class A Shares of
a Fund. Under the terms of the Class A Plan, each Successor Fund is authorized
to make payments to Janus Distributors for remittance to retirement plan service
providers, brokers, bank trust departments, financial advisers and other
financial intermediaries, as compensation for distribution services performed by
such entities for investors in Class A Shares of the Successor Fund. Because
12b-1 fees are paid out of the Successor Funds' assets on an ongoing basis, they
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
CLASS C SHARES
Under a distribution and shareholder servicing plan adopted in accordance
with Rule 12b-1 under the 1940 Act (the "Class C Plan"), Class C Shares of each
Successor Fund may pay Janus Distributors a fee at an annual rate of up to 1.00%
of the average daily net assets of Class C Shares of the Successor Fund. Up to
0.75% of this fee is for distribution services and up to 0.25% of this fee is
for shareholder account services. All or a portion of such fees may be remitted
to financial intermediaries who assist in the distribution of Class C Shares of
a Successor Fund or who provide shareholder account services to existing Class C
shareholders in the Successor Fund. Financial intermediaries may from time to
time be required to meet certain criteria in order to receive 12b-1 fees. Janus
Distributors is entitled to retain some or all fees payable under the Class C
Plan in certain circumstances, including when there is no broker of record or
when certain qualification standards have not been met by the broker of record.
Janus Distributors is entitled to retain all fees paid under the Class C Plan
for the first 12 months on any investment in Class C Shares to recoup its
expenses with respect to the payment of commissions on sales of Class C Shares.
Financial intermediaries will become eligible for compensation under the Class C
Plan beginning in the 13th month following the purchase of Class C Shares,
although Janus Distributors may, pursuant to a written agreement between Janus
Distributors and a particular financial intermediary, pay such financial
intermediary 12b-1 fees prior to the 13th month following the purchase of Class
C Shares. Because 12b-1 fees are paid out of the Successor Funds' assets on an
ongoing basis, they will increase the cost of your investment and may cost you
more than paying other types of sales charges.
DISTRIBUTION OF THE SUCCESSOR FUNDS
The Successor Funds are distributed by Janus Distributors, a member of the
National Association of Securities Dealers, Inc. ("NASD"). To obtain information
about NASD member firms and their associated persons, you may contact NASD
Regulation, Inc. at www.nasdr.com, or the Public Disclosure Hotline at
800-289-9999. An investor brochure containing information describing the Public
Disclosure Program is available from NASD Regulation, Inc.
12
PRINCIPAL RISK FACTORS
VONTOBEL U.S. VALUE FUND AND JANUS ADVISER -- U.S. VALUE FUND
The Successor Fund has substantially the same risk factors as the Existing
Fund. These risk factors are summarized below.
Because each fund may invest substantially all of its assets in common
stocks, the main risk is the risk that the value of the stocks it holds might
decrease in response to the activities of an individual company or in response
to general market and/or economic conditions. If this occurs, a fund's share
price may also decrease. A fund's performance may also be affected by risks
specific to certain types of investments, such as foreign securities, derivative
investments, initial public offerings (IPOs) or companies with relatively small
market capitalizations. IPOs and other investment techniques may have a
magnified performance impact on a fund with a small asset base. A fund may not
experience similar performance as its assets grow.
An investment in either fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Diversification. Diversification is a way to reduce risk by investing in a
broad range of stocks or other securities. The Successor Fund and the Existing
Fund are each classified as "non-diversified." A fund classified as
"non-diversified" has the ability to take larger positions in a smaller number
of issuers than a fund classified as "diversified." This gives the fund more
flexibility to focus its investments in the most attractive companies identified
by the portfolio manager. Because the appreciation or depreciation of a single
stock may have a greater impact on the NAV of a non-diversified fund, its share
price can be expected to fluctuate more than a comparable diversified fund. This
fluctuation, if significant, may affect the performance of the fund.
Value Investing. If the portfolio manager's perception of a company's
worth is not realized in the expected time frame, the overall performance of the
fund may suffer. In general, the portfolio manager believes this risk is
mitigated by investing in companies that are undervalued in the market in
relation to earnings, dividends and/or assets. The value of a fund's portfolio
may decrease if the portfolio manager's belief about a company's intrinsic worth
is incorrect.
Investments in Foreign Securities. Within the parameters of its specific
investment policies, each fund may invest without limit in foreign securities
either indirectly (e.g., Depositary Receipts) or directly in foreign markets.
Investments in foreign securities, including those of foreign governments, may
involve greater risks than investing in domestic securities because a fund's
performance may depend on factors other than the performance of a particular
company. These risks include currency risk, political and economic risk,
regulatory risk, foreign markets risk, transaction costs and geographic risk.
VONTOBEL INTERNATIONAL EQUITY FUND AND JANUS ADVISER -- INTERNATIONAL EQUITY
FUND
The Successor Fund has substantially the same risk factors as the Existing
Fund. These risk factors are summarized below.
Because each fund may invest substantially all of its assets in common
stocks, the main risk is the risk that the value of the stocks it holds might
decrease in response to the activities of an individual company or in response
to general market and/or economic conditions. If this occurs, a fund's share
price may also decrease. A fund's performance may also be affected by risks
specific to certain types of investments, such as foreign securities, derivative
investments, initial public offerings (IPOs) or companies with relatively small
market capitalizations. IPOs and other investment techniques may have a
magnified performance impact on a fund with a small asset base. A fund may not
experience similar performance as its assets grow.
An investment in either fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Investments in Foreign Securities. Within the parameters of its specific
investment policies, each fund may invest without limit in foreign securities
either indirectly (e.g., Depositary Receipts) or directly in foreign markets.
Investments in foreign securities, including those of foreign governments, may
involve greater risks
13
than investing in domestic securities because a fund's performance may depend on
factors other than the performance of a particular company. These factors
include:
- Currency Risk. As long as a fund holds a foreign security, its value
will be affected by the value of the local currency relative to the U.S.
dollar. When a fund sells a foreign denominated security, its value may
be worth less in U.S. dollars even if the security increases in value in
its home country. U.S. dollar denominated securities of foreign issuers
may also be affected by currency risk.
- Political and Economic Risk. Foreign investments may be subject to
heightened political and economic risks, particularly in emerging markets
which may have relatively unstable governments, immature economic
structures, national policies restricting investments by foreigners,
different legal systems, and economies based on only a few industries. In
some countries, there is the risk that the government may take over the
assets or operations of a company or that the government may impose taxes
or limits on the removal of a fund's assets from that country.
- Regulatory Risk. There may be less government supervision of foreign
markets. As a result, foreign issuers may not be subject to the uniform
accounting, auditing and financial reporting standards and practices
applicable to domestic issuers and there may be less publicly available
information about foreign issuers.
- Market Risk. Foreign securities markets, particularly those of emerging
market countries, may be less liquid and more volatile than domestic
markets. Certain markets may require payment for securities before
delivery and delays may be encountered in settling securities
transactions. In some foreign markets, there may not be protection
against failure by other parties to complete transactions.
- Transaction Costs. Costs of buying, selling and holding foreign
securities, including brokerage, tax and custody costs, may be higher
than those involved in domestic transactions.
- Geographic Risk. Investments in a selected region (such as Western
Europe), even though representing a number of different countries within
the region, may be affected by common economic forces and other factors.
A fund with a large portion of its assets invested in a single region is
subject to greater risks of adverse events that occur in the region and
may experience greater volatility than a fund that is more broadly
diversified geographically. Political or economic disruptions, even in
countries in which a fund is not invested, may adversely affect security
values and thus a fund's NAV.
14
THE REORGANIZATION
THE PLAN
Stockholders of each Existing Fund are being asked to approve the Plan with
respect to their fund. The terms and conditions under which the Reorganization
for each Existing Fund will be implemented are set forth in the Plan.
Significant provisions of the Plan are summarized below; however, this summary
is qualified in its entirety by reference to the Plan, which is attached as
Appendix A to this Prospectus/Proxy Statement.
The Plan contemplates (i) each Successor Fund's acquiring substantially all
of the assets of the corresponding Existing Fund in exchange solely for shares
of the Successor Fund and the assumption by each Successor Fund of all of the
corresponding Existing Fund's known liabilities, if any, as of the closing date,
and (ii) the distribution on the closing date of those shares to the
shareholders of the Existing Fund. Existing Vontobel Class A shareholders who
purchased their shares without a sales charge will receive Investor Shares of
the corresponding Successor Fund, existing Vontobel Class A shareholders who
purchased their shares with a sales charge will receive Class A Shares of the
corresponding Successor Fund, and existing Vontobel Class C shareholders will
receive Class C Shares of the corresponding Successor Fund.
The value of each Existing Fund's assets to be acquired and the amount of
its liabilities to be assumed by the corresponding Successor Fund and the net
asset value of a share of each Existing Fund will be determined as of the close
of regular trading on the NYSE on the closing date, after the declaration of any
dividends on the closing date, and will be determined in accordance with the
valuation procedures described in the Trust's Trust Instrument and its
Prospectus and Statement of Additional Information. The Plan provides that Janus
will bear all costs and expenses of the Reorganization, including the costs and
expenses incurred in the preparation and mailing of this Prospectus/Proxy
Statement. The closing date is expected to be on or about September , 2003.
As soon as practicable after the closing date, each Existing Fund will
distribute pro rata to its shareholders of record the Investor Shares, Class A
Shares and Class C Shares of the corresponding Successor Fund it receives in the
Reorganization, so that each Class A and Class C shareholder of an Existing Fund
will receive a number of full and fractional Investor Shares, Class A Shares or
Class C Shares, as applicable, of the corresponding Successor Fund equal in
value to his or her holdings in the Existing Fund. Each Existing Fund will be
dissolved soon thereafter. Such distribution will be accomplished by opening
accounts on the books of each Successor Fund in the names of the corresponding
Existing Fund shareholders and by transferring thereto the Investor Shares,
Class A Shares and Class C Shares, as applicable, of the Successor Fund
previously credited to the account of the corresponding Existing Fund on those
books. Each shareholder account shall be credited with the pro rata number of
the corresponding Successor Fund's Investor Shares, Class A Shares or Class C
Shares, as applicable, due to that shareholder. Accordingly, immediately after
the Reorganization, each former shareholder of an Existing Fund will own
Investor Shares, Class A Shares or Class C Shares, as applicable, of the
corresponding Successor Fund that will be equal to the value of that
shareholder's shares of the Existing Fund immediately prior to the
Reorganization. Any special options (for example, automatic investment plans on
current Existing Fund shareholder accounts) will automatically transfer to the
new accounts.
The implementation of the Reorganization is subject to a number of
conditions set forth in the Plan. For instance, the Plan may be terminated and
the Reorganization abandoned at any time prior to the closing date by Vontobel
Funds' Board of Directors and the Trust's Board of Trustees if either determines
that the Reorganization would disadvantage their respective funds.
REASONS FOR THE REORGANIZATION
At meetings of the Board of Trustees of the Trust, held on May 9, 2003, and
the Board of Directors of Vontobel Funds, held on , 2003, the Boards
have [unanimously] determined that the Reorganization is in the best interests
of the shareholders of their respective funds, and that the interests of
shareholders of their respective funds will not be diluted as a result of the
Reorganization.
15
At a meeting held on , 2003, the directors of Vontobel Funds
concluded that the proposed Reorganization will be advantageous to the
shareholders of the Existing Funds for several reasons. The directors considered
the following matters, among others, in approving the Plan.
First, shareholders of each Existing Fund would enjoy continuity of
portfolio management. Because Janus will retain Vontobel to act as subadviser to
the Successor Funds, the portfolio manager of each Existing Fund will not change
as a result of the Reorganization. Janus will oversee Vontobel as subadviser to
the Successor Funds in accordance with the terms of a subadvisory agreement.
Second, while Vontobel will manage the assets of each Successor Fund on a
day-to-day basis as its subadviser, Janus will be responsible for the overall
management of each Successor Fund's operations, including supervision of
compliance with the investment guidelines and regulatory restrictions. Your fund
will benefit from Janus' experience and resources in managing and distributing
mutual funds. As of June 30, 2003, Janus managed 61 mutual funds with
approximately $150 billion in assets.
Third, Janus and its affiliates have greater potential for increasing the
size of the funds due to Janus' experience in distribution of mutual funds
through a broader range of distribution channels than currently available to the
Existing Funds. Over the long-term, if this potential for a larger asset base is
realized, it will reduce each Successor Fund's per share operating expenses and
increase the portfolio management options available to the Successor Funds.
[Fourth, although the Investor Shares and Class A Shares of the applicable
Successor Fund that you may receive in the Reorganization will be subject to a
Rule 12b-1 fee calculated at an annual rate of 0.25% of average net assets, the
effect of contractual expense waivers undertaken by the investment adviser will
reduce the effect of these fees by reducing the Fund's overall operating
expenses.] Moreover, there is a possibility that due to asset growth and
resulting economies of scale or other efficiencies the overall expenses of each
Successor Fund could be lower than those of the corresponding Existing Fund.
Fifth, the Successor Funds are part of a diverse family of mutual funds,
and each class of Shares of the Successor Funds will have exchange privileges
with other Janus funds.
The board of directors of each Existing Fund and the board of trustees of
each Successor Fund also considered that each fund's investment adviser will
benefit from the Reorganization. Because each Successor Fund will be the
accounting successor to the corresponding Existing Fund and will assume such
Existing Fund's performance record, Janus expects to be able to increase each
Successor Fund's assets at a faster rate than would otherwise be possible if it
began offering a fund with similar objectives and no historical performance
record. Such an increase in size benefits Janus by increasing its management
fees and accelerating the point at which management of the fund is profitable to
Janus. As subadviser to the Successor Funds, Vontobel would similarly benefit
from increased assets.
FEDERAL INCOME TAX CONSEQUENCES
As a condition to the Reorganization, the Trust will receive a legal
opinion from Goodwin Procter LLP, to the effect that, subject to customary
assumptions and representations, on the basis of the existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations
promulgated thereunder and current administrative and judicial interpretations
thereof, for federal income tax purposes:
- the transfer of all or substantially all of the assets of each Existing
Fund solely in exchange for shares of the corresponding Successor Fund
and the assumption by each Successor Fund of all known liabilities of the
corresponding Existing Fund, and the distribution of such shares to the
shareholders of the Existing Funds, will constitute a "reorganization"
within the meaning of Section 368(a) of the Code; the Successor Funds and
the Existing Funds will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
- no gain or loss will be recognized by either Existing Fund on the
transfer of the assets of each Existing Fund to the corresponding
Successor Fund in exchange for the Successor Fund shares and the
assumption by the applicable Successor Fund of all known liabilities of
the Existing Fund or upon the
16
distribution of the Successor Fund shares to the applicable Existing Fund
shareholders in exchange for their shares of the Existing Fund;
- the tax basis of the Existing Fund's assets acquired by the applicable
Successor Fund will be the same to the Successor Fund as the tax basis of
such assets to the Existing Fund immediately prior to the Reorganization,
and the holding period of the assets of the Existing Fund in the hands of
the applicable Successor Fund will include the period during which those
assets were held by the Existing Fund;
- no gain or loss will be recognized by each Successor Fund upon the
receipt of the assets of the corresponding Existing Fund solely in
exchange for the Successor Fund shares and the assumption by each
Successor Fund of all known liabilities of the corresponding Existing
Fund;
- no gain or loss will be recognized by shareholders of each Existing Fund
upon the receipt of the corresponding Successor Fund shares by such
shareholders, provided such shareholders receive solely the Successor
Fund shares (including fractional shares) in exchange for their Existing
Fund shares; and
- the aggregate tax basis of the Successor Fund shares, including any
fractional shares, received by each shareholder of the applicable
Existing Fund pursuant to the Reorganization will be the same as the
aggregate tax basis of the Existing Fund shares held by such shareholder
immediately prior to the Reorganization, and the holding period of the
Successor Fund shares, including fractional shares, to be received by
each shareholder of the applicable Existing Fund will include the period
during which the Existing Fund shares exchanged therefor were held by
such shareholder (provided that the Existing Fund shares were held as a
capital asset on the date of the Reorganization).
The receipt of such an opinion is a condition to the consummation of the
Reorganization. The Trust has not obtained an Internal Revenue Service ("IRS")
private letter ruling regarding the federal income tax consequences of the
Reorganization, and the IRS is not bound by advice of counsel. If the transfer
of the assets of each Existing Fund in exchange for the corresponding Successor
Fund shares and the assumption by each Successor Fund of all known liabilities
of the corresponding Existing Fund do not constitute a tax-free reorganization,
each Existing Fund shareholder generally will recognize gain or loss equal to
the difference between the value of the corresponding Successor Fund shares such
shareholder acquires and the tax basis of such shareholder's Existing Fund
shares.
Shareholders of the Existing Funds should consult their tax advisers
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion relates only to the
federal income tax consequences of the Reorganization, shareholders of the
Existing Funds should also consult tax advisers as to state and local tax
consequences, if any, of the Reorganization.
COMPARATIVE INFORMATION ABOUT THE EXISTING AND SUCCESSOR FUNDS
This portion of the Proxy Statement/Prospectus is designed to allow you to
compare various features of the Successor Funds with those of the Existing
Funds. Shareholders should read this entire Proxy Statement/ Prospectus
carefully.
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS
FORM OF ORGANIZATION
Each Existing Fund is a series of Vontobel Funds, a Maryland corporation
formed on October 28, 1983 pursuant to Articles of Incorporation dated October
26, 1983, as amended. Each Successor Fund is a series of the Trust, an
unincorporated voluntary association organized under the laws of the State of
Delaware as a statutory trust, pursuant to an Amended and Restated Trust
Instrument dated May 9, 2003 (the "Trust Instrument"). The operations of the
Existing Funds are governed by Vontobel Funds' Articles of Incorporation and
Bylaws and by Maryland law. The operations of the Successor Funds are governed
by the Trust's Trust Instrument and Bylaws and by Delaware law. The Existing
Funds and the Successor Funds are
17
registered with the SEC as open-end management investment companies and are
subject to the provisions of the 1940 Act and the rules and regulations of the
SEC thereunder.
SHARES
The Trust is authorized to issue shares of beneficial interest in separate
portfolios (series). The Trust Instrument of the Trust authorizes the Trustees
to create an unlimited number of series in the Trust. The Trust currently has
two series outstanding, and the Trust may organize other series in the future.
Within each series, the Trustees may create an unlimited number of classes,
each with an unlimited number of full and fractional shares. The Successor Funds
intend to offer Investor Shares, Class I, Class A and Class C shares, each with
a different arrangement for shareholder services and/or the distribution of
shares.
Each share of a given class and series represents an equal proportionate
interest in a Successor Fund and is entitled to such dividends and distributions
out of the net income and capital gains belonging to such Successor Fund when
declared by the Trustees. In the event a Successor Fund were to be liquidated in
the future, shareholders would be entitled to share pro rata in the net assets
belonging to such Successor Fund available for distribution. Each share of a
given class and series has identical voting, dividend, redemption, liquidation,
and other rights. When issued, each share is fully paid and nonassessable by the
Trust, has no preemptive or subscription rights, and is fully transferable.
There are no conversion rights.
Vontobel Funds is also authorized to issue shares of common stock in
separate series. The Articles of Incorporation of Vontobel Funds authorizes the
Directors to create an unlimited number of series. In addition to the Existing
Funds, Vontobel Funds currently has one other series outstanding, the Vontobel
Eastern European Equity Fund. This other series is not participating in the
Reorganization. Within each series, the Directors may create an unlimited number
of classes. Although the Directors have authorized three classes of shares,
Class A, Class B and Class C, only Class A and Class C Shares are currently
outstanding. Shares of the Existing Fund are also fully paid and non-assessable,
have no preference, preemptive or similar rights unless designated by their
governing boards, and are freely transferable.
The assets and proceeds received by the Trust or Vontobel Funds from the
issue or sale of shares of a series or class are allocated to that series and
class and constitute the rights of that series or class, subject only to the
rights of creditors. Any underlying assets of a series or class are required to
be segregated on the books and accounts of the Trust or Vontobel Funds. These
assets are to be used to pay the expenses of the series or class as well as a
share of the general expenses.
MEETINGS
Neither the Existing Funds nor the Successor Funds hold regular or annual
shareholder meetings. The Directors of the Existing Funds may call shareholder
meetings as necessary. The Trustees of the Successor Funds may also call
shareholder meetings as necessary. Special meetings of shareholders of the
Existing Funds shall be called upon the written request of holders of at least
25 percent of the outstanding shares entitled to vote. Under the Trust
Instrument, special meetings of shareholders of the Trust or of any Successor
Fund shall be called subject to certain conditions, upon the written request of
shareholders owning shares representing at least two-thirds of the votes
entitled to be cast at such meeting. To the extent required by the 1940 Act,
meetings held for the purpose of voting on the removal of any Director of the
Existing Funds or any Trustee of the Successor Funds shall be called by
Directors or Trustees, as applicable, upon written request by shareholders
holding at least ten percent of the outstanding shares entitled to vote. A
majority of the issued and outstanding shares of the Existing Funds entitled to
vote and represented in person or by proxy constitutes a quorum at a shareholder
meeting. One-third of the shares of the Successor Fund entitled to vote
constitutes a quorum at a shareholder meeting.
18
SHAREHOLDER LIABILITY
Under Maryland law, shareholders have no personal liability for acts or
obligations of the corporation. Similarly, Delaware law provides that the
shareholders and trustees of a Delaware statutory trust are not liable for
obligations of the trust.
LIABILITY OF DIRECTORS AND TRUSTEES
The Vontobel Funds' Articles provide that Directors will generally be
personally liable only for willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties as Directors and that Vontobel Funds shall
also indemnify its Directors and officers to the full extent permitted by
Maryland law and the 1940 Act. Similarly, the Trust Instrument of the Trust
provides that Trustees will generally be personally liable only for willful
misfeasance, bad faith, gross negligence or reckless disregard of duties. The
Trust may purchase insurance for Trustees to cover potential liabilities and
will generally indemnify a trustee against such claims upon satisfaction of
certain procedural requirements. The Trust may also advance payments to a
Trustee in connection with indemnification.
VOTING REQUIREMENTS
Under Maryland law and the Vontobel Funds' Articles and Bylaws, shareholder
voting power is generally limited to electing directors, approving investment
management or sub-investment management agreements, ratifying the selection of
independent public accountants, approving plans of distribution adopted pursuant
to Rule 12b-1, approving amendments to Vontobel Funds' Articles and authorizing
extraordinary corporate action, such as a merger, consolidation, or sale of
substantially all of the corporation's assets. Shareholders are entitled to one
vote for each full share of capital stock and a fractional vote for each
fractional share of capital stock. The Vontobel Funds' Articles provide that
capital stock of Vontobel Funds that is issued, outstanding and entitled to vote
shall be voted in the aggregate, and not by series or class, except when
otherwise required by law or if the Vontobel Funds Board of Directors has
determined that only one or more particular series or classes are affected by
the matter under consideration, in which case only the affected series or
classes vote. Maryland law provides that a corporation's charter may require a
lesser proportion of votes of shareholders on matters than otherwise required by
Maryland law, but not less than a majority. Under Vontobel Funds' Articles and
Bylaws, any corporate action to be taken by a shareholder vote may be authorized
by a majority of votes cast on the matter (although a plurality may elect a
Director), subject to applicable laws, regulations, or rules or orders of the
SEC.
Under the Trust Instrument, each shareholder of a Successor Fund is
entitled to one vote for each whole or fractional dollar of net asset value
(determined as of the applicable record date) of each share owned by the
shareholder (the number of shares owned times net asset value per share) on any
matter on which such shareholder is entitled to vote. Shareholder voting power
is generally limited to electing or removing Trustees, approving investment
management or sub-investment management agreements, and with respect to such
matters as are required by the 1940 Act. Under the Trust Instrument, the
Trustees of the Trust may generally authorize mergers, consolidations, share
exchanges and reorganizations of a series of the Trust with another series of
the Trust or another business organization without shareholder approval. All
shares of all series of the Trust or any class of such series vote together as a
single class, except when otherwise required by law or if the Trustees have
determined that only one or more particular series or classes are affected by
the matter under consideration, in which case only the affected series or
classes vote. Under the Trust's Trust Instrument and Bylaws, any action to be
taken by a shareholder vote is authorized by a majority of votes validly cast on
the matter, except a plurality is required to elect a Trustee and a vote of
shareholders holding not less than two-thirds of the shares then outstanding is
required to remove a Trustee and except as otherwise provided in the applicable
laws, regulations, or rules or orders of the SEC.
19
LIQUIDATION OR DISSOLUTION
In the event of the liquidation or dissolution of an Existing Fund, the
shareholders of such fund are entitled to receive the excess of the fund's
assets over the fund's liabilities, in proportion to the number of shares of the
fund held by them and recorded on the books of Vontobel Funds.
In the event of the liquidation or dissolution of a Successor Fund, the
Trustees shall distribute the assets of the respective Successor Fund to the
shareholders, according to their respective rights, after accounting for fund
liabilities of that Fund.
DERIVATIVE ACTIONS
Under Maryland law, shareholders of an Existing Fund may not bring a
derivative action unless they have first made a demand upon the corporation to
sue in its own name and the demand was refused. If the directors improperly
refuse to bring a derivative suit or if the demand upon the Directors is
excused, then a plaintiff generally must then make the demand upon the
corporation's other shareholders before commencing suit.
Under Delaware law and the Trust Instrument, a shareholder of a Successor
Fund may bring a derivative action on behalf of the Trust only if the following
conditions are met. In general, the shareholder must make a pre-suit demand upon
the Trustees to bring the subject action unless a majority of the Board of
Trustees, or a majority of any committee established to consider the merits of
such action, has a personal financial interest in the transaction. A Trustee
shall not be disqualified from ruling on the merits of a shareholder demand by
virtue of the fact that such Trustee receives remuneration for his service on
the Board of Trustees of the Trust or on the boards of other funds that are
affiliated with the Trust. Unless a demand upon the Trustees is not required,
shareholders who hold at least 10% of the outstanding shares of the Trust must
generally join in the demand upon the Trustees.
The foregoing is only a summary of certain characteristics of the
operations of the Articles of Incorporation of Vontobel Funds, Trust Instrument
of the Trust, their respective Bylaws and Maryland and Delaware law and is not a
complete description of those documents or law. Shareholders should refer to the
provisions of such Articles of Incorporation, Trust Instrument, Bylaws and
Maryland and Delaware law directly for more complete information.
COMPARATIVE INFORMATION ON INVESTMENT RESTRICTIONS
CERTAIN INVESTMENT RESTRICTIONS
The Existing Funds and the Successor Funds are each subject to certain
investment restrictions that restrict the scope of their investments.
Fundamental investment restrictions may not be changed without the affirmative
vote of the holders of a majority of the outstanding securities (as defined in
the 1940 Act) of the fund. However, investment restrictions that are not
fundamental may be changed by the Directors or Trustees, as the case may be,
without shareholder approval. The table below compares certain fundamental and
non-fundamental investment restrictions of the Existing Funds and the Successor
Funds. Fundamental restrictions are followed by an "(F);" non-fundamental
restrictions are followed by an "(nf)."
In general, if any percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the fund's assets will not constitute a violation of the
restriction, except with respect to the Existing Fund's restrictions on
borrowings. Each of the Successor Funds is permitted to invest substantially all
of its assets in the securities of a single open-end registered investment
company with similar investment objectives and policies without violating its
investment restrictions.
20
In applying the fundamental investment policies and restrictions Vontobel
Funds applies the following rules of construction:
<Table>
<Caption>
SUBJECT MATTER
OF RESTRICTION EXISTING FUND SUCCESSOR FUND
- -------------- ------------- --------------
INVESTMENT FOCUS........ No fundamental or non-fundamental U.S. Value Fund will invest, under
restriction normal circumstances, at least 80% of
its net assets in equity securities of
companies that are traded on U.S.
exchanges or quoted on an established
over-the-counter market.(nf)
Under normal circumstances,
International Equity Fund will invest
at least 80% of its net assets in
equity securities of issuers that are
located outside of the United States,
or which derive a significant portion
of their business or profits outside
of the United States.(nf)
BORROWING............... Vontobel International Equity Fund may A Successor Fund may not borrow money,
not borrow money except for temporary except as permitted under the 1940
or emergency purposes and then only in Act, as amended, or any regulation
an amount not in excess of 5% of the thereunder, as the same may be
lower of value or cost of its total interpreted by the SEC staff from time
assets, in which case the Fund may to time, or as permitted by an
pledge, mortgage or hypothecate any of exemptive order obtained from the
its assets as security for such SEC.(F)
borrowing but not to an extent greater
than 5% of its total assets.(F)
Vontobel U.S. Value Fund may not
borrow money, except as a temporary
measure for extraordinary or emergency
purposes, or except in connection with
reverse repurchase agreements,
provided that Vontobel U.S. Value Fund
maintains asset coverage of 300% in
connection with the issuance of senior
securities. Notwithstanding the
foregoing, to avoid the untimely
disposition of assets to meet
redemptions, Vontobel U.S. Value Fund
may borrow up to 33 1/3% of the value
of its assets to meet redemptions,
provided that Vontobel U.S. Value Fund
may not make other investments while
such borrowings are outstanding.(F)
LENDING................. An Existing Fund may not may not make A Successor Fund may not make loans,
loans, except that a Fund may (1) lend except that the Fund may (i) lend
portfolio securities; and (2) enter portfolio securities, (ii) enter into
into repurchase agreements secured by repurchase agreements, (iii) purchase
U.S. Government securities.(F) all or a portion of an issue of debt
securities, bank loan participation
(Restrictions with respect to interests, bank certificates of
repurchase agreements shall be deposit, bankers' acceptances,
construed to be for repurchase debentures or other securities,
agreements entered into for the whether or not the purchase is made
investment of available cash upon the original issuance of the
consistent with a Fund's repurchase securities and (iv) participate in an
agreement procedures, not repurchase interfund lending program with other
commitments entered into for general registered investment companies.(F)
investment purposes.)
</Table>
21
<Table>
<Caption>
SUBJECT MATTER
OF RESTRICTION EXISTING FUND SUCCESSOR FUND
- -------------- ------------- --------------
ILLIQUID SECURITIES/
RESTRICTED............ An Existing Fund may not invest more The Successor Funds do not currently
than 15% of its net assets in illiquid intend to purchase any security or
securities.(nf) enter into a repurchase agreement if,
as a result, more than 15% of their
respective net assets would be
invested in repurchase agreements not
entitling the holder to payment of
principal and interest within seven
days and in securities that are
illiquid by virtue of legal or
contractual restrictions on resale or
the absence of a readily available
market. The Trustees, or the Successor
Funds' investment adviser acting
pursuant to authority delegated by the
Trustees, may determine that a readily
available market exists for securities
eligible for resale pursuant to Rule
144A under the Securities Act of 1933,
or any successor to such rule, Section
4(2) commercial paper and municipal
lease obligations. Accordingly, such
securities may not be subject to the
foregoing limitation.(nf)
PURCHASES OF MARGIN
SECURITIES AND SHORT
SALES................. An Existing Fund may not engage in A Successor Fund may sell securities
short sales.(F) short if it owns or has the right to
obtain securities equivalent in kind
and amount to the securities sold
short without the payment of any
additional consideration therefor
("short sales against the box"). In
addition, the Fund may engage in
"naked" short sales, which involve
selling a security that the Fund
borrows and does not own. The total
market value of all of the Fund's
naked short sale positions will not
exceed 8% of its assets. Transactions
in futures, options, swaps and forward
contracts are not deemed to constitute
selling securities short.(nf)
OTHER INVESTMENT
COMPANIES............. An Existing Fund may not invest in No fundamental or non-fundamental
securities of other investment restriction
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.(F)
</Table>
22
<Table>
<Caption>
SUBJECT MATTER
OF RESTRICTION EXISTING FUND SUCCESSOR FUND
- -------------- ------------- --------------
DIVERSIFICATION......... Vontobel International Equity Fund may With respect to 75% of its total
not purchase stock or securities of an assets, Janus Adviser -- International
issuer (other than the obligations of Equity Fund may not purchase
the United States or any agency or securities of an issuer (other than
instrumentality thereof) if such the U.S. government, its agencies,
purchase would cause the Fund to own instrumentalities or authorities or
more than 10% of any class of the repurchase agreements collateralized
outstanding voting securities of such by U.S. government securities, and
issuer.(F) other investment companies) if: (a)
such purchase would, at the time,
Vontobel International Equity Fund may cause more than 5% of the Fund's total
not as to 75% of its assets, purchase assets taken at market value to be
the securities of any issuer (other invested in the securities of such
than obligations issued or guaranteed issuer; or (b) such purchase would, at
as to principal and interest by the the time, result in more than 10% of
Government of the United States or any the outstanding voting securities of
agency or instrumentality thereof) if, such issuer being held by the Fund.(F)
as a result of such purchase, more
than 5% of its total assets would be Janus Adviser -- U.S. Value Fund is
invested in the securities of such classified as "non-diversified" within
issuer.(F) the meaning of the 1940 Act and has no
fundamental investment restriction
Vontobel U.S. Value Fund is classified regarding diversification.
as "non-diversified" within the
meaning of the 1940 Act and has no
fundamental investment restriction
regarding diversification.
INDUSTRY CONCENTRATION.. An Existing Fund may not invest more A Successor Fund may not purchase a
than 25% of a Fund's total assets in security if, after giving effect to
securities of one or more issuers the purchase, more than 25% of its
having their principal business total assets would be invested in the
activities in the same industry. For securities of one or more issuers
the purpose of this restriction, conducting their principal business
telephone companies are considered to activities in the same industry (other
be in a separate industry from gas and than U.S. Government securities).(F)
electric public utilities, and wholly
owned finance companies are considered
to be in the industry of their parents
if their activities are primarily
related to financing the activities of
their parents.(F)
COMMODITIES; OIL, GAS &
MINERALS.............. An Existing Fund may not buy or sell A Successor Fund may not purchase or
commodities or commodity contracts, sell commodities or commodity
provided that Vontobel International contracts, except the Fund may
Fund may utilize not more than 1.00% purchase and sell derivatives
of its assets for deposits or (including but not limited to options,
commissions required to enter into and futures contracts and options on
forward foreign currency contracts for futures contracts) whose value is tied
hedging purposes.(F) to the value of a financial index or a
financial instrument or other asset
An Existing Fund may not invest in (including, but not limited to,
interests in oil, gas, or other securities indexes, interest rates,
mineral explorations or development securities, currencies and physical
programs.(F) commodities).(F)
SENIOR SECURITIES....... An Existing Fund may not issue senior A Successor Fund may not issue "senior
securities.(F) securities," except as permitted under
the 1940 Act, as amended, or any
regulation thereunder, as the same may
be interpreted by the SEC staff from
time to time, or as permitted by an
exemptive order obtained from the
SEC.(F)
</Table>
23
<Table>
<Caption>
SUBJECT MATTER
OF RESTRICTION EXISTING FUND SUCCESSOR FUND
- -------------- ------------- --------------
REAL ESTATE............. An Existing Fund may not purchase or A Successor Fund may not purchase or
sell real estate (except that a Fund sell real estate, except that the Fund
may invest in: (i) securities of may (i) invest in securities of
companies which deal in real estate or issuers that invest in real estate or
mortgages; and (ii) securities secured interests therein, (ii) invest in
by real estate or interests therein, mortgage-related securities and other
and that a Fund reserves freedom of securities that are secured by real
action to hold and to sell real estate estate or interests therein, and (iii)
acquired as a result of the Fund's hold and sell real estate acquired by
ownership of securities).(F) the Fund as a result of the ownership
of securities.(F)
UNDERWRITING............ An Existing Fund may not act as an A Successor Fund may not engage in the
underwriter of securities of other business of underwriting securities
issuers, except that Vontobel issued by others, except to the extent
International Fund may invest up to that the Fund may be considered to be
10% of the value of its total assets an underwriter within the meaning of
(at time of investment) in portfolio the Securities Act of 1933 in the
securities which the Fund might not be disposition of restricted securities
free to sell to the public without or in connection with its investments
registration of such securities under in other investment companies.(F)
the Securities Act of 1933, as
amended, or any foreign law
restricting distribution of securities
in a country of a foreign issuer.(F)
EXERCISING CONTROL...... An Existing Fund may not invest in A Successor Fund may not invest in
companies for the purpose of companies for the purpose of
exercising control.(F) exercising control of management.(nf)
JOINT ACCOUNTS.......... An Existing Fund may not participate No fundamental or non-fundamental
on a joint or a joint and several restriction
basis in any securities trading
account.(F)
</Table>
CAPITALIZATION
Each Successor Fund will be the accounting successor to the corresponding
Existing Fund after consummation of the Reorganization. Accordingly, the pro
forma capitalization of the combined funds will be identical to the
capitalization of the corresponding Existing Fund, shown in the tables below as
of [December 31, 2002]. No information has been provided with respect to Class C
Shares of Vontobel International Equity because no Class C Shares were
outstanding as of December 31, 2002.
VONTOBEL U.S. VALUE FUND AND JANUS ADVISER -- U.S. VALUE FUND
<Table>
<Caption>
NET ASSET
VALUE PER SHARES
FUND NET ASSETS SHARE OUTSTANDING
- ---- ------------ --------- -----------
Vontobel U.S. Value Fund -- Class A.............. $112,302,365 $18.64 6,024,493
Pro Forma Combined -- Janus Adviser -- U.S. Value
Fund -- Class A (unaudited).................... $112,302,365 $18.64 6,024,493
Vontobel U.S. Value Fund -- Class C.............. $ 354,726 $18.60 19,068
Pro Forma Combined -- Janus Adviser -- U.S. Value
Fund -- Class C (unaudited).................... $ 354,726 $18.60 19,068
</Table>
VONTOBEL INTERNATIONAL EQUITY FUND AND JANUS ADVISER -- INTERNATIONAL EQUITY
FUND
<Table>
<Caption>
NET ASSET
VALUE PER SHARES
FUND NET ASSETS SHARE OUTSTANDING
- ---- ----------- --------- -----------
Vontobel International Equity Fund -- Class A..... $29,026,186 $11.86 2,448,114
Pro Forma Combined -- Janus
Adviser -- International Equity -- Class A
(unaudited)..................................... $29,026,186 $11.86 2,448,114
</Table>
24
Board's recommendation
For the reasons discussed above under the caption "Reasons for the
Reorganization," the Board of Directors of Vontobel Funds, including the
directors who are not "interested persons" of the Existing Funds, [unanimously]
approved the Reorganization. In particular, the directors determined that the
Reorganization is in the best interests of the Existing Funds. Similarly, the
Board of Trustees of the Trust, including the trustees who are not "interested
persons" of the Successor Funds, unanimously approved the Reorganization. The
trustees also determined that the Reorganization is in the best interests of the
Successor Funds.
THE BOARD OF VONTOBEL FUNDS RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE REORGANIZATION FOR YOUR FUND.
COMPARISON OF INVESTMENT ADVISORY ARRANGEMENTS
INVESTMENT ADVISER
Janus, 100 Fillmore Street, Denver, Colorado 80206-4928, is the investment
adviser to each of the Successor Funds. Janus has contracted with Vontobel, the
investment adviser to the Existing Funds, to act as subadviser to the Successor
Funds pursuant to a separate subadvisory agreement. Janus (together with its
predecessors) has served as investment adviser to Janus Fund since 1970 and
currently serves as investment adviser to all of the Janus funds, acts as
subadviser for a number of private-label mutual funds and provides separate
account advisory services for institutional accounts.
Janus has overall supervisory responsibility for the investment program of
each Successor Fund. Janus also furnishes certain administrative, compliance and
accounting services for the Successor Funds, and may be reimbursed by the
Successor Funds for its costs in providing those services. In addition, Janus
employees serve as officers of the Successor Funds and Janus provides office
space for the Successor Funds and pays the salaries, fees and expenses of all
Successor Fund officers and those Trustees who are interested persons of Janus.
SUBADVISER
Janus has contracted with Vontobel to act as subadviser to the Successor
Funds. Vontobel is located at 450 Park Avenue, New York, New York 10022. As
subadviser, Vontobel provides day-to-day management of the investment operations
of each Successor Fund. Vontobel has been the investment adviser to the Existing
Funds since 1990.
Vontobel is a wholly owned and controlled subsidiary of Vontobel Holding
AG, a Swiss bank holding company, having its registered offices in Zurich,
Switzerland. In addition to U.S. registered investment companies, Vontobel also
acts as the adviser to five series of a Luxembourg SICAV that accepts
investments from non-U.S. investors only and that was organized by an affiliate
of Vontobel. Vontobel has provided investment advisory services to mutual fund
clients since 1990. As of [June 30, 2003], Vontobel managed in excess of [$1.3
billion].
Edwin Walczak is a Senior Vice President of Vontobel and Portfolio Manager
of Janus Adviser -- U.S. Value Fund. Mr. Walczak joined Vontobel in 1988 as Vice
President and head of US equity research and portfolio management. Mr. Walczak
has been the President and Portfolio Manager of Vontobel U.S. Value Fund since
the fund's inception in March 1990. He received a Bachelor of Arts in Government
from Colby College, a Masters in Art in International Politics and Economics
from Columbia University and a Masters in Business Administration in Finance
from Columbia University. Mr. Walczak will continue as portfolio manager of
Janus Adviser -- U.S. Value Fund following the reorganization.
Rajiv Jain is a Senior Vice President of Vontobel and Portfolio Manager of
Janus Adviser -- International Equity Fund. Mr. Jain joined Vontobel in 1994 as
an equity analyst and Associate Manager of Vontobel's international equity
portfolios. Mr. Jain has been the President and Portfolio Manager of Vontobel
International Equity Fund since February 2002. He received a Bachelor of
Commerce (Honors) from Panjab University, India, a Master's Degree in Finance
from the University of Ajmer, India, a Post-Graduate diploma
25
in International Marketing from the Delhi School of Economics, India, and
received his Masters in Business Administration from the University of Miami.
Mr. Jain will continue as portfolio manager of Janus Adviser -- International
Equity Fund following the reorganization.
ADVISORY AGREEMENTS-EXISTING FUNDS
The following is a summary of the material terms of the Existing Funds'
investment advisory agreements with Vontobel (the "Vontobel Advisory
Agreements"). The Vontobel Advisory Agreements may be renewed annually provided
such renewal is approved annually by: (i) Vontobel Funds' Board of Directors; or
(ii) by a majority vote of the outstanding voting securities of the Vontobel
Funds and a majority of the Directors who are not "interested persons" of
Vontobel Funds. The Vontobel Advisory Agreements will automatically terminate in
the event of their "assignment," as that term is defined in the 1940 Act, and
may be terminated without penalty at any time upon 60 days' written notice to
the other party by: (i) the majority vote of all the Directors or by vote of a
majority of the outstanding voting securities of the Existing Fund; or (ii)
Vontobel.
Under the Vontobel Advisory Agreements, Vontobel provides the Existing
Funds with investment management services, subject to the supervision of
Vontobel Funds' Board of Directors, and with office space, and pays the ordinary
and necessary office and clerical expenses relating to investment research,
statistical analysis, supervision of each Existing Fund's portfolio and certain
other costs. Vontobel also bears the cost of fees, salaries and other
remuneration of Vontobel Funds' directors, officers or employees who are
officers, directors, or employees of Vontobel. The Existing Funds are
responsible for their other costs and expenses, such as, but not limited to,
brokerage fees and commissions in connection with the purchase and sale of
securities, legal, auditing, bookkeeping and record keeping services, custodian
and transfer agency fees and fees and other costs of registration of the
Existing Funds' shares for sale under various state and federal securities laws.
As compensation for its service as investment adviser for the Existing
Funds, Vontobel receives a fee. That fee is payable monthly at an annualized
rate that is equal to a percentage of the Existing Fund's average daily net
assets. The percentages are set forth below.
Under the Vontobel Advisory Agreements, the monthly compensation paid to
Vontobel is accrued daily at an annual rate of 1.00% on the first $100 million
of average daily net assets and 0.75% on average daily net assets in excess of
$100 million. The table below shows the total amount of advisory fees that each
Existing Fund paid Vontobel for the last three fiscal years.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 FEES 2001 FEES 2002 FEES
---------- ---------- ---------
Vontobel U.S. Value Fund.......................... $ 616,564 $1,167,082 $876,616
Vontobel International Equity Fund................ $1,473,957 $ 830,594 $361,230
</Table>
[An expense reimbursement agreement has been in effect since April 2003
with respect to Vontobel International Equity Fund.]
Vontobel will be entitled to reimbursement of fees waived or reimbursed by
Vontobel to the Existing Funds. The total amount of reimbursement by Vontobel
(the "Reimbursement Amount") is the sum of all fees previously waived or
reimbursed by Vontobel to the Existing Funds during any of the previous three
(3) years, less any reimbursement previously paid by the Existing Funds to
Vontobel with respect to any waivers, reductions, and payments made with respect
to the Existing Funds. 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 of Trustees. Each Existing Fund's
obligation to pay any Reimbursement Amount will be an obligation of the
corresponding Successor Fund.
ADVISORY AGREEMENTS-SUCCESSOR FUNDS
The Advisory Agreement of each Successor Fund provides that Janus will have
overall supervisory responsibility for the investment program of each Successor
Fund, provide office space for the Successor
26
Fund, and pay the salaries, fees and expenses of the Successor Fund's officers
and of those Trustees who are interested persons of Janus. Janus also may make
payments from its own resources to selected broker-dealer firms or institutions
which were instrumental in the acquisition of shareholders for the Successor
Funds or other Janus funds or which perform recordkeeping or other services with
respect to shareholder accounts. The minimum aggregate size required for
eligibility for such payments, and the factors in selecting the broker-dealer
firms and institutions to which they will be made, are determined from time to
time by Janus. Janus is also authorized to perform the management and
administrative services necessary for the operation of the Successor Funds. As
discussed below, Janus has delegated certain of these duties to Vontobel
pursuant to a subadvisory agreement between Janus and Vontobel.
From their own assets, Janus, Janus Distributors LLC or their affiliates
may pay retirement plan service providers, brokers, banks, financial advisers
and other financial intermediaries fees for providing recordkeeping,
subaccounting and other administrative services to their customers in connection
with investment in the Successor Funds. These fees may be in addition to any
distribution, administrative or shareholder servicing fees paid from the
Successor Funds' assets to these financial intermediaries.
The Successor Funds pay custodian and transfer agent fees and expenses,
brokerage commissions and dealer spreads and other expenses in connection with
the execution of portfolio transactions, legal and accounting expenses,
interest, taxes, trade or other investment company dues and expenses,
registration fees, expenses of shareholders' meetings and reports to
shareholders, fees and expenses of Successor Funds' Trustees who are not
interested persons of Janus, trade or other investment company organization dues
and expenses and other costs of complying with applicable laws regulating the
sale of the Successor Funds' shares. Pursuant to the Advisory Agreements, Janus
furnishes certain other services, including net asset value determination,
portfolio accounting, recordkeeping, and blue sky registration and monitoring
services, for which the Successor Funds may reimburse Janus for its costs.
Each Successor Fund has agreed to compensate Janus for its services by the
monthly payment of a fee at the following annual rates:
JANUS ADVISER -- U.S. VALUE FUND
<Table>
<Caption>
ANNUAL RATE
AVERAGE DAILY NET ASSETS OF FUND PERCENTAGE(%)
- -------------------------------- -------------
First $100 Million.......................................... 0.96
Increment from $100 Million to $300 Million................. 0.85
Increment over $300 Million................................. 0.75
</Table>
JANUS ADVISER -- INTERNATIONAL EQUITY FUND
<Table>
<Caption>
ANNUAL RATE
AVERAGE DAILY NET ASSETS OF FUND PERCENTAGE(%)
- -------------------------------- -------------
First $100 Million.......................................... 0.99
Increment from $100 Million to $300 Million................. 0.85
Increment over $300 Million................................. 0.75
</Table>
Until at least [ ] (or until the next annual renewal of the advisory
agreements), provided that Janus remains investment adviser to the Successor
Funds, Janus has agreed by contract to waive the advisory fee payable by each
Successor Fund in an amount equal to the amount, if any, that such Successor
Fund's normal operating expenses in any fiscal year, including the investment
advisory fee, but excluding the [administrative services fee applicable to
Investor Shares, and the distribution and shareholder servicing fee applicable
to
27
Investor Shares, Class A Shares and Class C Shares], brokerage commissions,
interest, taxes and extraordinary expenses, exceed the following annual rates:
<Table>
<Caption>
EXPENSE LIMIT
FUND NAME PERCENTAGE(%)
- --------- -------------
Janus Adviser -- U.S. Value Fund............................ [0.90%]
Janus Adviser -- International Equity Fund.................. [1.00%]
</Table>
Each Successor Fund's Advisory Agreement is dated [August 5], 2003, and
will continue in effect until [August 1], 2005, and thereafter from year to year
so long as such continuance is approved annually by a majority of the Successor
Funds' Trustees who are not parties to the Advisory Agreement or interested
persons of any such party, and by either a majority of the outstanding voting
shares of that Successor Fund or the Trustees of the Successor Funds. Each
Advisory Agreement (i) may be terminated without the payment of any penalty by
the Successor Fund or Janus on 60 days' written notice; (ii) terminates
automatically in the event of its assignment; and (iii) generally, may not be
amended without the approval by vote of a majority of the Trustees, including
the Trustees who are not interested persons of that Successor Fund or Janus and,
to the extent required by the 1940 Act, the vote of a majority of the
outstanding voting securities of that Successor Fund.
SUBADVISORY AGREEMENTS-SUCCESSOR FUNDS
Under the Subadvisory Agreements, Vontobel is obligated to: (i) make
investment decisions on behalf of the Successor Funds; (ii) place all orders for
the purchase and sale of investments for the Successor Funds with brokers or
dealers selected by Vontobel; (iii) vote all proxies for portfolio securities;
and (iv) perform certain limited related administrative functions in connection
therewith. The Subadvisory Agreements provide that Vontobel shall not be liable
for any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission taken with respect to the Successor Funds,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
thereunder and except to the extent otherwise provided by law.
The Successor Funds pay no fees directly to Vontobel as the subadviser.
Under the Subadvisory Agreements, Vontobel is compensated with respect to the
Successor Funds by Janus at the following annual rates:
JANUS ADVISER -- U.S. VALUE FUND
<Table>
<Caption>
ANNUAL RATE
AVERAGE DAILY NET ASSETS OF FUND PERCENTAGE(%)
- -------------------------------- -------------
First $100 Million.......................................... 0.74
Increment between $100 Million and $300 Million............. 0.415
Increment between $300 Million and $500 Million............. 0.365
Increment between $500 Million and $1 Billion............... 0.325
Increment between $1 Billion and $1.4 Billion............... 0.285
Increment equal to or in excess of $1.4 Billion............. 0.215
</Table>
JANUS ADVISER -- INTERNATIONAL EQUITY FUND
<Table>
<Caption>
ANNUAL RATE
AVERAGE DAILY NET ASSETS OF FUND PERCENTAGE(%)
- -------------------------------- -------------
First $500 Million.......................................... 0.408
Increment between $500 Million and $1 Billion............... 0.325
Increment between $1 Billion and $1.4 Billion............... 0.285
Increment equal to or in excess of $1.4 Billion............. 0.215
</Table>
28
Each Subadvisory Agreement is dated [August 5, 2003]. The initial term of
each Subadvisory Agreement will continue until [August 1], 2005. Each
Subadvisory Agreement is subject to termination by Janus or Vontobel on 60 days'
written notice and terminates automatically in the event of its assignment and
in the event of termination of the Advisory Agreement with respect to the
relevant Successor Fund. Janus and Vontobel have entered into an additional
agreement under which Vontobel is restricted from being involved in the
investment management or underwriting of registered investment companies that
have the same or substantially equivalent investment style to the Existing Funds
for a certain period of time. This agreement also provides that Janus would be
required to pay certain liquidated damages to Vontobel if a Subadvisory
Agreement were terminated during its first three years, other than in certain
circumstances constituting cause. In addition, this agreement contemplates that
Janus will make certain payments to Vontobel that are designed to provide an
incentive for Edwin Walczak, portfolio manager of the Vontobel U.S. Value Fund,
to remain at Vontobel. Any payments under this agreement would be made by Janus
and not by either of the Existing Funds.
EXEMPTIVE ORDER APPLICATION
Janus and the Successor Funds have applied for an exemptive order from the
SEC that would, subject to certain conditions, permit Janus and the Successor
Funds, with the approval of the Trust's Board of Trustees, to retain other
subadvisers for the Successor Funds, or subsequently change the subadvisers, or
continue the employment of existing subadvisers after events that under the 1940
Act and the relevant subadvisory agreement would otherwise cause an automatic
termination of the subadvisory agreement, without submitting the subadvisory
agreement, or material amendments to that agreement, to a vote of the
shareholders of the relevant Successor Fund. Janus would notify shareholders of
a Successor Fund in the event of any change in the identity of the subadviser of
that Successor Fund. In addition, the exemptive order would prohibit Janus from
entering into subadvisory agreements with affiliates of Janus without
shareholder approval, except Janus would be permitted to replace a subadviser
that is a wholly-owned subsidiary of Janus with another wholly-owned Janus
subsidiary. Although shareholder approval would not be required for the
termination of subadvisory agreements, shareholders of a Successor Fund will
continue to have the right to terminate such subadvisory agreements for the
Successor Fund at any time by a vote of a majority of the outstanding voting
securities of the Successor Fund.
Until or unless the exemptive order is granted, if the subadviser is
terminated or otherwise ceases to advise a Successor Fund, the Successor Fund
would be required to submit the subadvisory agreement with a new subadviser to
the shareholders of the Successor Fund for approval. There is no guarantee that
the SEC will grant the exemptive order.
29
MANAGEMENT OF THE TRUST
The following are the names of the Trustees of the Trust, together with a
brief description of their principal occupations during the last five years.
Each Trustee has served in that capacity since he or she was originally elected
or appointed. The Trustees do not serve a specified term of office. Each Trustee
will hold office until the termination of the Trust or his or her earlier death,
resignation, retirement, incapacity or removal. The retirement age for Trustees
is 72.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND OTHER
NAME, AGE AS OF LENGTH COMPLEX DIRECTORSHIPS
DECEMBER 31, 2002 POSITIONS HELD OF TIME PRINCIPAL OCCUPATIONS DURING THE OVERSEEN BY HELD BY
AND ADDRESS WITH FUND SERVED PAST FIVE YEARS TRUSTEE TRUSTEE
- ----------------- -------------- ------- -------------------------------- ------------- -------------
INTERESTED TRUSTEES
Thomas H. Bailey*........... Trustee 5/03- Formerly, President (1978- 2002) [63] N/A
100 Fillmore Street Present and Chief Executive Officer
Denver, CO 80206 (1994-2002) of Janus or Janus
Age 64 Capital Corporation. Formerly,
Chairman and Director
(1978-2002) of Janus Capital
Corporation; and Director
(1997-2001) of Janus
Distributors, Inc.; President
and Director (1994-2002) of the
Janus Foundation
Mark B. Whiston............. Trustee 5/03- President, Chief Executive [2] N/A
100 Fillmore Street Present Officer and Director Janus
Denver, CO 80206 Capital Group Inc. (since
Age 41 1/1/03); President and Chief
Executive Officer, Janus Capital
Management LLC (since 9/1/02).
Formerly, President of Retail
and Institutional Services,
Janus (11/00-9/02); Vice
President and Chief Marketing
Officer of Janus Capital
Corporation (Janus' predecessor)
(3/91-11/00)
</Table>
- ---------------
* The Successor Funds will treat Mr. Bailey as an "interested person" of the
Trust by virtue of his past positions and continuing relationship with Janus.
30
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND
NAME, AGE AS OF LENGTH COMPLEX
DECEMBER 31, 2002 POSITIONS HELD OF TIME PRINCIPAL OCCUPATIONS DURING OVERSEEN BY OTHER DIRECTORSHIPS
AND ADDRESS WITH FUND SERVED THE PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
- ----------------- -------------- ------- ---------------------------- ------------- -------------------
INDEPENDENT TRUSTEES
Samuel Boyd, Jr. ........ Trustee [ ] Manager (since 1978) of [2] Director, World
100 Fillmore Street Customer Service Accounting Funds, The World
Denver, CO 80206 Division, Potomac Electric Insurance Trust,
Age 62 Power Company, Washington Vontobel Funds USA
D.C. and Satuit Capital
Management Trust
Thomas I. Florence....... Trustee 5/03- Consultant. Formerly, [2] N/A
100 Fillmore Street Present President Morningstar
Denver, CO 80206 Investment Services
Age 40 (3/00/12/02) and Managing
Director, Pilgrim Baxter &
Associates (12/96/3/00)
Arthur F. Lerner......... Trustee 5/03- Retired. Formerly, Senior [2] Director, Sthenos
100 Fillmore Street Present Vice President Arnhold and Capital (United
Denver, CO 80206 S. Bleichroeder (investment Kingdom)
Age 61 manager) (12/69/1/03)
Dennis B. Mullen......... Trustee 5/03- Private Investor. Formerly [63] Director, Red Robin
100 Fillmore Street Present (1997-1998) Chief Financial Gourmet Burgers,
Denver, CO 80206 Officer-Boston Market Inc.
Age 58 Concepts, Boston Chicken
Inc., Golden, CO (a
restaurant chain)
James T. Rothe........... Trustee 5/03- Professor of Business, [63] Director, Optika,
100 Fillmore Street Present University of Colorado, Inc. and Neocore
Denver, CO 80206 Colorado Springs, CO (since Corp.
Age 58 2002). Formerly,
Distinguished Visiting
Professor of Business (2001-
2002), Thunderbird (American
Graduate School of
International Management),
Phoenix, AZ; and Principal
(1988-1999) of
Phillips-Smith Retail Group,
Addison, TX (a venture
capital firm)
Maureen T. Upton......... Trustee 5/03- Formerly, Director of Sales [2] N/A
100 Fillmore Street Present and Marketing, Intelligent
Denver, CO 80206 Markets, Inc. (3/00/3/03);
Age 38 Associate Equities Division,
Goldman Sachs & Co.
(8/98/1/00)
</Table>
The Successor Fund's officers are elected annually by the Trustees for a
one-year term. Certain officers also serve as officers of three other registered
investment companies advised by Janus: Janus Investment Fund, Janus Adviser
Series and Janus Aspen Series.
31
<Table>
<Caption>
NAME, AGE AS OF TERM OF OFFICE*
DECEMBER 31, 2002 POSITIONS HELD AND LENGTH OF PRINCIPAL OCCUPATIONS
AND ADDRESS WITH FUNDS TIME SERVED DURING THE PAST FIVE YEARS
- ----------------- ------------------ --------------- -----------------------------------
Thomas A. Early.................... Vice President and 5/03-Present Vice President, General Counsel,
100 Fillmore Street General Counsel Chief Corporate Affairs Officer,
Denver, CO 80206 Secretary and Interim Director of
Age 47 Janus; Vice President, General
Counsel and Secretary of Janus
Services LLC, Janus Capital
International LLC and Janus
Institutional Services LLC; Vice
President, General Counsel and
Director to Janus International
(Asia) Limited and Janus
International Limited; Vice
President, General Counsel and
Secretary to Janus Distributors LLC
and the Janus Foundation; and
Director for Janus Capital Trust
Manager Limited and Janus World
Funds. Formerly, Director (2001) of
Janus Distributors, Inc. and Janus
Services, Inc.; Vice President,
General Counsel, Secretary and
Director (2000-2002) of Janus
International Holding, Inc.;
Executive Vice President and
General Counsel (1997-1998) of
Prudential Investments Fund
Management LLC.
Bonnie M. Howe..................... Vice President 5/03-Present Vice President and Assistant
100 Fillmore Street General Counsel to Janus, Janus
Denver, CO 80206 Distributors and Janus Services.
Age 37 Formerly, Assistant Vice President
(1997-1999) and Associate Counsel
(1995-1999) for Janus Capital
Corporation and Assistant Vice
President (1998-2000) for Janus
Service Corporation.
Anita E. Falicia................... Vice President, 5/03-Present Vice President of Investment
100 Fillmore Street Chief Financial Accounting of Janus. Formerly,
Denver, CO 80206 Officer and Assistant Vice President
Age 34 Principal (2000-2002) of Investment
Accounting Officer Accounting of Janus Capital or
Janus Capital Corporation; Director
(1999-2000) of Investment
Accounting of Janus Capital
Corporation; and Director
(1997-1999) of Fund Accounting of
Janus Capital Corporation.
Kelley Abbott Howes................ Vice President and 5/03-Present Vice President of Domestic Funds
100 Fillmore Street Secretary and Assistant General Counsel to
Denver, CO 80206 Janus, Janus Distributors and Janus
Age 37 Services. Formerly, Assistant Vice
President (1997-1999) of Janus
Capital Corporation; Chief
Compliance Officer, Director and
President (1997-1999) of Janus
Distributors, Inc.; and Assistant
Vice President (1998-2000) of Janus
Service Corporation.
David R. Kowalski.................. Vice President and 5/03-Present Vice President and Chief Compliance
100 Fillmore Street Chief Compliance Officer of Janus and Janus
Denver, CO 80206 Officer Distributors LLC; and Assistant
Age 45 Vice President of Janus Services
LLC. Formerly, Senior Vice
President and Director (1985-2000)
of Mutual Fund Compliance for Van
Kampen Funds.
</Table>
32
<Table>
<Caption>
NAME, AGE AS OF TERM OF OFFICE*
DECEMBER 31, 2002 POSITIONS HELD AND LENGTH OF PRINCIPAL OCCUPATIONS
AND ADDRESS WITH FUNDS TIME SERVED DURING THE PAST FIVE YEARS
- ----------------- ------------------ --------------- -----------------------------------
Loren M. Starr..................... President and 5/03-Present Vice President of Finance,
100 Fillmore Street Chief Executive Treasurer, Chief Financial Officer
Denver, CO 80206 Officer and Interim Director of Janus; Vice
Age 41 President of Finance, Treasurer and
Chief Financial Officer of Janus
Services, Janus Distributors, Janus
Capital International LLC, Janus
Institutional Services LLC and
Janus International Limited; and
Director of Janus Capital Trust
Manager Limited, Janus World
Principal Protected Funds and Janus
World Funds. Formerly, Vice
President of Finance, Treasurer,
Chief Financial Officer (2001-2002)
and Director (2002) for Janus
International Holding, Inc.;
Managing Director, Treasurer and
Head of Corporate Finance and
Reporting (1998-2001) for Putnam
Investments; and Senior Vice
President of Financial Planning and
Analysis (1996-1998) for Lehman
Brothers, Inc.
Heidi J. Walter.................... Vice President 5/03-Present Vice President and Assistant
100 Fillmore Street General Counsel to Janus and Janus
Denver, CO 80206 Services. Formerly, Vice President
Age 35 and Senior Legal Counsel
(1995-1999) for Stein Roe &
Farnham, Inc.
</Table>
- ---------------
* Officers are elected annually by the Trustees for a one-year term.
AUDIT COMMITTEE
The Board of Trustees has an Audit Committee, consisting of Messrs.
Florence, Lerner and Mullen. Under the terms of its charter, the Audit Committee
reviews the financial reporting process, the system of internal control, the
audit process, and the Successor Funds' process for monitoring compliance with
investment restrictions and applicable laws and the Successor Funds' Code of
Ethics. The Committee's review of the audit process includes, among other
things, the appointment, compensation and oversight of the auditors and
pre-approval of all audit and non-audit services above a certain cost threshold.
TRUSTEE SHARE OWNERSHIP
The table below gives the dollar range of shares of all funds advised and
sponsored by Janus (collectively, the "Janus Funds"), owned by each Trustee as
of December 31, 2002. As of December 31, 2002, none of the Trustees owned shares
of the Successor Funds as the Successor Funds will not commence operations until
the reorganization has been consummated.
<Table>
<Caption>
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES
IN ALL REGISTERED INVESTMENT COMPANIES
NAME OF TRUSTEE OVERSEEN BY TRUSTEE IN JANUS FUNDS
- --------------- -------------------------------------------
Interested Trustees.......................
Independent Trustees......................
</Table>
As of December 31, 2002, none of the Independent Trustees or their
immediate family members owned shares of Janus, Janus Distributors of their
control persons.
33
TRUSTEE COMPENSATION
The following table shows the aggregate compensation earned by and paid to
each Trustee by the Successor Funds and all Janus Funds for the periods
indicated. None of the Trustees receives pensions or retirement benefits from
the Successor Funds or other Janus Funds.
[TO BE UPDATED]
<Table>
<Caption>
AGGREGATE COMPENSATION FROM THE AGGREGATE COMPENSATION FROM THE
FUNDS FOR FISCAL YEAR ENDING JANUS FUNDS FOR CALENDAR YEAR ENDED
NAME OF PERSON, POSITION FEBRUARY 29, 2004(1) DECEMBER 31, 2002(2)
- ------------------------ ------------------------------- ------------------------------------
Interested Trustee
Thomas H. Bailey(3).......... $ 0 $ 0
Mark B. Whiston(4)........... $ 0 $ 0
Independent Trustees
Samuel Boyd, Jr.(4).......... $45,000 $ 0
Thomas I. Florence(4)........ $45,000 $ 0
Arthur F. Lerner(4).......... $45,000 $ 0
Dennis B. Mullen............. $45,000 $183,667
James T. Rothe............... $45,000 $176,667
Maureen T. Upton(4).......... $45,000 $ 0
</Table>
- ---------------
(1) Since the Successor Funds had not commenced operations as of February 28,
2003, no fees were paid during this fiscal year. The aggregate compensation
from the Successor Funds is estimated for the period ending February 29,
2004 and for the Successor Funds' first full year March 1, 2004 through
February 28, 2005 as follows: Samuel Boyd, Jr. $50,000; Thomas I. Florence
$50,000; Arthur F. Lerner $50,000; Dennis B. Mullen $50,000; James T. Rothe
$50,000; and Maureen T. Upton $50,000.
(2) As of December 31, 2002, Janus Funds consisted of three registered
investment companies comprised of a total of 59 funds.
(3) Mr. Bailey is being treated as an interested person of the Successor Funds
and Janus and is compensated by Janus.
(4) Messrs. Whiston, Florence, Lerner and Ms. Upton were appointed as Trustees
of the Trust on May 9, 2003, and Mr. Boyd was appointed as Trustee of the
Trust on August 5, 2003. Messrs. Boyd, Whiston, Florence, Lerner and Ms.
Upton did not serve as Trustees of any Janus Funds prior to those dates, and
therefore did not receive any compensation from the Janus Funds prior to
.
INDEPENDENT PUBLIC AUDITORS
The Trust has retained PricewaterhouseCoopers LLP, 1670 Broadway, Suite
1000, Denver, Colorado 80202, as the independent auditors for the Successor
Funds for the fiscal year ending December 31, 2003. Because the Trust and the
Successor Funds were recently formed, the Trust has not paid
PricewaterhouseCoopers LLP any audit or audit related fees, any fees in
connection with the preparation of tax returns or tax compliance or any other
fees of financial statements for the Successor Funds.
VOTING MATTERS
GENERAL INFORMATION
This solicitation is being made primarily by the mailing of this Proxy
Statement/Prospectus and the accompanying proxy card. Supplementary
solicitations may be made by mail, telephone, telegraph, facsimile, electronic
means or by personal interview by representatives of Janus. In addition,
Georgeson Shareholder Communications Inc. ("GS"), a professional proxy
solicitor, may be paid to solicit shareholders of the
34
Existing Fund. The total cost of such services is estimated to be $ . The
cost of preparing, printing and mailing the Proxy Statement/Prospectus, and all
other costs incurred in connection with the solicitation of proxies, including
the fees of GS, will be paid by Janus. Janus also will reimburse brokerage firms
and other financial intermediaries for their reasonable expenses in forwarding
solicitation materials to the beneficial owners of shares.
The Trust and Vontobel Funds may arrange to have proxies authorized by
telephone. If the Trust and Vontobel Funds solicit proxies by telephone, they
will use procedures designed to authenticate shareholders' identities, to allow
shareholders to authorize voting in accordance with their instructions and to
confirm that their instructions have been properly recorded. Telephonic proxies
may be revoked in the same manner as proxies voted by mail may be revoked.
The Trust and Vontobel Funds may also arrange to have proxies authorized
over the Internet. In order to use this feature, you should follow the
instructions set forth on your proxy card(s). You will be prompted to follow a
simple set of instructions. Internet proxies may be revoked in the same manner
as proxies voted by mail may be revoked.
VOTING RIGHTS AND REQUIRED VOTE
The Shareholders of each Existing Fund will vote separately on the Plan.
Shareholders of each Existing Fund are entitled to one vote for each full share
held. Any shareholder giving a proxy may revoke it at any time before it is
exercised by submitting to Vontobel Funds a written notice of revocation or a
subsequently executed proxy or by attending the Meeting and voting in person.
A majority of the issued and outstanding shares of each Existing Fund
entitled to vote constitutes a quorum at the meeting as to that Existing Fund.
Each shareholder will be entitled to one vote for each share of an Existing Fund
held on the close of business on , 2003 (the "Record Date") and a
fractional vote for each fractional share held at that time. Approval of the
Plan (and therefore the Reorganization) as to an Existing Fund will require the
affirmative vote of a majority of the outstanding voting securities of the
Existing Fund (within the meaning of the 1940 Act). Under the 1940 Act, "a
majority of the outstanding voting securities" of a registered investment
company means the affirmative vote by holders of the lesser of either (i) 67% or
more of the outstanding voting securities of such company present at a meeting,
if the holders of more than 50% of the outstanding voting securities of such
company are present in person or represented by proxy or (ii) more than 50% of
the outstanding voting securities of such company. On the Record Date, there
were outstanding shares of Vontobel U.S. Value Fund and
outstanding shares of Vontobel International Equity Fund.
Each shareholder of an Existing Fund is asked to sign and return the
enclosed proxy card to indicate their voting instructions. You may, however,
revoke your proxy by executing another proxy, by giving written notice of such
revocation to Vontobel Funds or by attending the meeting and voting by ballot at
that meeting. If you return a signed proxy card without indicating voting
instructions, your shares will be voted in favor of the Plan. If any other
matter is properly placed before the meeting, your shares will be voted in
accordance with the recommendation of the Board of Directors. Vontobel Funds and
the Trust have no knowledge of any other matters which may be presented to the
Special Meeting and, under corporate law, a special meeting is generally called
solely for the purpose specified in the Notice.
Vontobel Funds will include abstentions and broker non-votes for purposes
of determining whether a quorum is present at the meeting. Due to the
requirement that the Plan be approved as to an Existing Fund by the affirmative
vote of a majority of the outstanding voting securities of the Existing Fund
(within the meaning of the 1940 Act), abstentions and broker non-votes have the
effect of a vote against the Plan.
If sufficient votes of an Existing Fund in favor of the Plan are not
received by the time scheduled for the Special Meeting, the holders of shares
present in person or by proxy at the Special Meeting and entitled to vote at the
Special Meeting, whether or not sufficient to constitute a quorum, may adjourn
the Special Meeting as to that Existing Fund by the affirmative vote of a
majority of votes cast on the matter. The persons named as proxies will vote in
favor of such adjournment if they determine that each adjournment and
35
additional solicitation are reasonable and in the interests of shareholders.
Abstentions and broker non-votes will have no effect on the matter of
adjournment. Any business that might have been transacted at a meeting
originally called may be transacted at any such adjourned session(s) at which a
quorum is present. The costs of any additional solicitation and of any adjourned
session(s) will be borne by Janus. If sufficient votes of an Existing Fund in
favor of the Plan have been received, the Special Meeting may be concluded as to
that Fund, notwithstanding the fact that the Special Meeting may be adjourned as
to the other Existing Fund.
SHAREHOLDER PROPOSALS
Vontobel Funds does not hold annual or regular meetings of shareholders. A
shareholder proposal intended to be presented at any subsequent meeting of the
shareholders of the Vontobel Funds must be received by Vontobel Funds a
reasonable time before the Board of Directors makes the solicitation relating to
such meeting in order to be included in Vontobel Fund's proxy statement and
forms of proxy relating to that meeting.
SHARE OWNERSHIP
VONTOBEL U.S. VALUE FUND AND VONTOBEL INTERNATIONAL EQUITY FUND
[Officers and Directors of Vontobel Funds as a group own less than [1%] of
the outstanding Class A Shares and Class C Shares of each Existing Fund.] As of
[date no more than 30 days prior to filing of the registration statement], 2003,
the percentage ownership of each entity owning more than 5% of the outstanding
Class A Shares and Class C Shares of each Existing Fund is listed below:
[TO BE UPDATED BY AMENDMENT]
JANUS ADVISER -- U.S. VALUE FUND AND JANUS ADVISER -- INTERNATIONAL EQUITY
FUND
INVESTOR SHARES
Officers and Trustees as a group own less than [1%] of the outstanding
Investor Shares of each Successor Fund. As of [date no more than 30 days prior
to filing of the registration statement], 2003, the percentage ownership of each
entity owning more than 5% of the outstanding Investor Shares of each Successor
Fund is listed below:
[TO BE UPDATED BY AMENDMENT]
CLASS A SHARES AND CLASS C SHARES
As of [date no more than 30 days prior to filing of the registration
statement], 2003, all of the outstanding Class A Shares and Class C Shares of
each Fund were owned by , which provided seed capital for the
Successor Funds. To the knowledge of the Successor Funds, no other shareholder
owned more than 5% of the outstanding Class A Shares or Class C Shares of either
of the Successor Funds as of , 2003.
[TO BE UPDATED BY AMENDMENT]
AVAILABLE INFORMATION
The Trust and each series thereof and Vontobel Funds and each series
thereof are subject to the informational requirements of the Securities Exchange
Act of 1934 and the Investment Company Act of 1940 and in accordance therewith
files reports, proxy material and other information with the SEC. Such reports,
proxy material and other information can be inspected and copied at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material also can be obtained at
prescribed rates from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549.
36
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this day of July, 2003, by and between Janus Adviser, a Delaware statutory
trust (the "Trust"), on behalf of U.S. Value Fund and International Equity Fund
series of the Trust (each a "Successor Fund" and collectively, the "Successor
Funds"), and Vontobel Funds, Inc., a Maryland corporation (the "Corporation"),
on behalf of the Vontobel U.S. Value Fund and Vontobel International Equity Fund
series of the Corporation (each a "Predecessor Fund" and collectively, the
"Predecessor Funds").
All references in this Agreement to action taken by the Predecessor Funds
or the Successor Funds shall be deemed to refer to action taken by the
Corporation or the Trust, respectively.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer by each Predecessor Fund of all
or substantially all of its assets to the corresponding Successor Fund, in
exchange solely for shares of beneficial interest in the corresponding Successor
Fund (in the case of Janus Adviser-U.S. Value Fund, the "Janus Value Fund
Shares" and in the case of Janus Adviser-International Equity Fund, the "Janus
International Fund Shares") having a net asset value equal to the net asset
value of the Predecessor Fund, the assumption by each Successor Fund of all the
known liabilities of the corresponding Predecessor Fund, and the distribution of
the Janus Value Fund Shares and the Janus International Fund Shares to the
shareholders of the applicable Predecessor Fund in complete liquidation of the
Predecessor Funds as provided herein, all upon the terms and conditions
hereinafter set forth in this Agreement.
WHEREAS, the Board of Directors of the Corporation has determined that it
is in the best interest of each Predecessor Fund that the assets of each
Predecessor Fund be acquired by the corresponding Successor Fund pursuant to
this Agreement and in accordance with the applicable statutes of the State of
Maryland and the State of Delaware and that the interests of existing
shareholders will not be diluted as a result of this transaction;
WHEREAS, the Board of Trustees of the Trust has determined that it is in
the best interest of each Successor Fund that the assets of the corresponding
Predecessor Fund be acquired by each Successor Fund pursuant to this Agreement
and in accordance with the applicable statutes of the State of Maryland and the
State of Delaware and that the interests of existing shareholders will not be
diluted as a result of this transaction;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. PLAN OF REORGANIZATION
1.1 Subject to the requisite approval of the Predecessor Funds'
shareholders and the other terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, the Corporation
shall transfer all or substantially all of the assets of each Predecessor Fund,
as set forth in paragraph 1.2, to the corresponding Successor Fund, and the
Trust shall (i) cause the Successor Funds to deliver to the Corporation a number
of full and fractional Janus Value Fund Shares and Janus International Fund
Shares equal to the number of shares of the corresponding Predecessor Fund, as
of the time and date set forth in Article 2 and (ii) assume all the known
liabilities of the Predecessor Funds, as set forth in paragraph 1.2. Such
transactions shall take place at the closing provided for in paragraph 2.1 (the
"Closing").
1.2 The assets of each Predecessor Fund to be acquired by the
corresponding Successor Fund shall consist of all property, including, without
limitation, all cash, securities, commodities and futures interests, and
dividends or interest receivable that are owned by such Predecessor Fund and any
deferred or prepaid expenses shown as an asset on the books of the Predecessor
Fund on the closing date provided in paragraph 2.1
A-1
(the "Closing Date"). All known liabilities, expenses, costs, charges and
reserves of each Predecessor Fund, to the extent that they exist at or after the
Closing, shall after the Closing attach to the corresponding Successor Fund, and
may be enforced against such Successor Fund to the same extent as if the same
had been incurred by the Successor Fund.
1.3 Each Predecessor Fund will distribute pro rata to its shareholders of
record, determined as of immediately after the close of business on the Closing
Date (the "Current Shareholders"), the applicable Janus Value Fund Shares and
Janus International Fund Shares received by the Corporation pursuant to
paragraph 1.1. Such distribution and liquidation will be accomplished by the
transfer of Janus Value Fund Shares and Janus International Fund Shares then
credited to the accounts of the applicable Predecessor Fund on the books of the
corresponding Successor Fund to open accounts on the share records of the
corresponding Successor Fund in the names of the applicable Current Shareholders
and representing the respective pro rata number of Janus Value Fund Shares and
Janus International Fund Shares, as applicable, of the corresponding class due
such shareholders. All issued and outstanding shares of each Predecessor Fund
will simultaneously be canceled on the books of the Corporation. The Successor
Funds shall not issue certificates representing the Janus Value Fund Shares and
Janus International Fund Shares, as applicable, in connection with such
exchange. Ownership of Janus Value Fund Shares and Janus International Fund
Shares will be shown on the books of the Trust's transfer agent. As soon as
practicable after the Closing, the Corporation shall take all steps necessary to
effect a complete liquidation of the Predecessor Funds.
1.4 Any reporting responsibility of the Predecessor Funds including, but
not limited to, the responsibility for filing of regulatory reports, tax
returns, or other documents with the U.S. Securities and Exchange Commission
(the "Commission"), any state securities commission, and any federal, state or
local tax authorities or any other relevant regulatory authority, is and shall
remain the responsibility of the Predecessor Funds.
1.5 All books and records of each Predecessor Fund, including all books
and records required to be maintained under the Investment Company Act of 1940,
as amended (the "1940 Act") and the rules and regulations thereunder, shall be
available to the corresponding Successor Fund from and after the Closing Date
and shall be turned over to such Successor Fund as soon as practicable following
the Closing Date.
2. CLOSING AND CLOSING DATE
2.1 The Closing Date shall be September 26, 2003, or such later date as
the parties may agree to in writing. All acts taking place at the Closing shall
be deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m. New York Time.
The Closing shall be held at the offices of Janus Capital Management LLC ("Janus
Capital"), 100 Fillmore Street, Denver, Colorado 80206-4928, or at such other
time and/or place as the parties may agree.
2.2 The Corporation shall direct Brown Brothers Harriman & Co. (the
"Custodian"), as custodian for the Predecessor Funds, to deliver, at the
Closing, a certificate of an authorized officer stating that (i) assets shall
have been delivered in proper form to the Successor Funds prior to or on the
Closing Date, and (ii) all necessary taxes in connection with the delivery of
the assets, including all applicable federal and state stock transfer stamps, if
any, have been paid or provision for payment has been made. Each Predecessor
Fund's portfolio securities represented by a certificate or other written
instrument shall be presented for examination by the Custodian to the custodian
for the Successor Funds no later than five business days preceding the Closing
Date, and shall be transferred and delivered by each Predecessor Fund as of the
Closing Date for the account of the corresponding Successor Fund duly endorsed
in proper form for transfer in such condition as to constitute good delivery
thereof. The Custodian shall deliver, as of the Closing Date, by book entry, in
accordance with the customary practices of the Custodian and the securities
depositories (as defined in Rule 17f-4 under the 1940 Act) in which each
Predecessor Fund's assets are deposited, each Predecessor Fund's assets
deposited with such depositories. The cash to be transferred by the Predecessor
Funds shall be delivered by wire transfer of federal funds on the Closing Date.
A-2
2.3 The Corporation shall cause Fund Services, Inc. (the "Transfer
Agent"), transfer agent of the Predecessor Funds, to deliver at the Closing a
certificate of an authorized officer stating that its records contain the names
and addresses of the Current Shareholders and the number and percentage
ownership of outstanding shares of each Predecessor Fund owned by each such
shareholder immediately prior to the Closing. The Successor Funds shall issue
and deliver a confirmation evidencing the Janus Value Fund Shares and the Janus
International Fund Shares to be credited on the Closing Date to the Secretary of
the Corporation or provide evidence satisfactory to the Corporation that such
Janus Value Fund Shares and Janus International Fund Shares have been credited
to the accounts of the corresponding Predecessor Fund on the books of the
applicable Successor Fund. At the Closing, each party shall deliver to the other
such bills of sales, checks, assignments, share certificates, if any, receipts
or other documents as such other party or its counsel may reasonably request.
2.4 (i) The value of the assets of each Predecessor Fund shall be the
value of such assets computed as of immediately after the close of regular
trading of the New York Stock Exchange and after the declaration of any
dividends on the Closing Date, using the valuation procedures set forth in the
Trust's Trust Instrument and its prospectus and statement of additional
information, together with any other valuation procedures established by the
trustees of the Trust.
(ii) The number of Janus Value Fund Shares and Janus International
Fund Shares to be issued (including fractional shares, if any) in exchange
for the assets of the corresponding Predecessor Fund shall be determined by
dividing the value of the applicable Predecessor Fund's net assets
determined using the valuation procedures referred to in paragraph 2.4(i),
by the net asset value of a Janus Value Fund Share or a Janus International
Fund Share, as applicable, determined in accordance with paragraph 2.4(ii).
(iii) All computations of value shall be made by or under the
direction of the Predecessor Funds' and the Successor Funds' respective
record keeping agents, if applicable, and shall be subject to review by the
Predecessor Funds' record keeping agent and by the Predecessor Funds' and
the Successor Funds' respective independent accountants.
3. REPRESENTATIONS AND WARRANTIES
3.1 The Corporation, on behalf of the Predecessor Funds, hereby represents
and warrants to the Successor Funds as follows:
(i) the Corporation is duly incorporated, validly existing and in good
standing under the laws of the State of Maryland and has full power and
authority to conduct its business as presently conducted;
(ii) the Corporation has full power and authority to execute, deliver
and carry out the terms of this Agreement on behalf of the Predecessor
Funds;
(iii) the execution and delivery of this Agreement on behalf of the
Predecessor Funds and the consummation of the transactions contemplated
hereby are duly authorized and no other proceedings on the part of the
Corporation or the shareholders of the Predecessor Funds (other than as
contemplated in paragraph 4.2(v)) are necessary to authorize this Agreement
and the transactions contemplated hereby;
(iv) this Agreement has been duly executed by the Corporation on
behalf of the Predecessor Funds and constitutes their valid and binding
obligation, enforceable in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium and other rights
affecting creditors' rights generally, and general equitable principles;
(v) neither the execution and delivery of this Agreement by the
Corporation on behalf of the Predecessor Funds, nor the consummation by the
Corporation on behalf of the Predecessor Funds of the transactions
contemplated hereby will conflict with, result in a breach or violation of
or constitute (or with notice, lapse of time or both) a breach of or
default under, the Articles of Incorporation or By-Laws of the Corporation,
as each may be amended, or any statute, regulation, order, judgment or
decree, or any
A-3
instrument, contract or other agreement to which the Corporation is a party
or by which the Corporation or any of its assets is subject or bound;
(vi) no authorization, consent or approval of any governmental or
other public body or authority or any other party is necessary for the
execution and delivery of this Agreement by the Corporation on behalf of
the Predecessor Funds or the consummation of any transactions contemplated
hereby by the Corporation, other than as shall be obtained at or prior to
the Closing;
(vii) The current prospectus and statement of additional information
of the Predecessor Funds and each prospectus and statement of additional
information of the Predecessor Funds used at all times prior to the date of
this Agreement conforms or conformed at the time of its use in all material
respects to the applicable requirements of the Securities Act of 1933, as
amended (the "1933 Act") and the 1940 Act and the rules and regulations of
the Commission thereunder and does not or did not at the time of its use
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not materially misleading;
(viii) On the Closing Date, the Corporation, on behalf of the
Predecessor Funds, will have good and marketable title to the assets and
full right, power, and authority to sell, assign, transfer and deliver such
assets hereunder free of any liens or other encumbrances, and upon delivery
and payment for such assets, the Trust, on behalf of the Successor Funds,
will acquire good and marketable title thereto, subject to no restrictions
on the full transfer thereof, including such restrictions as might arise
under the 1933 Act, other than as disclosed to the Successor Funds;
(ix) The execution, delivery and performance of this Agreement will
not result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease,
judgment or decree to which the Corporation, on behalf of the Predecessor
Funds, is a party or by which it is bound;
(x) All material contracts or other commitments of the Predecessor
Funds (other than this Agreement and certain investment contracts,
including options, futures, and forward contracts) will terminate without
liability to the Predecessor Funds on or prior to the Closing Date;
(xi) Except as otherwise disclosed in writing to and accepted by the
Trust, on behalf of the Successor Funds, no litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or, to its knowledge, threatened against the Predecessor
Funds or any of its properties or assets that, if adversely determined,
would materially and adversely affect its financial condition or the
conduct of its business. The Corporation, on behalf of the Predecessor
Funds, knows of no facts which might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
(xii) The Statement of Assets and Liabilities, Statements of
Operations and Changes in Net Assets, and Portfolio of Investments of the
Predecessor Funds at December 31, 2002 have been audited by Tait, Weller &
Baker, independent accountants, and are in accordance with generally
accepted accounting principles ("GAAP") consistently applied, and such
statements (copies of which have been furnished to the Successor Funds)
present fairly, in all material respects, the financial condition of the
Predecessor Funds as of such date in accordance with GAAP, and there are no
known contingent liabilities of the Predecessor Funds required to be
reflected on a balance sheet (including the notes thereto) in accordance
with GAAP as of such date not disclosed therein;
(xiii) Since December 31, 2002, there has not been any material
adverse change in the Predecessor Funds' financial condition, assets,
liabilities or business, other than changes occurring in the ordinary
course of business, or any incurrence by the Predecessor Funds of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by the
Successor Funds. For the purposes of this subparagraph (j), a decline in
net asset value per share of the
A-4
Predecessor Funds due to declines in market values of securities in the
Predecessor Funds' portfolio, the discharge of Predecessor Funds
liabilities, or the redemption of Predecessor Funds shares by shareholders
of the Predecessor Funds shall not constitute a material adverse change;
(xiv) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Predecessor Funds
required by law to have been filed by such date (including any extensions)
shall have been filed and are or will be correct in all material respects,
and all Federal and other taxes shown as due or required to be shown as due
on said returns and reports shall have been paid or provision shall have
been made for the payment thereof, and to the best of the Predecessor
Funds' knowledge, no such return is currently under audit and no assessment
has been asserted with respect to such returns;
(xv) For each taxable year of their operation (including the taxable
year ending on the Closing Date), the Predecessor Funds have met the
requirements of Subchapter M of the Code for qualification as a regulated
investment company and have elected to be treated as such, have been
eligible to and have computed (or will compute) their federal income tax
under Section 852 of the Code, and will have distributed all of their
investment company taxable income and net capital gain (as defined in the
Code) that has accrued through the Closing Date, and before the Closing
Date will have declared dividends sufficient to distribute all of their
investment company taxable income and net capital gain for the period
ending on the Closing Date;
(xvi) All issued and outstanding shares of the Predecessor Funds are,
and on the Closing Date will be, duly and validly issued and outstanding,
fully paid and non-assessable by the Corporation. All of the issued and
outstanding shares of the Predecessor Funds will, at the time of Closing,
be held by the persons and in the amounts set forth in the records of the
Transfer Agent, on behalf of the Predecessor Funds, as provided in
paragraph 2.3. The Predecessor Funds do not have outstanding any options,
warrants or other rights to subscribe for or purchase any of the shares of
the Predecessor Funds, nor is there outstanding any security convertible
into any of the Predecessor Funds' shares; and
(xvii) The information to be furnished by the Predecessor Funds for
use in registration statements, proxy materials and other documents filed
or to be filed with any federal, state or local regulatory authority
(including the National Association of Securities Dealers, Inc.), which may
be necessary in connection with the transactions contemplated hereby, shall
be accurate and complete in all material respects and shall comply in all
material respects with Federal securities and other laws and regulations
thereunder applicable thereto.
3.2 The Trust, on behalf of the Successor Funds, hereby represents and
warrants to the Predecessor Funds as follows:
(i) The Trust is duly organized, validly existing and in good standing
under the laws of the State of Delaware and has full power and authority to
conduct its business as presently conducted. The Trust is a newly formed
entity and shall not have commenced operations prior to the Closing Date;
(ii) the Trust has full power and authority to execute, deliver and
carry out the terms of this Agreement on behalf of the Successor Funds;
(iii) the execution and delivery of this Agreement on behalf of the
Successor Funds and the consummation of the transactions contemplated
hereby are duly authorized and no other proceedings on the part of the
Trust or the shareholders of the Successor Funds are necessary to authorize
this Agreement and the transactions contemplated hereby;
(iv) this Agreement has been duly executed by the Trust on behalf of
the Successor Funds and constitutes its valid and binding obligation,
enforceable in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other rights affecting
creditors' rights generally, and general equitable principles;
(v) neither the execution and delivery of this Agreement by the Trust
on behalf of the Successor Funds, nor the consummation by the Trust on
behalf of the Successor Fund of the transactions
A-5
contemplated hereby will conflict with, result in a breach or violation of
or constitute (or with notice, lapse of time or both constitute) a breach
of or default under, the Trust Instrument or By-Laws of the Trust, as each
may be amended, or any statute, regulation, order, judgment or decree, or
any instrument, contract or other agreement to which the Trust is a party
or by which the Trust or any of its assets is subject or bound;
(vi) no authorization, consent or approval of any governmental or
other public body or authority or any other party is necessary for the
execution and delivery of this Agreement by the Trust on behalf of the
Successor Funds or the consummation of any transactions contemplated hereby
by the Trust, other than as shall be obtained at or prior to the Closing;
(vii) The execution, delivery and performance of this Agreement will
not result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease,
judgment or decree to which the Trust, on behalf of the Successor Funds, is
a party or by which it is bound;
(viii) Except as otherwise disclosed in writing to and accepted by the
Corporation, on behalf of the Predecessor Funds, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or, to its knowledge, threatened
against the Successor Funds or any of its properties or assets that, if
adversely determined, would materially and adversely affect its financial
condition or the conduct of its business. The Trust, on behalf of the
Successor Funds, knows of no facts which might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
(ix) All issued and outstanding shares of the Successor Funds are, and
on the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Trust. The Successor Funds do not have
outstanding any options, warrants or other rights to subscribe for or
purchase any shares of the Successor Funds, nor is there outstanding any
security convertible into any shares of the Successor Funds; and
(x) The Janus Value Fund Shares and the Janus International Fund
Shares to be issued and delivered to the Predecessor Funds, for the account
of the applicable Current Shareholders, pursuant to the terms of this
Agreement, will on the Closing Date have been duly authorized and, when so
issued and delivered, will be duly and validly issued shares of the
Successor Funds, and will be fully paid and non-assessable.
4. CONDITIONS PRECEDENT
4.1 The obligations of the Corporation on behalf of the Predecessor Funds
to effectuate the Reorganization shall be subject to the satisfaction of the
following conditions:
(i) The Trust shall have filed with the Commission a registration
statement on Form N-14 under the 1933 Act and such amendment or amendments
thereto as are determined by the Board of Trustees of the Trust to be
necessary and appropriate to effect the registration of the Janus Value
Fund Shares and the Janus International Fund Shares (the "Registration
Statement"), and the Registration Statement shall have become effective,
and no stop-order suspending the effectiveness of the Registration
Statement shall have been issued, and no proceeding for that purpose shall
have been initiated or threatened by the Commission (and not withdrawn or
terminated);
(ii) The applicable Janus Value Fund Shares and the Janus
International Fund Shares shall have been duly qualified for offering to
the public in all states in which such qualification is required for
consummation of the transactions contemplated hereunder;
(iii) All representations and warranties of the Trust on behalf of the
Successor Funds contained in this Agreement shall be true and correct in
all material respects as of the date hereof and as of the Closing, with the
same force and effect as if then made, and the Corporation on behalf of the
Predecessor
A-6
Funds shall have received a certificate of an officer of the Trust acting
on behalf of the Successor Funds to that effect in form and substance
reasonably satisfactory to the Corporation on behalf of the Predecessor
Funds; and
(iv) The Corporation on behalf of the Predecessor Funds shall have
received an opinion from Goodwin Procter LLP regarding certain tax matters
in connection with the Reorganization.
4.2 The obligations of the Trust on behalf of the Successor Funds to
effectuate the Reorganization shall be subject to the satisfaction of the
following conditions:
(i) The Trust shall have filed the Registration Statement with the
Commission, and the Registration Statement shall have become effective, and
no stop-order suspending the effectiveness of the Registration Statement
shall have been issued, and no proceeding for that purpose shall have been
initiated or threatened by the Commission (and not withdrawn or
terminated);
(ii) The applicable Janus Value Fund Shares and the Janus
International Fund Shares shall have been duly qualified for offering to
the public in all states in which such qualification is required for
consummation of the transactions contemplated hereunder;
(iii) All representations and warranties of the Corporation on behalf
of the Predecessor Funds contained in this Agreement shall be true and
correct in all material respects as of the date hereof and as of the
Closing, with the same force and effect as if then made, and the Trust on
behalf of the Successor Funds shall have received a certificate of an
officer of the Corporation acting on behalf of the Predecessor Funds to
that effect in form and substance reasonably satisfactory to the Trust on
behalf of the Successor Funds;
(iv) The Trust on behalf of each of the Successor Funds shall have
received an opinion from Goodwin Procter LLP regarding certain tax matters
in connection with the Reorganization; and
(v) The shareholders of the Predecessor Funds shall have approved this
Agreement at a special meeting of the shareholders of the Predecessor
Funds.
5. COVENANTS OF THE PREDECESSOR FUNDS AND THE SUCCESSOR FUNDS
5.1 The Successor Funds and the Predecessor Funds covenant to operate
their respective business in the ordinary course between the date hereof and the
Closing Date, it being understood that such ordinary course of business will
include the declaration and payment of customary dividends and distributions,
and any other distribution that may be advisable.
5.2 The Predecessor Funds covenant to call a meeting of the shareholders
of the Predecessor Funds to consider and act upon this Agreement and to take all
other action necessary to obtain approval of the transactions contemplated
herein.
5.3 The Predecessor Funds covenant that the Janus Value Fund Shares and
the Janus International Fund Shares to be issued hereunder are not being
acquired for the purpose of making any distribution thereof, other than in
accordance with the terms of this Agreement.
5.4 The Predecessor Funds will assist the Successor Funds in obtaining
such information as the Successor Funds reasonably request concerning the
beneficial ownership of the Predecessor Funds' shares.
5.5 Subject to the provisions of this Agreement, the Successor Funds and
the Predecessor Funds will each take, or cause to be taken, all action, and do
or cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement.
5.6 The Predecessor Funds will provide the Successor Funds with
information reasonably necessary for the preparation of a proxy
statement/prospectus to be included in the Registration Statement, in compliance
A-7
with the 1933 Act, the 1934 Act and the 1940 Act, in connection with the meeting
of the shareholders of the Predecessor Funds to consider approval of this
Agreement and the transactions contemplated herein.
5.7 As soon as is reasonably practicable after the Closing, the
Predecessor Funds will make a liquidating distribution to their shareholders
consisting of the Janus Value Fund Shares and the Janus International Fund
Shares, as applicable, received at the Closing.
5.8 The Successor Funds and the Predecessor Funds shall use their
reasonable best efforts to fulfill or obtain the fulfillment of the conditions
precedent to effect the transactions contemplated by this Agreement as promptly
as practicable.
5.9 The Corporation, on behalf of Predecessor Funds, covenants that the
Corporation will, from time to time, as and when reasonably requested by the
Successor Funds, execute and deliver or cause to be executed and delivered all
such assignments and other instruments, and will take or cause to be taken such
further action as the Trust, on behalf of the Successor Funds, may reasonably
deem necessary or desirable in order to vest in and confirm (a) the
Corporation's, on behalf of the Predecessor Funds', title to and possession of
the Janus Value Fund Shares and the Janus International Fund Shares to be
delivered hereunder, and (b) the Trust's, on behalf of the Successor Funds',
title to and possession of all the assets of the Predecessor Funds and otherwise
to carry out the intent and purpose of this Agreement.
5.10 The Successor Funds will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and other
applicable law as may be necessary in order to continue their operations after
the Closing Date.
6. EXPENSES
All of the expenses and costs of the Reorganization and the transactions
contemplated thereby shall be borne by Janus Capital.
7. ENTIRE AGREEMENT
The Trust, on behalf of the Successor Funds, and the Corporation, on behalf
of the Predecessor Funds, agree that this Agreement constitutes the entire
agreement between the parties.
8. TERMINATION
This Agreement may be terminated and the transactions contemplated hereby
may be abandoned by either party by (i) mutual agreement of the parties, or (ii)
by either party if the Closing shall not have occurred on or before December 31,
2003, unless such date is extended by mutual agreement of the parties, (iii) by
resolution of the Board of Trustees of the Trust or the Board of Directors of
the Corporation, at any time prior to the Closing Date, if circumstances should
develop that, in the opinion of either Board, make proceeding with the Agreement
inadvisable, or (iv) by either party if the other party shall have materially
breached its obligations under this Agreement or made a material and intentional
misrepresentation herein or in connection herewith. In the event of any such
termination, this Agreement shall become void and there shall be no liability
hereunder on the part of any party or their respective trustees/directors or
officers, except for any such material breach or intentional misrepresentation,
as to each of which all remedies at law or in equity of the party adversely
affected shall survive.
9. AMENDMENTS
This agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties.
A-8
10. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to the parties hereto at their
respective principal places of business.
11. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
11.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.2 This Agreement may be executed in any number of counterparts each of
which shall be deemed an original.
11.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
11.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
11.5 It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the trustees, shareholders, nominees, officers,
agents or employees of the Trust personally, but shall bind only the trust
property of the Trust, as provided in the Trust Instrument of the Trust. The
execution and delivery by such officers of the Trust shall not be deemed to have
been made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust as provided in
the Trust Instrument of the Trust. The Trust is a series company with two series
and has entered into this Agreement on behalf of the Successor Funds.
THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.
A-9
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
executed as of the date set forth above.
<Table>
ATTEST JANUS ADVISER
For and on behalf of U.S. Value Fund and
International Equity Fund
Name: --------------------------------------------- By: -------------------------------------------------
Secretary Name:
Title:
ATTEST VONTOBEL FUNDS, INC.
For and on behalf of Vontobel U.S. Value Fund and
Vontobel International Equity Fund
Name: --------------------------------------------- By: -------------------------------------------------
Secretary Name:
Title:
</Table>
A-10
FORM OF PROXY CARD
VONTOBEL FUNDS, INC.
VONTOBEL U.S. VALUE FUND AND VONTOBEL INTERNATIONAL EQUITY FUND
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
_______________________, 2003
The undersigned hereby constitutes and appoints John Pasco, III and Darryl S.
Peay, or any of them, with power of substitution, as proxies to appear and vote
all of the shares of stock standing in the name of the undersigned on the record
date at the Special Meeting of Shareholders of the Vontobel U.S. Value Fund and
the Vontobel International Equity Fund to be held at 1500 Forest Avenue, Suite
223, Richmond, Virginia 23229 on the _____ day of ___________, 2003 at 10:00
a.m. Eastern time, or at any postponement or adjournment thereof; and the
undersigned hereby instructs said proxies to vote as indicated on this proxy
card.
1. To approve an Agreement and Plan of Reorganization by and
between Janus Adviser and Vontobel Funds, Inc. on behalf of
your fund. Pursuant to this Agreement, as described in the
accompanying prospectus/proxy statement, your fund will
transfer all of its assets to a newly created Janus fund with
substantially similar investment objectives and policies as
your fund in exchange for shares of that Janus fund.
FOR_____ AGAINST_____ ABSTAIN_____
To transact such other business as may properly come before the Special Meeting.
Management knows of no other such business.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED
HEREON AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING
AUTHORITY TO VOTE "FOR" THE PROPOSAL. THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF
THE ACCOMPANYING NOTICE OF SPECIAL MEETING AND PROSPECTUS/PROXY STATEMENT.
BY SIGNING AND DATING THIS CARD, YOU AUTHORIZE THE PROXIES TO VOTE ON PROPOSAL
NO. 1 AS MARKED. IF NOT MARKED, THE PROXIES WILL VOTE "FOR" PROPOSAL 1 AND AS
THEY SEE FIT ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING. IF
YOU DO NOT INTEND TO PERSONALLY ATTEND THE MEETING, PLEASE COMPLETE AND MAIL
THIS CARD AT ONCE IN THE ENCLOSED ENVELOPE.
- ---------------------------- ------------------------------ -------------
SIGNATURE SIGNATURE (JOINT OWNER) DATE
PLEASE DATE AND SIGN NAME OR NAMES TO AUTHORIZE THE VOTING OF YOUR SHARES AS
INDICATED ABOVE. WHERE SHARES ARE REGISTERED WITH JOINT OWNERS, ALL JOINT OWNERS
SHOULD SIGN. PERSONS SIGNING AS AN EXECUTOR, ADMINISTRATOR, TRUSTEE OR OTHER
REPRESENTATIVE SHOULD GIVE FULL TITLE AS SUCH.
PLEASE REFER TO THE PROSPECTUS/PROXY STATEMENT FOR DISCUSSION OF THE PROPOSAL.
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS.
[graphics omitted] Prospectus
Vontobel U.S. Value Fund
Vontobel International Equity Fund
Vontobel Eastern European Equity Fund
Series of Vontobel Funds, Inc.
(the "Company")
A "Series" Investment Company
Prospectus
Dated
May 1, 2003
As With All Mutual Funds, The U.S. Securities and Exchange Commission Has
Not Approved Or Disapproved These Securities Or Passed Upon The Accuracy Or
Completeness Of This Prospectus. It Is A Criminal Offense To Suggest
Otherwise.
Page 1
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
Risk/Return Summary 3
Fees and Expenses 9
Objectives and Strategies 13
Risks 16
Management 17
Shareholder Information 18
Purchasing Shares 19
Redeeming Shares 20
Distribution and Taxes 22
Distribution Arrangements 23
Financial Highlights 25
-----
</Table>
Page 2
RISK/RETURN SUMMARY
Vontobel U.S. Value Fund
Investment Objective -- Long-term capital appreciation.
Principal Investment Strategies -- The Vontobel U.S. Value Fund (the "Value
Fund") will seek to achieve its investment objective by investing in a
non-diversified portfolio consisting primarily of equity securities. Under
normal market conditions, the Value Fund will invest at least 65% of its net
assets in equity securities of companies that are traded on U.S. exchanges.
Equity securities consist of common stocks and securities convertible into
common stocks, such as warrants, rights, convertible bonds, debentures or
convertible preferred stock. The Value Fund may also invest in debt securities
and cash equivalents, such as overnight repurchase agreements, and short-term
U.S. Government securities. Debt securities include obligations of governments,
instrumentalities and corporations. Short-term instruments are generally used to
protect the Fund against movements in interest rates and to provide the Value
Fund with liquidity.
Principal Risks -- The principal risk of investing in the Value Fund is that the
value of its investments are subject to market, economic and business risk that
may cause the Value Fund's net asset value ("NAV") to fluctuate over time.
Therefore, the value of your investment in the Value Fund could decline and you
could lose money. There is no assurance that the adviser will achieve the Value
Fund's objective.
The Value Fund operates as a non-diversified fund for purposes of the Investment
Company Act of 1940, as amended (the "1940 Act"). This means that the Value Fund
may invest a larger portion of its assets in a small number of securities. This
may cause the market action of the Value Fund's larger portfolio positions to
have a greater impact on the Value Fund's NAV, which could result in increased
volatility.
An investment in the Value Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Investor Profile -- You may want to invest in the Value Fund if you are seeking
long-term capital appreciation and are willing to accept share prices that may
fluctuate, sometimes significantly, over the short-term. The Value Fund will not
be appropriate if you are seeking current income or are seeking safety of
principal.
Performance Information -- The bar chart and table show how the Value Fund has
performed in the past and gives some indication of the risks of investing in the
Value Fund. Both assume that all dividends and distributions are reinvested in
the Value Fund. Returns shown are for Class A Shares of the Value Fund. As of
the date of this prospectus, the Class C Shares of the Value Fund have not yet
completed one calendar year of operations. Class C Shares should have returns
that are substantially the same because they represent interests in the same
portfolio of securities and differ only to the extent that they bear different
expenses. The bar chart shows how the performance of the Class A Shares of the
Value Fund has varied from year to year. The bar chart figures don't include any
sales charges that an investor will pay when they buy or sell Class A Shares of
the Value Fund. If sales charges were included, the returns would be lower. The
table compares the average annual total returns of the Class A Shares of the
Value Fund for the periods ended December 31, 2002 to the Standard and Poor's
500 Index (the "S&P 500 Index"). Keep in mind that past performance (before and
after taxes) may not indicate how well the Value Fund will perform in the
future.
Page 3
[bar chart goes here]
Vontobel U.S. Value Fund Total Return
<Table>
1993 6.00%
1994 0.02%
1995 40.36%
1996 21.28%
1997 34.31%
1998 14.70%
1999 (14.07%)
2000 35.18%
2001 3.06%
2002 (2.20%)
</Table>
Best Quarter: 4th Q 2000 up 20.26%
Worst Quarter: 3rd Q 1999 down 15.28%
[end bar chart]
The total return for the Value Fund's Class A Shares for the three months ended
March 31, 2003, was (5.47%).
<Table>
<Caption>
Average Annual Total Returns
(for the period ending December 31, 2002)
One Year Five Years Ten Years
Value Fund - Class A Shares
Before Taxes(1) (7.82%) 4.83% 11.96%
After Taxes on Distributions(1)(2) (9.29%) 3.64% 9.25%
After Taxes on Distributions
and Sale of Fund Shares(1)(2) (4.79%) 3.36% 8.61%
Class C Shares(3) (4.15%) 6.08% 12.63%
S&P 500 Index(4) (22.10%) (0.59%) 9.34%
</Table>
(1) Prior to September 9, 2002, no sales charges were imposed on Class A
Shares. These returns represent the performance of the Class A Shares
but they have been restated to include the effect of the maximum 5.75%
front-end sales charge payable on purchases of Class A Shares.
(2) After-tax returns presented are for Class A Shares only. After-tax
returns for Class C Shares will be different. After-tax returns are
calculated using the historical highest individual federal marginal
income tax rates, and do not reflect the impact of state and local
taxes. Actual after-tax returns depend on the investor's tax situation
and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) These returns represent the performance of the Class A Shares but they
have been restated to reflect the fact that Class C Shares are sold
without a front-end sales charge and to include the effect of the 2.00%
deferred sales charge payable on redemptions of Class C Shares if
redeemed within two years of purchase. Class C Shares are also subject
to distribution and service fees at an annual rate of 1.00% of the
Value Fund's Class C Share assets. Had the performance of the Class A
Shares of the Value Fund been restated to reflect these distribution
and service fees, the average annual total returns would have been
lower.
Page 4
(4) The S&P 500 Index is a widely recognized, unmanaged index of 500 stocks
of a representative sampling of leading U.S. companies based on market
size, liquidity and industry group representation. Returns include
dividends and distributions. The comparative index is not adjusted to
reflect deductions for fees, expenses or taxes that the U.S. Securities
and Exchange Commission (the "SEC") requires to be reflected in the
Value Fund's performance.
Vontobel International Equity Fund
Investment Objective -- Capital appreciation.
Principal Investment Strategies -- The Vontobel International Equity Fund (the
"International Equity Fund") will seek to achieve its investment objective by
investing in a diversified portfolio consisting primarily of equity securities.
Equity securities consist of common stocks and securities convertible into
common stocks, such as warrants, rights, convertible bonds, debentures or
convertible preferred stock. Under normal market conditions the International
Equity Fund will invest at least 80% of its net assets in equity securities of
issuers that are located outside of the U.S., or which derive a significant
portion of their business or profits outside of the U.S. The International
Equity Fund intends to diversify its investments broadly among countries and
normally to have represented in the portfolio business activities of not less
than three different countries. The International Equity Fund will primarily
hold securities listed on a security exchange or quoted on an established
over-the-the counter market.
Principal Risks -- The principal risk of investing in the International Equity
Fund is that the value of its investments are subject to market, economic and
business risks that may cause the International Equity Fund's NAV to fluctuate
over time. Therefore, the value of your investment in the International Equity
Fund could decline and you could lose money. There is no assurance that the
adviser will achieve the International Equity Fund's objective.
The International Equity Fund will invest in foreign countries. These
investments may involve financial, economic or political risks not ordinarily
associated with U.S. securities. The International Equity Fund's NAV may be
affected by changes in exchange rates between foreign currencies and the U.S.
dollar, less rigorous regulatory standards, less liquidity in markets and more
volatility in prices than U.S. securities, higher taxes, and adverse social or
political developments.
The International Equity Fund also invests in securities of companies that trade
in emerging and developing markets. In addition to the typical risks that are
associated with investing in foreign countries, companies in developing
countries generally do not have lengthy operating histories. Consequently, these
markets may be subject to more substantial volatility and price fluctuations
than securities traded in more developed markets.
An investment in the International Equity Fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Investor Profile -- You may want to invest in the International Equity Fund if
you are seeking capital appreciation and wish to diversify your existing
investments. The International Equity Fund may be particularly suitable for you
if you wish to take advantage of opportunities in the securities markets of
foreign countries. You should not invest in the International Equity Fund if you
are not willing to accept the risks associated with investing in foreign
countries, if you are seeking current income or are seeking safety of principal.
Performance Information -- The bar chart and table show how the International
Equity Fund has performed in the past and gives some indication of the risks of
investing in the International Equity Fund. Both assume that all dividends and
Page 5
distributions are reinvested in the International Equity Fund. The returns shown
below are for Class A Shares of the International Equity Fund. As of the date of
this prospectus, the International Equity Fund has not offered Class C Shares.
Class C Shares should have returns that are substantially the same because they
represent interests in the same portfolio of securities and differ only to the
extent that they bear different expenses. The bar chart shows how the
performance of the Class A Shares of the International Equity Fund has varied
from year to year. The bar chart figures don't include any sales charges that an
investor will pay when they buy or sell Class A Shares of the International
Equity Fund. If sales charges were included, the returns would be lower. The
table compares the average annual total returns of the Class A Shares of the
International Equity Fund for the periods ended December 31, 2002 to the Morgan
Stanley Capital International's Europe, Australasia and Far East Index ("MSCI
EAFE Index"). Keep in mind that past performance (before and after taxes) may
not indicate how well the International Equity Fund will perform in the future.
[bar chart goes here]
Vontobe International Equity Fund Total Return
<Table>
1993 40.80%
1994 (5.28%)
1995 10.91%
1996 16.98%
1997 9.19%
1998 16.77%
1999 46.52%
2000 (18.70%)
2001 (29.22%)
2002 (7.92%)
</Table>
Best Quarter: 4th Q 1999 up 34.02%
Worst Quarter: 1st Q 2001 down 18.82%
[end bar chart]
The total return for the International Equity Fund's Class A Shares for the
three months ended March 31, 2003 was (6.66%).
<Table>
<Caption>
Average Annual Total Returns
(for the period ending December 31, 2002)
One Year Five Years Ten Years
International Equity Fund - Class A Shares
Before Taxes(1) (13.21%) (3.07%) 5.06%
After Taxes on Distributions(1)(2) (13.21%) (4.35%) 3.53%
After Taxes on Distributions
and Sale of Fund Shares(1)(2) (8.11%) (2.12%) 4.05%
Class C Shares(3) (9.76%) (1.92%) 5.69%
MSCI EAFE Index(4) (22.71%) (4.53%) 3.12%
</Table>
(1) Prior to September 9, 2002, no sales charges were imposed on Class A
Shares. These returns represent the performance of the Class A Shares
but they have been restated to include the effect of the maximum 5.75%
front-end sales charge payable on purchases of Class A Shares.
(2) After-tax returns presented are for Class A Shares only. After-tax
returns for Class C Shares will be different. After-tax returns are
calculated using the historical highest individual federal marginal
income tax rates, and do not reflect the impact of state and local
taxes. Actual after-tax
Page 6
returns depend on the investor's tax situation and may differ from
those shown. After-tax returns shown are not relevant to investors who
hold their fund shares through tax-deferred arrangements such as 401(k)
plans or individual retirement accounts.
(3) These returns represent the performance of the Class A Shares but have
been restated to reflect the fact that Class C Shares are sold without
a front-end sales charge and to include the effect of the 2.00%
deferred sales charge payable on redemptions of Class C Shares redeemed
within two years of purchase. Class C Shares are also subject to
distribution and service fees at an annual rate of 1.00% of the
International Equity Fund's Class C Share assets. Had the performance
of the Class A Shares of the International Equity Fund been restated to
reflect these distribution and service fees, the average annual total
returns would have been lower.
(4) The MSCI EAFE Index is an unmanaged index of more than 1,100 common
stock securities issued by foreign companies. Returns include dividends
and distributions and are expressed in U.S. dollars. The comparative
index is not adjusted to reflect deductions for fees, expenses or taxes
that the SEC requires to be reflected in the International Equity
Fund's performance.
Vontobel Eastern European Equity Fund
Investment Objective -- Capital appreciation.
Principal Investment Strategies -- The Vontobel Eastern European Equity Fund
(the "Eastern European Equity Fund") will seek to achieve its objective by
investing in equity securities, such as common stocks and securities that are
convertible into common stock. Under normal market conditions, the Eastern
European Equity Fund will invest at least 80% of its assets in equity securities
of companies located in eastern Europe or which conduct a significant portion of
their business in countries which are generally considered to comprise eastern
Europe. The Eastern European Equity Fund normally will have represented in the
portfolio business activities of not less than three different countries.
Principal Risks -- The Eastern European Equity Fund's investments are subject to
market, economic and business risks. These risks may cause the Eastern European
Equity Fund's NAV to fluctuate over time. Therefore, the value of your
investment in the Eastern European Equity Fund could decline and you could lose
money. Also, there is no assurance that the adviser will achieve the Eastern
European Equity Fund's objective.
The Eastern European Equity Fund will invest in foreign countries. These
investments may involve financial, economic or political risks that are not
ordinarily associated with U.S. securities. Hence, the Eastern European Equity
Fund's NAV may be affected by changes in exchange rates between foreign
currencies and the U.S. dollar, different regulatory standards, less liquidity
and increased volatility, taxes and adverse social or political developments.
The Eastern European Equity Fund also invests in securities of companies that
trade in emerging and developing markets. In addition to the typical risks that
are associated with investing in foreign countries, companies in developing
countries generally do not have lengthy operating histories. Consequently, these
markets may be subject to more substantial volatility and price fluctuations
than securities traded in more developed markets.
An investment in the Eastern European Equity Fund is not a bank deposit and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
Investor Profile -- You may wish to invest in the Eastern European Equity Fund
if you are seeking capital appreciation, wish to diversify your current equity
holdings and wish to take advantage of opportunities in the newly reorganized
markets of eastern Europe. You should not invest in the Eastern European Equity
Page 7
Fund if you are not willing to accept the risk associated with investing in
foreign and developing markets or if you are seeking current income.
Performance Information -- The bar chart and table show how the Eastern European
Equity Fund has performed in the past and gives some indication of the risks of
investing in the Eastern European Equity Fund. Both assume that all dividends
and distributions are reinvested in the Eastern European Equity Fund. Returns
shown below are for Class A Shares of the Eastern European Equity Fund. As of
the date of this prospectus, the Eastern European Equity Fund has not offered
Class C Shares. Class C Shares should have returns that are substantially the
same because they represent interests in the same portfolio of securities and
differ only to the extent that they bear different expenses. The bar chart shows
how the performance of the Class A Shares of the Eastern European Equity Fund
has varied from year to year. The bar chart figures don't include any sales
charges that an investor will pay when they buy or sell Class A Shares of the
Eastern European Equity Fund. If sales charges were included, the returns would
be lower. The table compares the average annual total returns of the Class A
Shares of the Eastern European Equity Fund for the periods ended December 31,
2002 to the Nomura Research Institute's Central and Eastern European Equity
Index (the "Nomura Composite-11 Index"). Keep in mind that the past performance
(before and after taxes) may not indicate how well the Eastern European Equity
Fund will perform in the future.
[bar chart goes here]
vontobel Eastern European Equity Fund Total Return
<Table>
1997 8.74%
1998 (46.62%)
1999 14.50%
2000 (17.49%)
2001 (7.41%)
2002 20.51%
</Table>
Best Quarter: 4th Q 1999 up 31.64%
Worst Quarter: 3rd Q 1998 down 40.48%
[end bar chart]
The total return for the Eastern European Equity Fund's Class A Shares for the
three months ended March 31, 2003 was (1.40%).
<Table>
<Caption>
Average Annual Total Returns
(for the period ending December 31, 2002)
Since Inception
One Year Five Year (February 15, 1996)
Eastern European Equity Fund - Class A Shares
Before Taxes(1) 13.58% (11.92%) (2.19%)
After Taxes on Distributions(1)(2) 13.58% (11.92%) (2.48%)
After Taxes on Distributions
and Sale of Fund Shares(1)(2) 8.34% ( 8.99%) (4.97%)
Class C Shares (3) 18.10% (10.87%) (1.35%)
Nomura Composite-11 Index(4) 23.86% (1.27%) n.a.
</Table>
Page 8
(1) Prior to September 9, 2002, no sales charges were imposed on Class A
Shares. These returns represent the performance of the Class A Shares
but they have been restated to include the effect of the maximum 5.75%
front-end sales charge payable on purchases of Class A Shares.
(2) After-tax returns presented are for Class A Shares only. After-tax
returns for Class C Shares will be different. After-tax returns are
calculated using the historical highest individual federal marginal
income tax rates, and do not reflect the impact of state and local
taxes. Actual after-tax returns depend on the investor's tax situation
and may differ from those shown. After-tax returns shown are not
relevant to investors who hold their fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) These returns represent the performance of the Class A Shares but they
have been restated to reflect the fact that Class C Shares are sold
without a front-end sales charge and to include the effect of the 2.00%
deferred sales charge payable on redemptions of Class C Shares redeemed
within two years of purchase. Class C Shares are also subject to
distribution and service fees at an annual rate of 1.00% of the Eastern
European Equity Fund's Class C Share assets. Had the performance of the
Class A Shares of the Eastern European Equity Fund been restated to
reflect these distribution and service fees, the average annual total
returns would have been lower.
(4) The Nomura Composite-11 Index is an unmanaged index of equity
securities traded on securities exchanges or established
over-the-counter markets in Poland, the Czech Republic, Hungary,
Slovakia, Croatia, Romania, Slovenia, Estonia, Latvia, Lithuania and
Russia. Returns do not include dividends and distributions and are
expressed in U.S. dollars. The comparative index is not adjusted to
reflect deductions for fees, expenses or taxes that the SEC requires to
be reflected in the Eastern European Equity Fund's performance.
FEES AND EXPENSES
Costs are an important consideration in choosing a mutual fund. Shareholders
indirectly pay the costs of operating a fund, plus any transaction costs
associated with buying and selling the securities a fund holds. These costs will
reduce a portion of the gross income or capital appreciation a fund achieves.
Even small differences in these expenses can, over time, have a significant
effect on a fund's performance.
The following table describes the fees and expenses that you will pay directly
or indirectly in connection with an investment in the Funds. The annual
operating expenses, which cover the costs of investment management,
administration, accounting and shareholder communications, are shown as an
annual percentage of the average daily net assets.
Value Fund
Shareholder Transaction Fees (fees paid directly from your investment)
<Table>
<Caption>
Class A Class C
-------- --------
Maximum Sales Charge (Load) Imposed on Purchases(1) 5.75% None
Maximum Deferred Sales Charge (Load) 2.00%(2) 2.00%(3)
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends and Distributions None None
Redemption Fees(4) None None
Exchange Fees(5) None None
</Table>
Estimated Annual Operating Expenses (expenses that are deducted from Fund
assets)
Page 9
<Table>
<Caption>
Class A Class C
-------- --------
Management Fee 0.98% 0.98%
Distribution (12b-1) and Service Fees (6) None 1.00%
Other Expenses 0.76% 0.76%
-------- --------
Total Annual Fund Operating Expenses 1.74% 2.74%
======== ========
</Table>
Page 10
International Equity Fund
Shareholder Transaction Fees (fees paid directly from your investment)
<Table>
<Caption>
Class A Class C
-------- --------
Maximum Sales Charge (Load) Imposed on Purchases (1) 5.75% None
Maximum Deferred Sales Charge (Load) 2.00(2) 2.00%(3)
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends and Distributions None None
Redemption Fees(4) None None
Exchange Fees(5) None None
</Table>
Estimated Annual Operating Expenses (expenses that are deducted from Fund
assets)
<Table>
<Caption>
Class A Class C
-------- --------
Management Fee 1.00% 1.00%
Distribution (12b-1) and Service Fees (6) None% 1.00%
Other Expenses 1.44% 1.44%
-------- --------
Total Annual Fund Operating Expenses 2.44% 3.44%
======== ========
</Table>
Eastern European Equity Fund
Shareholder Transaction Fees (fees paid directly from your investment)
<Table>
<Caption>
Class A Class C
-------- --------
Maximum Sales Charge (Load) Imposed on Purchases(1) 5.75% None
Maximum Deferred Sales Charge (Load) 2.00(2) 2.00%(3)
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends and Distributions None None
Redemption Fees(4) None None
Exchange Fees(5) None None
</Table>
Estimated Annual Operating Expenses (expenses that are deducted from Fund
assets)
<Table>
<Caption>
Class A Class C
-------- --------
Management Fee 1.25% 1.25%
Distribution (12b-1) and Service Fees (6) None 1.00%
Other Expenses 1.98% 1.98%
-------- --------
Total Annual Fund Operating Expenses 3.23% 4.23%
======== ========
</Table>
Page 11
(1) As a percentage of offering price. Reduced rates apply to purchases of
Class A Shares over $50,000, and the sales charge is waived for certain
classes of investors.
(2) If you are in a category of investors who may purchase Class A Shares
without a front-end sales charge, you will be subject to a 2.00%
deferred sales charge if you redeem your shares within 360 days of
purchase.
(3) A deferred sales charge of 2.00% is imposed on the proceeds of Class C
Shares redeemed within 2 years of purchase. The charge is a percentage
of the net asset value at the time of purchase.
(4) A shareholder electing to redeem shares by telephone will be charged
$10 for each such redemption request.
(5) A shareholder may be charged a $10 fee for each telephone exchange.
(6) The Company has approved separate Plans of Distribution for each Fund's
Class C Shares pursuant to Rule 12b-1 of the 1940 Act, providing for
the payment of distribution and service fees to the distributor of the
Funds. Class C Shares pay a maximum distribution and service fee of
1.00% of average daily net assets. Of this amount, 0.75% represents
distribution 12b-1 fees payable under each Fund's Class C Rule 12b-1
Plan and 0.25% represents shareholder servicing fees. The higher 12b-1
fees borne by Class C Shares may cause long-term investors to pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers.
Example:
The following expense examples show the expenses that you could pay over time.
It will help you compare the costs of investing in each of the Funds with the
cost of investing in other mutual funds. The examples assume that you invest
$10,000 in a Fund, you pay he maximum initial sales charge and any applicable
deferred sales charge, you reinvest all dividends and distributions in
additional shares of a Fund, you redeem all of your shares at the end of the
periods indicated, you earn a 5.00% annual return and each Fund's operating
expenses remain the same. Because actual return and expenses will be different,
the example is for comparison only. Based on these assumptions, your costs would
be:
<Table>
<Caption>
1 Year 3 Years 5 Years 10 Years
---------- ---------- ---------- ----------
Value Fund
Class A Shares(1) $ 742 $ 1,091 $ 1,464 $ 2,509
Class C Shares 477 850 1,450 3,070
International Equity Fund
Class A Shares(1) 808 1,292 1,801 3,192
Class C Shares 547 1,056 1,788 3,721
Eastern European Equity Fund
Class A Shares(1) 882 1,513 2,166 3,903
Class C Shares 625 1,284 2,156 4,396
</Table>
(1) With respect to each Fund's Class A Shares, the above examples assume
the payment of the maximum initial sales charge of 5.75% at the time of
purchase. The sales charge varies depending upon the amount of Fund
shares that an investor purchases. Accordingly, your actual expenses
may vary.
Page 12
OBJECTIVES AND STRATEGIES
Value Fund
The Value Fund's investment objective is long-term capital appreciation. The
Value Fund will seek to achieve its objective by investing in a non-diversified
portfolio consisting primarily of equity Securities. Equity securities consist
of common stocks and securities that are convertible into common stocks, such as
warrants, rights, convertible bonds, debentures or convertible preferred stock.
Under normal market conditions, the Fund will invest at least 65% of its net
assets in equity securities of companies that are traded on U.S. exchanges. The
Value Fund also invests in debt securities and cash equivalents, such as
overnight repurchase agreements and short-term U.S. Government securities. Debt
securities include obligations of governments, instrumentalities and
corporations. The adviser uses the S&P 500 Index as the benchmark for the broad
market against which the performance of the Value Fund is measured.
Vontobel Asset Management, Inc. (the "Adviser"), the adviser for each of the
Funds, employs a bottom-up approach to stockpicking. (A bottom-up approach means
that securities are selected company by company rather than by identifying a
suitable industry or market sector for investments and then investing in
companies in that industry or market sector.) This bottom-up approach emphasizes
qualitative criteria in evaluating a company's potential as a prospective
investment opportunity. Although the Value Fund's return will be compared to
that provided by the broad market, the Adviser seeks to achieve attractive
absolute returns over the "risk-free" rate, defined as the rate of return
available on 10-year U.S. Government securities. The Adviser's utilization of an
"absolute" rather than a "relative" valuation yardstick is designed to achieve
not only a satisfactory return over the risk-free rate but at the same time
ensure safety of principal. The Adviser considers the riskiness of an investment
to be a function of the company's business rather than the volatility of its
stock price. Therefore, the Adviser seeks to identify companies whose businesses
are predictable or that exhibit elements of a franchise. Ideally, such companies
must have a history of competitive returns on invested capital, reliable growth
in earnings and free cash flow, low debt and effective management.
As noted above, the Adviser seeks to achieve its investment objective by
investing principally in equity securities, such as common stocks or securities
that are convertible into common stock. Nonetheless, the Adviser may construct,
and in fact has at times constructed, a portfolio in which cash and cash
equivalents (including, but not limited to, overnight repurchase agreements and
short-term U.S. Government securities), and/or fixed-income instruments,
comprise a significant portion of the Value Fund's total assets. The Adviser
views its "cash position" as a residual investment that is a measure of the
ability of its investment personnel to identify enough stocks and convertible
securities that meet their rigorous investment criteria.
In determining which portfolio securities to sell, the Adviser considers the
following: (1) if a stock appreciates such that, as a total percentage of the
portfolio, it becomes too large; (2) if the sector or stock appears to be
under-performing; (3) if the company management appears to be engaging in
conduct not in the best interest of public shareholders; (4) to sell loss
positions in order to reduce taxable gains to our shareholders reflected in
earlier sales of positions with gains; and, (5) to raise funds to cover
redemptions.
International Equity Fund
The International Equity Fund's investment objective is capital appreciation.
The International Equity Fund will seek to achieve its objective by investing in
a diversified portfolio consisting primarily of equity securities. Equity
securities consist of common stocks and securities convertible into common
stocks, such as warrants, rights, convertible bonds, debentures or convertible
preferred stock. Under normal market conditions, the Fund will invest at least
Page 13
80% of its assets in equity securities of issuers that are located outside of
the U.S., or which derive a significant portion of their business or profits
outside of the U.S. The International Equity Fund will invest most of its assets
in equity securities of countries which are generally considered to have
developed markets, such as the United Kingdom, the eleven euro-zone countries
(France, Germany, Italy, Spain, Portugal, Finland, Ireland, Belgium, the
Netherlands, Luxembourg and Austria), Switzerland, Norway, Japan, Hong Kong,
Australia, and Singapore. The Adviser will decide when and how much to invest in
each of these markets. Investments may also be made in equity securities issued
by companies in "developing countries" or "emerging markets," such as Taiwan,
Malaysia, Indonesia, and Brazil, which are included in Morgan Stanley Capital
International's Emerging Markets Free Index ("EMF").
The International Equity Fund typically invests in the securities of medium to
large capitalization companies, but is not limited to investing in the
securities of companies of any size. The Adviser employs a bottom-up stock and
business analysis to identify high-quality growth companies. Typically, these
companies tend to be well managed with the following attributes:
o Consistent operating histories and financial performance
o Favorable long-term economic prospects
o Free cash flow generation
o Competent management that can be counted on to use cash flow wisely, and
channel the reward from the business back to its shareholders
The Adviser's goal is to construct a portfolio of high quality growth companies
in the developed markets of various foreign countries. With approximately 70-90
stocks, the Fund seeks to be well diversified and will normally have represented
in the portfolio business activities of not less than three different countries.
The International Equity Fund generally holds its core positions for at least
two years.
The International Equity Fund may select its investments from companies which
are listed on a securities exchange or from companies whose securities have an
established over-the-counter market, and may make limited investments in "thinly
traded" securities.
The securities the International Equity Fund purchases may not always be
purchased on the principal market. For example, Depositary Receipts may be
purchased if trading conditions make them more attractive than the underlying
security (see Depositary Receipts).
In addition to common stocks and securities that are convertible into common
stocks, the International Equity Fund may invest in shares of closed-end
investment companies. These investment companies invest in securities that are
consistent with the International Equity Fund's objective and strategies. By
investing in other investment companies, the International Equity Fund
indirectly pays a portion of the expenses and brokerage costs of these companies
as well as its own expenses. Also, federal securities laws impose limits on such
investments, which may affect the ability of the International Equity Fund to
purchase or sell these shares.
The International Equity Fund has the authority to enter into forward contracts
to purchase or sell foreign currencies, purchase and write covered call options
on foreign currencies and enter into contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures").
In determining which portfolio securities to sell, the Adviser considers the
following: (1) the price target has been met; (2) there has been an
overvaluation of the company by the stock market; (3) there is a clear
deterioration of future earnings power; (4) there is a loss of long-term
competitive advantage; (5) there is detrimental merger/acquisition related
activity; (6) a better investment opportunity is identified; (7) a violation of
Page 14
portfolio construction parameters has taken place; (8) to sell loss positions in
order to reduce taxable gains to our shareholders reflected in earlier sales of
positions with gains; and (9) to raise funds to cover redemptions.
Eastern European Equity Fund
The Eastern European Equity Fund's investment objective is capital appreciation.
The Eastern European Equity Fund will seek to achieve its objective by investing
in equity securities, such as common stocks and securities that are convertible
into common stock. Under normal market conditions, the Eastern European Equity
Fund will invest at least 80% of its net assets in equity securities of
companies that are located in or conduct a significant portion of their business
in countries which are generally considered to comprise Eastern Europe. This is
not a fundamental policy and may be changed by the Board of Directors of the
Company, without a vote of shareholders, upon 60 days' prior notice. The
Adviser's investment universe consists of companies that are located in, or
listed on the exchanges of Central and Eastern European countries, as well as
companies that derive at least two-thirds of their sales from such countries.
Not all of these countries have a functioning stock exchange and others still
have an illiquid securities market; consequently, the Adviser concentrates on
the markets of Hungary, Poland, Slovenia, the Czech Republic, Slovakia, Russia,
Croatia and the Baltic states (Estonia, Latvia and Lithuania). The Adviser can
invest in local shares in Poland, Hungary, the Czech Republic, Slovakia, the
Baltic States, Croatia, Romania and Slovenia. Elsewhere, due to the lack of
local sub-custodians or liquidity, the Adviser currently invests only through
depository receipts such as American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and Registered
Depositary Certificates ("RDCs"). (Collectively, "Depositary Receipts".)
Trading volume of the stock exchanges of these markets may be substantially
lower than that in developed markets and the purchase and sale of portfolio
securities may not always be made at an advantageous price. The Adviser
generally will decide when and how much to invest in these developing markets
based upon its assessment of their continuing development. As stock markets in
the region develop and more investment opportunities emerge, the Eastern
European Equity Fund will broaden its portfolio to include securities of
companies located in or which conduct a significant portion of their business in
countries in this region.
The portfolio of the Eastern European Equity Fund will be diversified. The
selection of the securities in which the Eastern European Equity Fund will
invest will not be limited to companies of any particular size, or to securities
traded in any particular marketplace, and will be based only upon the expected
contribution such security will make to its investment objective. Currently, the
Adviser considers only about 250 stocks as suitable for investment, based upon
their market capitalization and liquidity. The Adviser expects this number to
increase dramatically in the years to come. Together, these 250 stocks represent
a market capitalization of approximately 75 billion U.S. dollars.
The Eastern European Equity Fund also invests in shares of closed-end investment
companies. These investment companies invest in securities that are consistent
with the Eastern European Equity Fund's objective and strategies. By investing
in other investment companies, the Eastern European Equity Fund indirectly pays
a portion of the expenses and brokerage costs of these companies in addition to
its own expenses. Also, federal laws impose limits on such investments, which
may affect the ability of the Eastern European Equity Fund to purchase or sell
these shares. The Eastern European Equity Fund does not actively manage currency
risk.
In determining which portfolio securities to sell, the Adviser considers the
following: (1) if a stock appreciates such that, as a total percentage of the
portfolio, it becomes too large; (2) if the sector or stock appears to be
under-performing; (3) if the company management appears to be engaging in
Page 15
conduct not in the best interest of public shareholders; (4) to sell loss
positions in order to reduce taxable gains to our shareholders reflected in
earlier sales of positions with gains; and, (5) to raise funds to cover
redemptions.
RISKS
Stock Market Risk -- Each Fund is subject to stock market risk. Stock market
risk is the possibility that stock prices overall will decline over short or
long periods. Because stock prices tend to fluctuate, the value of your
investment in the Funds may increase or decrease. The Funds' investment success
depends on the skill of the Adviser in evaluating, selecting and monitoring the
portfolio assets. If the Adviser's conclusions about growth rates or securities
values are incorrect, the Funds may not perform as anticipated.
Diversification -- The Value Fund is non-diversified under the 1940 Act.
However, because it intends to qualify as a "regulated investment company" for
purposes of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), the Value Fund must meet certain diversification requirements. These
include the requirement that at the end of each tax year quarter, at least 50%
of the market value of its total assets must be invested in cash, cash
equivalents, U.S. government securities and securities of issuers (including
foreign governments), in which it has invested not more than 5% of its assets. A
regulated investment company is also limited in its purchases of voting
securities of any issuer and may invest no more than 25% of the value of its
total assets in securities (other than U.S. government securities) of any one
issuer or of two or more issuers that the Value Fund controls and are engaged in
the same, similar or related trades or businesses.
Geographic Risk -- Investments in a single region, even though representing a
number of different countries within the region, may be affected by common
economic forces and other factors. A Fund is subject to greater risks of adverse
events which occur in the region and may experience greater volatility than a
fund that is more broadly diversified geographically. Political or economic
disruptions, even in countries in which a Fund is not invested, may adversely
affect security values and thus, a Fund's holdings.
Foreign Investing -- The International Equity and Eastern European Equity Funds'
investments in foreign securities may involve risks that are not ordinarily
associated with U.S. securities. Foreign companies are not generally subject to
the same accounting, auditing and financial reporting standards as are domestic
companies. Therefore, there may be less information available about a foreign
company than there is about a domestic company. Certain countries do not honor
legal rights enjoyed in the U.S. In addition, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments, which could affect U.S. investments in those countries.
Investments in foreign companies often are made in the foreign currencies,
subjecting the investor to the risk of currency devaluation or exchange rate
risk. In addition, many foreign securities markets have substantially less
trading volume than the U.S. markets, and securities of some foreign issuers are
less liquid and more volatile than securities of domestic issuers. These factors
make foreign investment more expensive for U.S. investors. Mutual funds offer an
efficient way for individuals to invest abroad, but the overall expense ratios
of mutual funds that invest in foreign markets are usually higher than those of
mutual funds that invest only in U.S. securities.
Emerging and Developing Markets -- The International Equity and Eastern European
Equity Funds' investments in emerging and developing countries involve those
same risks that are associated with foreign investing in general (see above). In
addition to those risks, companies in such countries generally do not have
lengthy operating histories. Consequently, these markets may be subject to more
substantial volatility and price fluctuations than securities that are traded on
more developed markets.
Page 16
Depositary Receipts -- In addition to the risk of foreign investments applicable
to the underlying securities, unsponsored Depositary Receipts may also be
subject to the risks that the foreign issuer may not be obligated to cooperate
with the U.S. bank, may not provide additional financial and other information
to the bank or the investor, or that such information in the U.S. market may not
be current.
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. On January 1, 2002, many national currencies
were replaced by Euro coins and bank notes. This change is likely to
significantly impact the European capital markets in which the International
Equity and Eastern European Equity Funds may invest and may result in 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 International Equity and Eastern European Equity
Funds' net asset value per share.
Temporary Defensive Position -- When the Adviser believes that investments
should be deployed in a temporary defensive posture because of economic or
market conditions, each of the Funds may invest up to 100% of its assets in U.S.
Government securities (such as bills, notes, or bonds of the U.S. Government and
its agencies) or other forms of indebtedness such as bonds, certificates of
deposits or repurchase agreements (for the risks involved in repurchase
agreements see the Statement of Additional Information (the "SAI")). For
temporary defensive purposes, the International Equity and Eastern European
Equity Funds may hold cash or debt obligations denominated in U.S. dollars or
foreign currencies. These debt obligations include U.S. and foreign government
securities and investment grade corporate debt securities, or bank deposits of
major international institutions. When a Fund is in a temporary defensive
position, it is not pursuing its stated investment objective. The Adviser
decides when it is appropriate to be in a defensive position. It is impossible
to predict how long such alternative strategies will be utilized.
MANAGEMENT
The Company -- Vontobel Funds, Inc. was organized under the laws of the State of
Maryland on October 28, 1983. The Company is an open-end management investment
company registered under the 1940 Act and is commonly known as a "mutual fund".
The Company has retained the Adviser to manage all aspects of the investments of
each Fund.
Investment Adviser -- Vontobel Asset Management, Inc., located at 450 Park
Avenue, New York, New York 10022, manages the investments of each Fund pursuant
to separate Investment Advisory Agreements (each, an "Advisory Agreement"). The
Adviser is a wholly owned and controlled subsidiary of Vontobel Holding AG, a
Swiss bank holding company, having its registered offices in Zurich,
Switzerland. As of December 31, 2002, the Adviser managed in excess of $1.3
billion. The Adviser also acts as the adviser to three series of a Luxembourg
fund organized by an affiliate of the Adviser. That fund does not accept
investments from the U.S. The Adviser has provided investment advisory services
to mutual fund clients since 1990.
Under each Advisory Agreement, the Adviser, subject to the general supervision
of the Board of Directors, manages each Fund in accordance with its investment
objective and policies, makes decisions with respect to, and places orders for,
all purchases and sales of portfolio securities, and maintains related records.
Page 17
The investment advisory fees paid to the Adviser by the Funds during the fiscal
year ended December 31, 2002 are set forth below.
<Table>
<Caption>
Management Fee As A
Fund Percentage of
Average Net Assets
--------------------
Value Fund 0.98%
--------------------
International Equity Fund 1.00%
--------------------
Eastern European Equity Fund 1.25%
--------------------
</Table>
Portfolio Managers -- Mr. Edwin Walczak is a Senior Vice President of the
Adviser. Mr. Walczak joined the Adviser in 1988 and has been the President
and portfolio manager of the Value Fund since its inception in March, 1990.
Mr. Rajiv Jain is a First Vice President of the Adviser. Mr. Jain joined the
Adviser in November, 1994 and has been the President and portfolio manager of
the International Equity Fund since February, 2002.
Mr. Gunter Faschang, who is a Vice President of the Adviser, is the portfolio
manager of the Eastern European Equity Fund. Mr. Faschang began his career in
September 1995 as a registered trader on the floor of the Frankfurt Stock
Exchange with Sputz AG and Exco-Bierbaum. In March 1997 he joined Investmentbank
Austria, Vienna, as a Central European equity strategist. In January 1998 Mr.
Faschang moved to Erste Bank, Vienna, as a Central European equity strategist
and sector analyst for Russian oil stocks, with responsibility for organizing
the Erste group's Central European research effort. In March 2000 he was
appointed manager of Erste-Sparinvest's Danubia Fund. Mr. Faschang recently
joined Vontobel Asset Management AG as head of Eastern European equity
management and research, and was at the same time appointed a Vice President of
the Adviser.
SHAREHOLDER INFORMATION
Each Fund's share price, called its NAV per share, is determined and shares are
priced as of the close of trading on the New York Stock Exchange ("NYSE")
(generally, 4:00 p.m. Eastern time) on each business day (the "Valuation Time")
that the NYSE is open. As of the date of this prospectus, the Funds are 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 each Fund's investments and other assets attributable
each Fund's Class A Shares or Class C Shares, subtracting any liabilities
attributable to each Fund's Class A Shares or Class C Shares, and then dividing
by the total number of shares of each class outstanding. Due to the fact that
different expenses may be charged against shares of different classes of the
Funds, the NAV of various classes of the Funds may vary.
Shares are bought at the public offering price per share next determined after a
request has been received in proper form. The public offering price of each
Fund's Class A Shares is equal to the net asset value plus the applicable sales
load, if any. The public offering price of each Fund's Class C Shares is equal
to the net asset value. Shares held by you are sold or exchanged at the net
asset value per share next determined after a request has been received in
proper form, less any applicable deferred sales charge. Any request received in
Page 18
proper form before the Valuation Time, will be processed the same business day.
Any request received in proper form after the Valuation Time, will be processed
the next business day.
Each Fund's securities are valued at current market prices. Investments in
securities traded on the national securities exchanges or included in the NASDAQ
National Market System are valued at the last reported sale price. Other
securities traded in he over-the-counter market and listed securities for which
no sales are reported on a given date are valued at the last reported bid price.
Short-term debt securities (less than 60 days to maturity) are valued at their
fair market value using amortized cost. Other assets for which market prices are
not readily available are valued at their fair value as determined in good faith
under procedures set by the Board of Directors. Depositary receipts will be
valued at the closing price of the instrument last determined prior to the
Valuation Time unless the Company is aware of a material change in value.
Securities for which such a value cannot be readily determined on any day will
be valued at the closing price of the underlying security adjusted for the
exchange rate. The value of a foreign security is determined as of the close of
trading on the foreign exchange on which it is traded or as of the scheduled
close of trading on the NYSE, whichever is earlier. Portfolio securities that
are listed on foreign exchanges may experience a change in value on days when
shareholders will not be able to purchase or redeem shares of the Funds.
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.
PURCHASING SHARES
Share Class Alternatives -- The Fund currently offers investors three different
classes of shares, two of which, Class A Shares and Class C Shares, are offered
by this prospectus. 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. 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 adviser to determine which class best meets your
financial objectives. For additional details about share class alternatives see
"Distribution Arrangements".
Share Transactions -- You may purchase and redeem Fund shares, or exchange
shares of the Funds for those of another, by contacting any broker authorized by
the distributor to sell shares of the Funds, by contacting the Funds at (800)
527-9500 or by contacting Fund Services, Inc. (the "Transfer Agent"), the Funds'
transfer and dividend disbursing agent, at 1500 Forest Avenue, Suite 111,
Richmond, Virginia 23229 or by telephoning (800) 628-4077. Brokers may charge
transaction fees for the purchase or sale of the Funds' shares, depending on
your arrangement with the broker.
Minimum Investments -- The minimum initial investment for each Fund is $2,500.
Subsequent investments, for each Fund, must be in amounts of $50 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.
By Mail -- For initial purchases, the account application form, which
accompanies this prospectus, should be completed, signed and mailed to the
Transfer Agent at 1500 Forest Avenue, Suite 111, Richmond, Virginia 23229,
together with your check payable to the applicable Fund. When you buy shares, be
Page 19
sure to specify the class of shares in which you choose 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).
Investing 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) 527-9500 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 form promptly
to the Transfer Agent. This account application is required to complete the
Funds' records. You will not have access to your shares until the Funds' records
are complete. Once your account is opened, you may make additional investments
using the wire procedure described above. Be sure to include your name and
account number in the wire instructions you provide your bank.
REDEEMING SHARES
You may redeem your shares at any time and in any amount by mail or telephone.
For your protection, the Transfer Agent will not redeem your shares until it has
received all the information and documents necessary for your request to be
considered in proper order. You will be notified promptly by the Transfer Agent
if your redemption request is not in proper order.
The Funds' procedure is to redeem shares at the NAV determined after the
Transfer Agent receives the redemption request in proper order, less any
applicable deferred sales charge. Payment will be made promptly, but no later
than the seventh day following the receipt of the request in proper order. The
Funds 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 withdraw your redemption request or permit your request to
be held for processing after the suspension is terminated. If you sell shares
through a securities dealer or investment professional, it is such person's
responsibility to transmit the order to the Funds in a timely fashion. Any loss
to you resulting from failure to do so must be settled between you and such
person.
Delivery of the proceeds of a redemption of shares purchased and paid for by
check shortly before the receipt of the request may be delayed until the Funds
determine that the Transfer Agent has completed collection of the purchase check
which may take up to 14 days. Also, payment of the proceeds of a redemption
request for an account for which purchases were made by wire may be delayed
until the Funds receive a completed account application to permit the Funds 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. 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 to be sent
to a different person or address. Signature guarantees are used to help protect
you and the Funds. 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 provided that
you request 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
Page 20
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 will 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.
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 account number, your account
number at your bank and wire information from your bank in your request to
redeem by wire.
Signature Guarantees -- To help to protect you and the Company from fraud,
signature guarantees are required for: (1) all redemptions ordered by mail if
you require that the check be payable to another person or that the check be
mailed to an address other than the one indicated on the account registration;
(2) all requests to transfer the registration of shares to another owner; and,
(3) all authorizations to establish or change telephone redemption service,
other than through your initial account application.
In the case of redemption by mail, signature guarantees must appear on either:
(a) the written request for redemption; or (b) 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.
The following institutions are acceptable signature guarantors: (a) participants
in good standing of the Securities Transfer Agents Medallion Program ("STAMP");
(b) commercial banks which are members of the Federal Deposit Insurance
Corporation ("FDIC"); (c) trust companies; (d) firms which are members of a
domestic stock exchange; (e) eligible guarantor institutions qualifying under
Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended, that are
authorized by charter to provide signature guarantees (e.g., credit unions,
securities dealers and brokers, clearing agencies and national securities
exchanges); and (f) foreign branches of any of the above. In addition, the
Company will guarantee your signature if you personally visit its offices at
1500 Forest Avenue, Suite 223, Richmond, Virginia 23229. The Transfer Agent
cannot honor guarantees from notaries public, savings and loan associations, or
savings banks.
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 Company may deduct $50 per year from your account or may redeem
the shares in your account, if it has a value of less than $2,500. For Class A
shareholders of each Fund who held their shares prior to May 24, 2000, the
minimum account size is $1,000. The Company will advise you in writing sixty
(60) days prior to deducting the annual fee or closing your account, during
which time you may purchase additional shares in any amount necessary to bring
the account balance up to the required minimum. If you bring your account
balance above the required minimum during this period, 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.
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 pre-authorized amount from your account on
Page 21
or about the 15th day of each month and applies the amount to the purchase of
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 Privileges -- You may exchange all or a portion of your shares in each
Fund for the shares of the same class of certain other funds 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'll pay a deferred sales charge based on
the date you bought the original shares you exchanged.
Modification or Termination -- 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, a 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 a 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. Your request should include (1) the
name of the Fund and existing account registration; (2) signature(s) of the
registered owner(s); (3) the new account registration, address, Social Security
Number or taxpayer identification number and how dividends and capital gains are
to be distributed; (4) any stock certificates which have been issued for the
shares being transferred; (5) signature guarantees (See "Signature Guarantees");
and (6) any additional documents which are required for transfer by
corporations, administrators, executors, trustees, guardians, etc. If you have
any questions about transferring shares, call the Transfer Agent at (800)
628-4077.
Account Statements and Shareholder Reports -- Each time you purchase, redeem or
transfer shares of a 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.
DISTRIBUTIONS AND TAXES
Dividends and Capital Gain Distributions -- Dividends from net investment
income, if any, are declared and paid annually. The Fund intends to distribute
annually any net capital gains.
Dividends and distributions will automatically be reinvested in additional
shares of the Fund, unless you elect to have the distributions paid to you in
cash. There are no sales charges or transaction fees for reinvested dividends
and all shares will be purchased at NAV. Shareholders will be subject to tax on
all dividends and distributions whether paid to them in cash or reinvested in
shares. If the investment in shares is made within an IRA, all dividends and
capital gain distributions must be reinvested.
Unless you are investing through a tax deferred retirement account, such as an
IRA, it is not to your advantage to buy shares of the Fund shortly before the
next distribution, because doing so can cost you money in taxes. This is known
Page 22
as "buying a dividend". To avoid buying a dividend, check the Fund's
distribution schedule before you invest.
Taxes -- In general, Fund distributions are taxable to you as either ordinary
income or capital gains. This is true whether you reinvest your distributions in
additional shares of the Fund or receive them in cash. Any net capital gains the
Fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares. Other Fund distributions (including
distributions attributable to short-term capital gains of the Fund) will
generally be taxable to you as ordinary income. Every January, you will receive
a statement that shows the tax status of distributions you received for the
previous year. Distributions declared in December but paid in January are
taxable as if they were paid in December.
When you sell shares of the Fund, you may have a capital gain or loss. For tax
purposes, an exchange of your shares of the Fund for shares of a different fund
of the Company is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares. Fund distributions and gains from the sale or exchange of your shares
will generally be subject to state and local income tax.
The one major exception to these tax principles is that distributions on, and
sales exchanges and redemptions of, shares held in an IRA (or other tax-deferred
retirement account) will not be currently taxable.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult with your tax adviser about the federal, state, local or foreign tax
consequences of your investment in the Fund.
By law, the Fund must withhold 30% of your taxable distribution and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the Internal Revenue Service (the "IRS") has
notified you that you are subject to backup withholding and instructs the Fund
to do so.
DISTRIBUTION ARRANGEMENTS
The Funds are offered through financial supermarkets, advisers and consultants,
financial planners, brokers, dealers and other investment professionals, and
directly through the Funds' 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. If you purchase your shares through a
broker-dealer, the broker-dealer firm is entitled to receive a percentage of the
sales charge you pay in order to purchase Fund shares. The following schedule
governs the percentage to be received by the selling broker-dealer firm.
Class A Shares
<Table>
<Caption>
Amount of Purchase Sales Charge as a Percentage of Dealer Discount
At the Public Offering Net Amount as Percentage of
Offering Price Price Invested Offering Price
- ------------------------------------ ---------------- ---------------- --------------------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.50% 4.71% 3.75%
$100,000 but less than $250,000 3.50% 3.63% 2.75%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more 1.00% 1.01% 1.00%
</Table>
Page 23
Class C Shares
Class C Shares of each Fund are sold at the net asset value and are subject to a
deferred sales charge of 2.00% if redeemed within two year of purchase. The
deferred sales charge is a percentage of the net asset value at the time of
purchase. In determining whether a deferred sales charge applies to a redemption
it is assumed that the shares being redeemed first are any shares in the
shareholder's account that are not subject to a deferred sales charge, followed
by shares held the longest in the shareholder's account.
Right of Accumulation -- After making an initial purchase, you may reduce the
sales charge applied to any subsequent purchases. Your shares purchased will be
taken into account on a combined basis at the current net asset value per share
in order to establish the aggregate investment amount to be used in determining
the applicable sales charge. Only previous purchases of shares that are still
held in the Fund and that were sold subject to a sales charge will be included
in the calculation. To take advantage of this privilege, you must give notice at
the time you place your initial order and subsequent orders that you wish to
combine purchases. When you send your payment and request to combine purchases,
please specify your account number(s).
Statement of Intention -- A reduced sales charge on shares of the Fund, as set
forth above, applies immediately to all purchases where the investor has
executed a Statement of Intention calling for the purchase within a 13-month
period of an amount qualifying for the reduced sales charge. The investor must
actually purchase the amount stated in such statement to avoid later paying the
full sales charge on shares that are purchased.
Waiver of Front-End Sales Charges
No sales charge shall apply to:
(1) purchase of Class A Shares if you were a Fund's Class A shareholder prior
to September 9, 2002;
(2) reinvestment of income dividends and capital gain distributions;
(3) exchanges of one Fund's shares for those of another Fund;
(4) purchases of Fund shares made by current or former directors, officers,
or employees, or agents of the Company, the Adviser, Vontobel Fund
Distributors, and by members of their immediate families, and employees
(including immediate family members) of a broker-dealer distributing Fund
shares;
(5) purchases of Fund shares by the Funds' distributor for their own
investment account and for investment purposes only;
(6) a "qualified institutional buyer," as that term is defined under Rule
144A of the Securities Act of 1933, including, but not limited to,
insurance companies, investment companies registered under the 1940 Act,
business development companies registered under the 1940 Act, and small
business investment companies;
(7) a charitable organization, as defined in Section 501(c)(3) of the
Internal Revenue Code (the "Code"), as well as other charitable trusts
and endowments, investing $50,000 or more;
(8) a charitable remainder trust, under Section 664 of the Code, or a life
income pool, established for the benefit of a charitable organization as
defined in Section 501(c)(3) of the Code;
(9) investment advisers or financial planners who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; and clients of those
investment advisers or financial planners who place trades for their own
accounts if the accounts are linked to the master account of the
investment adviser or financial planner on the books and records of the
broker or agent;
(10) institutional retirement and deferred compensation plans and trusts used
to fund those plans, including, but not limited to, those defined in
section 401(a), 403(b) or 457 of the Code and "rabbi trusts"; and
Page 24
(11) the purchase of Fund shares, if available, through certain third-party
fund "supermarkets." Some fund supermarkets may offer Fund shares without
a sales charge or with a reduced sales charge. Other fees may be charged
by the service-provider sponsoring the fund supermarket, and transaction
charges may apply to purchases and sales made through a broker-dealer.
Additional information regarding the waiver of sales charges may be obtained by
calling the Company at (800) 527-9500. All account information is subject to
acceptance and verification by the Funds' distributor.
General -- The Company reserves the right in its sole discretion to withdraw all
or any part of the offering of shares of the Funds when, in the judgment of the
Funds' management, such withdrawal is in the best interest of the Funds. An
order to purchase shares is not binding on, and may be rejected by, the Funds
until it has been confirmed in writing by the Funds and payment has been
received. The Funds offer the ability to purchase shares through a Statement of
Intention or a Right of Accumulation that may reduce sales charges on your
purchases of Class A Shares. Review the SAI or call the Funds at (800) 527-9500
for further information.
Rule 12b-1 Fees -- The Board of Directors has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act for the Class C Shares of each Fund.
Pursuant to the Rule 12b-1 Plans, each 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 Funds finance these distribution
and service activities through payments made to the Funds' distributor. The fee
paid to the Funds' distributor is computed on an annualized basis reflecting the
average daily net assets of a class, up to a maximum of 1.00% for Class C Share
expenses. Of this amount, 0.75% represents distribution 12b-1 fees payable under
each Fund's Class C Rule 12b-1 Plan, and 0.25% represents shareholder service
fees payable to institutions that have agreements with the Funds' distributor to
provide those services. Because these fees are paid out of Class C Shares'
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.
Shareholder Communications -- The Funds 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 Funds send these
documents to each shareholder individually by calling the Funds at (800)
527-9500.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund's
financial performance for the period of each Fund's operations or the period
since each Fund began offering a particular class of shares. Certain information
reflects financial results for a single share of a particular class. The total
returns in the table represent the rate that an investor would have earned [or
lost] on an investment in shares of a particular class of a Fund (assuming
reinvestment of all dividends and distributions). The financial highlights for
the periods presented have been audited by Tait, Weller and Baker, independent
auditors, whose unqualified report thereon, along with the Funds' financial
statements, are included in the Funds' Annual Report to Shareholders (the
"Annual Report") and are incorporated by reference into the SAI. Additional
performance information for the Funds is included in the Annual Report. The
Annual Report and the SAI are available at no cost from the Funds 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.
Page 25
VALUE FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
Class C
Years ended December 31, Period
------------------------------------------------------------------------------- Ended
2002 2001 2000 1999 1998 12/31/02*
------------ ------------ ------------ ------------ ------------ --------------
Per Share
Operating Performance
Net asset value,
beginning of period $ 19.86 $ 19.29 $ 14.27 $ 16.73 $ 16.51 $ 17.49
------------ ------------ ------------ ------------ ------------ --------------
Income from
investment operations
Net investment
income (loss) (0.09) (0.12) 0.02 0.07 0.22 (0.06)
Net realized and
unrealized gain (loss)
on investments (0.33) 0.71 5.00 (2.42) 2.06 1.97
------------ ------------ ------------ ------------ ------------ --------------
Total from
investment operations (0.42) 0.59 5.02 (2.35) 2.28 1.91
------------ ------------ ------------ ------------ ------------ --------------
Less distributions
Distributions from
net investment income -- (0.02) -- (0.11) (0.16) --
Distributions from
realized gain on
investments (0.80) -- -- -- (1.90) (0.80)
Total distributions (0.80) (0.02) -- (0.11) (2.06) (0.80)
------------ ------------ ------------ ------------ ------------ --------------
Net asset value,
end of year $ 18.64 $ 19.86 $ 19.29 $ 14.27 $ 16.73 $ 18.60
============ ============ ============ ============ ============ ==============
Total Return (2.20%) 3.06% 35.18% (14.07%) 14.70% 10.82%
Ratios/Supplemental Data
Net assets,
end of period (000's) $ 112,302 $ 86,157 $ 137,238 $ 71,480 $ 200,463 $ 355
Ratio to average net
assets- (A)
Expenses - (B) 1.74% 1.75% 1.75% 1.87% 1.46% 2.74%**
Expenses - net (C) 1.72% 1.75% 1.75% 1.87% 1.45% 2.72%**
Net investment
income (loss) (0.63%) (0.43%) 0.23% 0.40% 0.93% (1.63%)**
Portfolio turnover rate 75.89% 66.44% 103.76% 66.62% 122.71% 75.89%
</Table>
* Commencement of operations for Class C Shares was October 9, 2002.
** Annualized
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by 0.02% in 1999 and 0.01% in 1998.
(B) Expense ratio has been increased to include additional custodian fees in
2002 and 1998 which were offset by custodian fee credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits the
Value Fund received. In addition, the expense ratio was increased by
0.29% in 2001 as a result of a change in accounting principle related to
the recording of redemption fees. Prior year numbers have not been
restated to reflect this change.
Page 26
INTERNATIONAL EQUITY FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
Years ended December 31
----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Per Share Operating Performance
Net asset value, beginning of year $ 12.88 $ 18.86 $ 28.01 $ 20.18 $ 18.15
------------ ------------ ------------ ------------ ------------
Income from investment operations-
Net investment income(loss) 0.03 (0.10) (0.03)(1) 0.06 0.01
Net realized and unrealized
gain (loss) on investments (1.05) (5.41) (5.30) 9.07 2.98
------------ ------------ ------------ ------------ ------------
Total from investment operations (1.02) (5.51) (5.33) 9.13 2.99
------------ ------------ ------------ ------------ ------------
Less distributions-
Distributions from
net investment income -- (0.12) (0.08) (0.05) --
Distributions from realized gains -- (0.35) (3.74) (1.25) (0.96)
------------ ------------ ------------ ------------ ------------
Total distributions -- (0.47) (3.82) (1.30) (0.96)
------------ ------------ ------------ ------------ ------------
Net asset value, end of year $ 11.86 $ 12.88 $ 18.86 $ 28.01 $ 20.18
============ ============ ============ ============ ============
Total Return (7.92%) (29.22%) (18.70%) 46.52% 16.77%
Ratios/Supplemental Data
Net assets, end of year (000's) $ 29,026 $ 44,356 $ 133,233 $ 192,537 $ 161,933
Ratio to average net assets-
Expenses (A) 2.44% 1.89% 1.39% 1.28% 1.40%
Expenses-net (B) 2.44% 1.88% 1.38% 1.27% 1.36%
Net investment income (loss) 0.18% (0.38%) (0.15%) 0.03% 0.06%
Portfolio turnover rate 97.73% 92.39% 69.12% 37.91% 41.51%
</Table>
(A) Expense ratio has been increased to include additional custodian fees
which were offset by custodian fee credits.
(B) Expense ratio-net reflects the effect of the custodian fee credits the
International Equity Fund received. In addition, the expense ratio in
2001 was increased by 0.13% as a result of a change in accounting
principle related to the recording of redemption fees. Prior year numbers
have not been restated to reflect this change.
(1) Based on average shares outstanding
Page 27
EASTERN EUROPEAN EQUITY FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
Years ended December 31,
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Per Share Operating Performance
Net asset value, beginning of year $ 7.12 $ 7.69 $ 9.32 $ 8.14 $ 15.25
------------ ------------ ------------ ------------ ------------
Income from investment operations-
Net investment loss (0.13) (0.07) (0.21)(1) (0.20) (0.31)
Net realized and unrealized
gain(loss)on investments 1.59 (0.50) (1.42) 1.38 (6.80)
------------ ------------ ------------ ------------ ------------
Total from investment operations 1.46 (0.57) (1.63) 1.18 (7.11)
------------ ------------ ------------ ------------ ------------
Less distributions
Distributions from
realized gains on investments -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total distributions -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net asset value, end of year $ 8.58 $ 7.12 $ 7.69 $ 9.32 $ 8.14
============ ============ ============ ============ ============
Total Return 20.51% (7.41%) (17.49%) 14.50% (46.62%)
Ratios/Supplemental Data
Net assets, end of year (000's) $ 18,902 $ 15,070 $ 19,232 $ 33,644 $ 36,154
Ratio to average net assets-
Expenses (A) 3.23% 3.46% 2.81% 3.37% 2.57%
Expenses-net (B) 3.23% 3.38% 2.59% 3.26% 2.41%
Net investment loss (1.62%) (0.95%) (1.76%) (2.35%) (1.67%)
Portfolio turnover rate 85.90% 71.18% 85.97% 103.80% 135.35%
</Table>
(A) Expense ratio has been increased to include additional custodian fees
which were offset by custodian fee credits.
(B) Expense ratio-net reflects the effect of the custodian fee credits the
Eastern European Equity Fund received. In addition, the expense ratio in
2001 was increased by 0.25% as a result of a change in accounting
principle related to the recording of redemption fees. Prior year numbers
have not been restated to reflect this change.
(1) Based on average shares outstanding
Page 28
You'll find more information about the Funds in the following documents:
The Funds' annual and semi-annual reports will contain more information about
the Funds and a discussion of the market conditions and investment strategies
that had a significant effect on the Funds' performance during the last fiscal
year.
For more information about the Funds, you may wish to refer to the Company's SAI
dated May 1, 2003 which is on file with the SEC and incorporated by reference
into this prospectus. You can obtain a free copy of the SAI by writing to
Vontobel Funds, Inc., 1500 Forest Avenue, Suite 223, Richmond, Virginia 23229,
by calling toll free (800) 527-9500 or by e-mail at:
mail@shareholderservices.com. General inquiries regarding the Funds 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, 450 Fifth Street NW, Washington, D.C.
Information about the operation of the Public Reference Room may be obtained by
calling the SEC at (202) 942-8090. Reports and other information regarding the
Funds 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.
811-3551 and 2-78931)
Page 29
September , 2003
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 16, 2003
U.S. Value Fund
International Equity Fund
JANUS ADVISER
INVESTOR SHARES
Prospectus
The Securities and Exchange Commission has not approved or disapproved
of these securities or passed on the accuracy or adequacy of this
Prospectus. Any representation to the contrary is a criminal offense.
(JANUS LOGO)
This Prospectus describes two portfolios (each, a
"Fund" and collectively, the "Funds") of Janus Adviser
(the "Trust"). Janus Capital Management LLC ("Janus
Capital") serves as investment adviser to each Fund and
Vontobel Asset Management, Inc. ("Vontobel") is the
subadviser to each Fund. Each Fund of Janus Adviser
currently offers four classes of shares. The Investor
Shares (the "Shares") are offered by this prospectus
and are available to the general public.
It is currently contemplated that the Funds will
participate in a tax-free reorganization of Vontobel
U.S. Value Fund and Vontobel International Equity Fund
into U.S. Value Fund and International Equity Fund,
respectively. As a result of the reorganization,
existing Vontobel Class A shareholders who purchased
their shares without a sales charge will receive
Investor Class shares, existing Vontobel Class A
shareholders who purchased their shares with a sales
charge will receive Class A Shares, and existing
Vontobel Class C shareholders will receive Class C
Shares of the corresponding Fund(s). The reorganization
is subject to approval by the shareholders of Vontobel
U.S. Value Fund and Vontobel International Equity Fund,
and is expected to become effective on or about
September _ , 2003. The Funds will not commence
operations until the effective date of the
reorganization.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<Table>
RISK/RETURN SUMMARY.............................. 2
U.S. Value Fund............................... 4
International Equity Fund..................... 5
Fees and expenses............................. 7
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES AND RISKS............................. 10
Investment objectives and principal investment
strategies.................................... 10
General portfolio policies.................... 15
Risks......................................... 18
MANAGEMENT OF THE FUNDS.......................... 22
Investment adviser............................ 22
Subadviser.................................... 22
Management expenses........................... 24
OTHER INFORMATION................................ 26
DISTRIBUTIONS AND TAXES.......................... 28
Distributions................................. 28
Distribution Options.......................... 29
Taxes......................................... 29
SHAREHOLDER'S MANUAL
Doing business with Janus..................... 32
Minimum investments........................... 33
Types of account ownership.................... 33
To open an account or buy shares.............. 36
To exchange shares............................ 37
To sell shares................................ 37
Shareholder services and account policies..... 45
FINANCIAL HIGHLIGHTS............................. 50
GLOSSARY OF INVESTMENT TERMS..................... 51
Equity and debt securities.................... 51
Futures, options and other derivatives........ 55
Other investments, strategies and/or
techniques.................................... 56
</Table>
Janus Adviser prospectus 1
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
U.S. Value Fund and International Equity Fund are each designed
for long-term investors who primarily seek long-term capital
appreciation and who can tolerate the greater risks associated
with common stock investments.
1. WHAT ARE THE INVESTMENT OBJECTIVES OF THE FUNDS?
- --------------------------------------------------------------------------------
U.S. VALUE FUND AND INTERNATIONAL EQUITY FUND seek long-term
capital appreciation.
The Funds' Trustees may change the objective and principal
investment policies of each Fund without a shareholder vote. A
Fund will notify you at least 60 days before making any material
changes to its objective or principal investment policies. If
there is a material change to a Fund's objective or principal
investment policies, you should consider whether the Fund remains
an appropriate investment for you. There is no guarantee that a
Fund will meet its objective.
2. WHAT ARE THE MAIN INVESTMENT STRATEGIES OF THE FUNDS?
The portfolio managers apply a "bottom up" approach in choosing
investments. In other words, a Fund's portfolio manager looks at
companies one at a time to determine if a company is an
attractive investment opportunity and consistent with the Fund's
investment policies. If the portfolio manager is unable to find
such investments, the Fund's uninvested assets may be held in
cash or similar investments.
U.S. VALUE FUND
U.S. Value Fund will seek to achieve its investment objective by
investing in a non-diversified portfolio consisting primarily of
equity securities. The Fund will invest, under normal
circumstances, at least 80% of its net assets in equity
securities of companies that are traded on U.S. exchanges or
quoted on an established over-the-counter market.
U.S. Value Fund's return will be compared to that of the broad
market, reflected by the S&P 500 Index, but its portfolio manager
2 Janus Adviser prospectus
seeks to achieve attractive absolute returns over the "normalized
risk-free" rate, defined as the rate of return available on
long-term U.S. Government securities.
INTERNATIONAL EQUITY FUND
International Equity Fund will seek to achieve its investment
objective by investing in a diversified portfolio consisting
primarily of equity securities. Under normal market
circumstances, the Fund will invest at least 80% of its net
assets in equity securities of issuers that are located outside
of the United States, or which derive a significant portion of
their business or profits outside of the United States. The Fund
intends to diversify its investments among countries and normally
to have represented in the portfolio business activities of a
number of different countries. International Equity Fund will
primarily hold securities listed on a securities exchange or
quoted on an established over-the-the counter market.
3. WHAT ARE THE MAIN RISKS OF INVESTING IN A FUND?
The biggest risk is that a Fund's returns may vary, and you could
lose money. The Funds are designed for long-term investors who
can accept the risks of investing in a portfolio with significant
common stock holdings. Common stocks tend to be more volatile
than many other investment alternatives.
The value of a Fund's portfolio may decrease if the value of an
individual company in the portfolio decreases or if the portfolio
manager's belief about a company's intrinsic worth is incorrect.
The value of a Fund's portfolio could also decrease if the stock
market goes down. If the value of a Fund's portfolio decreases,
the Fund's net asset value (NAV) will also decrease, which means
if you sell your shares in the Fund you may get back less money
than you invested.
U.S. Value Fund is classified as a non-diversified fund. This
means that U.S. Value Fund may hold larger positions in a smaller
number of securities than a fund that is classified as
diversified.
Janus Adviser prospectus 3
As a result, a single security's increase or decrease in value
may have a greater impact on the Fund's NAV and total return.
International Equity Fund will have significant exposure to
foreign markets. As a result, its returns and NAV may be affected
to a large degree by fluctuations in currency exchange rates or
political or economic conditions in one or more countries.
An investment in these Funds is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
The following information provides some indication of the risks
of investing in the Funds by showing how each Fund's performance
has varied over time.
U.S. VALUE FUND
The Fund commenced operations on September , 2003, after the
reorganization of Vontobel U.S. Value Fund (the "U.S. Value
Predecessor Fund") into the Fund. The performance shown on the
following page for Investor Shares reflects the historical
performance of Class A Shares of the U.S. Value Predecessor Fund
prior to the Fund's commencement date. U.S. Value Fund's Investor
Shares' estimated operating expenses are lower than the operating
expenses of Class A Shares of U.S. Value Predecessor Fund. The
bar chart depicts the change in performance of Class A Shares of
the U.S. Value Predecessor Fund from year to year during the
periods indicated. The table compares the average annual total
4 Janus Adviser prospectus
returns of Class A Shares of the U.S. Value Predecessor Fund for
the periods indicated to a broad-based securities market index.
[TO BE UPDATED BY AMENDMENT]
<Table>
Annual returns for periods ended 12/31 (Investor Shares)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Best Quarter: % Worst Quarter: %
</Table>
The Investor Shares' year-to-date return as of the calendar
quarter ended , 2003 was %.
<Table>
<Caption>
Average annual total return for periods ended 12/31/2002
--------------------------------------------------------
1 year 5 years 10 years
Investor Shares(1)
Return Before Taxes
Return After Taxes on Distributions
Return After Taxes on Distributions and
Sale of Fund Shares
S&P 500 Index(2)
(reflects no deduction for expenses or
taxes)
-------------------------
</Table>
(1) Prior to September 9, 2002, no sales charges were imposed on
Class A Shares. These returns represent the performance of
the Class A Shares but they have been restated to include the
effect of the maximum 5.75% front-end sales charge payable on
purchases of Class A Shares.
(2) The S&P 500 is the Standard & Poor's Composite Index of 500
stocks, a widely recognized, unmanaged index of common stock
prices. Returns include dividends and distributions. The
comparative index is not adjusted to reflect deductions for
fees, expenses or taxes that the SEC requires to be reflected
in U.S. Value Fund's performance.
INTERNATIONAL EQUITY FUND
The Fund commenced operations on September , 2003, after the
reorganization of Vontobel International Equity Fund (the
"International Equity Predecessor Fund") into the Fund. The
Janus Adviser prospectus 5
performance shown below for Investor Shares reflects the
historical performance of Class A Shares of the International
Equity Predecessor Fund prior to the Fund's commencement date.
International Equity Fund's Investor Shares' estimated operating
expenses are lower than the operating expenses of Class A Shares
of International Equity Predecessor Fund. The bar chart depicts
the change in performance of Class A Shares of the International
Equity Predecessor Fund from year to year during the periods
indicated. The table compares the average annual total returns of
Class A Shares of the International Equity Predecessor Fund for
the periods indicated to a broad-based securities market index.
[TO BE UPDATED BY AMENDMENT]
<Table>
Annual returns for periods ended 12/31 (Investor Shares)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Best Quarter: % Worst Quarter: %
</Table>
The Investor Shares' year-to-date return as of the calendar
quarter ended , 2003 was %.
6 Janus Adviser prospectus
<Table>
<Caption>
Average annual total return for periods ended 12/31/2002
--------------------------------------------------------
1 year 5 years 10 years
Investor Shares(1)
Return Before Taxes
Return After Taxes on Distributions
Return After Taxes on Distributions and
Sale of Fund Shares
MSCI EAFE Index(2)
(reflects no deduction for expenses or
taxes)
-------------------------
</Table>
(1) Prior to September 9, 2002, no sales charges were imposed on
Class A Shares. These returns represent the performance of
the Class A Shares but they have been restated to include the
effect of the maximum 5.75% front-end sales charge payable on
purchases of Class A Shares.
(2) The MSCI EAFE Index is the Morgan Stanley Capital
International's Europe, Australasia and Far East Index, an
unmanaged index of more than 1,000 common stock securities
issued by foreign companies. Returns include dividends and
distributions and are expressed in U.S. dollars. The
comparative index is not adjusted to reflect deductions for
fees, expenses or taxes that the SEC requires to be reflected
in International Equity Fund's performance.
After-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect
the impact of state and local taxes. Actual after-tax returns
depend on your individual tax situation and may differ from those
shown in the preceding table. The after-tax return information
shown above does not apply to Fund shares held through a
tax-deferred account, such as a 401(k) plan or IRA.
The Funds' past performance (before and after taxes) does not
necessarily indicate how they will perform in the future.
FEES AND EXPENSES
The following table describes the fees and expenses that you may
pay if you buy and hold Shares of the Funds. Expense information
has been restated to reflect estimated annualized expenses that
the Funds expect to incur during the initial fiscal year after
the reorganization of Vontobel U.S. Value Fund and Vontobel
International Equity Fund into U.S. Value Fund and International
Equity Fund, respectively. All expenses are shown without the
effect of expense offset arrangements or custodial fee credits.
Janus Adviser prospectus 7
SHAREHOLDER FEES, such as sales loads, redemption fees or
exchange fees, are charged directly to an investor's account. The
Funds' Investor Shares is a no-load investment, so you will
generally not pay any shareholder fees when you buy or sell the
Funds' Investor Shares. However, if you sell Investor Shares of
International Equity Fund that you have held for three months or
less, you may pay a redemption fee.
ANNUAL FUND OPERATING EXPENSES are paid out of a Fund's assets
and include fees for portfolio management, maintenance of
shareholder accounts, shareholder servicing, accounting and other
services. You do not pay these fees directly but, as the example
below shows, these costs are borne indirectly by all
shareholders.
[TO BE UPDATED BY AMENDMENT]
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<Table>
Sales Charges None
Redemption Fee on shares of International Equity Fund held 3
months or less (as a % of amount redeemed)(1) 1.00%
</Table>
ESTIMATED ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<Table>
<Caption>
Total Annual Total Annual
Fund Operating Fund Operating
Management Distribution Other Expenses Without Total Expenses With
Fee (12b-1) Fees Expenses(2) Waivers Waivers Waivers
U.S. VALUE FUND
Investor Shares 0.96% 0.25% [ ] [ ] [ ] [ ]
INTERNATIONAL EQUITY
FUND
Investor Shares 0.99% 0.25% [ ] [ ] [ ] [ ]
</Table>
(1) The redemption fee may be waived in certain circumstances, as described in
the Shareholder's Manual. For Fund shares held through certain
intermediaries, the redemption fee will be charged in generally the same
manner as for shares held directly with the Fund. However, the
intermediaries' methods for tracking and calculating the fee may differ in
some respects from the Fund's.
(2) All expenses are stated both with and without contractual waivers by Janus
Capital. Janus Capital has contractually agreed to waive each Fund's total
operating expenses [(excluding brokerage commissions, interest, taxes and
extraordinary expenses)] to the levels indicated until at least [ ].
These waivers are first applied against the Management Fee and then
against Other Expenses. Expense information has been restated to reflect
estimated fees.
8 Janus Adviser prospectus
EXAMPLE:
The following example is based on expenses without waivers. This example is
intended to help you compare the cost of investing in the Fund with the cost
of investing in other mutual funds. The example assumes that you invest
$10,000 in each of the Funds for the time periods indicated, and then redeem
all of your Shares at the end of those periods.
The example also assumes that your investment has a 5% return each year, and
that the Funds' operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
<Table>
<Caption>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------
U.S. Value Fund -- Investor Shares $ $ $ $
International Equity Fund -- Investor Shares $ $ $ $
</Table>
Janus Adviser prospectus 9
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
This section takes a closer look at the investment objective of
each Fund, its principal investment strategies and certain risks
of investing in the Fund. Strategies and policies that are noted
as "fundamental" cannot be changed without a shareholder vote.
Please carefully review the "Risks" section of this Prospectus
for a discussion of risks associated with certain investment
techniques. We have also included a Glossary with a description
of investment terms used throughout this Prospectus.
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
U.S. VALUE FUND
U.S. Value Fund seeks long-term capital appreciation. It pursues
its objective by investing in a non-diversified portfolio
consisting primarily of equity securities. Realization of income
is not a significant consideration when choosing investments for
U.S. Value Fund, and income realized on the Fund's investments
will be incidental to its objective.
U.S. Value Fund will invest, under normal circumstances, at least
80% of its net assets in equity securities of companies that are
traded on U.S. exchanges or quoted on an established over-the-
counter market. The Fund may also invest in debt securities and
cash equivalents, such as overnight repurchase agreements and
short-term U.S. Government securities. Debt securities include
obligations of governments, instrumentalities and corporations.
Although U.S. Value Fund's return will be compared to that
provided by the broad market, reflected by the S&P 500 Index, the
Fund's portfolio manager seeks to achieve attractive absolute
returns over the "normalized risk-free" rate, defined as the rate
of return available on long-term U.S. Government securities. The
portfolio manager's utilization of an "absolute" rather than a
"relative" valuation yardstick is designed to achieve not only a
satisfactory return over the risk-free rate but at the same time
seek safety of principal. U.S. Value Fund's portfolio manager
considers the riskiness of an investment to be a function of the
company's business rather than the volatility of a company's
stock price.
10 Janus Adviser prospectus
INTERNATIONAL EQUITY FUND
International Equity Fund seeks long-term capital appreciation.
It pursues its objective by investing in a diversified portfolio
consisting primarily of equity securities. Under normal
circumstances, the Fund will invest at least 80% of its assets in
equity securities of issuers that are located outside of the
United States, or that derive a significant portion of their
business or profits outside of the United States. International
Equity Fund will generally invest most of its assets in equity
securities of countries that are generally considered to have
developed markets, such as, but not limited to, the United
Kingdom, the eleven euro-zone countries (France, Germany, Italy,
Spain, Portugal, Finland, Ireland, Belgium, the Netherlands,
Luxembourg and Austria), Switzerland, Norway, Japan, Hong Kong,
Australia, and Singapore. The portfolio manager will decide when
and how much to invest in each of these markets. Investments may
also be made in equity securities issued by companies in
"developing countries" or "emerging markets," such as, but not
limited to, Taiwan, Malaysia, Indonesia, and Brazil, that are
included in Morgan Stanley Capital International's Emerging
Markets Free Index ("EMF").
Although International Equity Fund's return will be compared to
that provided by the broad market; reflected by Morgan Stanley
Capital International's Europe, Far East and Australasia (EAFE)
Index, the Fund's portfolio manager seeks to achieve attractive
absolute returns over the "the normalized risk free rate",
defined as the rate of return available on long-term Government
Securities or their equivalent in each country in which the Fund
invests. The portfolio manager's utilization of an "absolute"
rather than a "relative" valuation yardstick is designed to
achieve not only a satisfactory return over the risk-free rate
but at the same time seek relative safety of principal.
International Fund's portfolio manager considers the riskiness of
an investment to be a function of the company's business rather
than the volatility of its stock price.
International Equity Fund may select its investments among
companies that are listed on a securities exchange or among
companies whose securities have an established over-the-counter
Janus Adviser prospectus 11
market, and may make limited investments in "thinly traded"
securities.
The securities International Equity Fund purchases may not always
be purchased on the principal market for the issuer's securities.
For example, Depositary Receipts may be purchased if trading
conditions make them more attractive than the underlying
security.
In addition to common stocks and securities that are convertible
into common stocks, International Equity Fund may invest in
shares of closed-end investment companies that invest in
securities that are consistent with International Equity Fund's
objective and strategies. By investing in other investment
companies, International Equity Fund indirectly pays a portion of
the expenses and brokerage costs of those companies as well as
its own expenses. Also, federal securities laws impose limits on
such investments, which may affect the ability of International
Equity Fund to purchase those investments.
International Equity Fund has the authority to enter into forward
contracts to purchase or sell foreign currencies, purchase and
write covered call options on foreign currencies and enter into
contracts for the purchase or sale for future delivery of foreign
currencies ("foreign currency futures").
The following questions and answers are designed to help you
better understand the Funds' principal investment strategies.
1. WHAT ARE "EQUITY SECURITIES"?
Equity securities consist of common stocks and securities that
are convertible into common stocks, such as warrants, rights,
convertible bonds, debentures or convertible preferred stock.
2. HOW ARE COMMON STOCKS SELECTED FOR THE FUNDS?
Consistent with its respective investment objective and policies,
each Fund may invest substantially all of its assets in common
stocks if its portfolio managers believe that common stocks will
appreciate in value. The portfolio managers take a "bottom up"
12 Janus Adviser prospectus
stock and business analysis approach to investments in equities.
The portfolio managers make their assessments by looking at
companies one at a time, regardless of size, country or
organization, place of principal business activity, or other
similar selection criteria.
The portfolio managers seek to identify undervalued companies
whose businesses are highly profitable, have consistent operating
histories and financial performance and enjoy favorable long-term
economic prospects. Ideally, such companies would have met some
or all of these additional characteristics:
- durable competitive advantage
- demonstrated consistent earning power
- businesses and industries that are stable, transparent and
unlikely to experience major change
- little or no debt or high interest coverage ratio
- free cash flow
- high return on equity
- ability to reinvest profits and compound intrinsic value or
distribute capital to shareholders
- management teams with outstanding talent and high integrity
that can be counted on to use cash flow wisely, and channel the
reward from the business back to its shareholders
3. HOW DO THE PORTFOLIO MANAGERS DETERMINE THAT A COMPANY MAY BE UNDERVALUED?
A company may be undervalued when, in the opinion of a Fund's
portfolio manager, the company is selling for a price that is
below its intrinsic worth. A company may be undervalued due to
market or economic conditions, temporary earnings declines,
unfavorable developments affecting the company or other factors.
Such factors may provide buying opportunities at attractive
prices compared to the Funds' portfolio managers' calculation of
future earnings power. The Funds' portfolio managers believe that
buying these
Janus Adviser prospectus 13
securities at a price that is below their intrinsic worth may
generate greater returns for the Funds than those obtained by
paying premium prices for companies currently in favor in the
market.
4. ARE THE SAME CRITERIA USED TO SELECT FOREIGN SECURITIES?
Consistent with the investment objectives and policies of each
Fund, the portfolio managers seek companies that meet their
selection criteria, regardless of where a company is located.
Under normal circumstances, U.S. Value Fund will invest at least
80% of its net assets in equity securities of companies that are
traded on U.S. exchanges or quoted on an established
over-the-counter market, so its exposure to foreign securities
will be limited.
5. WHEN WILL A PORTFOLIO MANAGER SELL A SECURITY?
In determining which portfolio securities to sell, the portfolio
managers of U.S. Value Fund and International Equity Fund focus
on the operating results of their portfolio companies - not
daily, or even monthly price quotations to measure whether their
investments are successful. In making sell decisions, they may
consider the following:
- if a security's price target has been met
- if there has been an overvaluation of the company by the stock
market
- if they believe there has been a clear deterioration of future
earnings power
- if they believe there has been a loss of long-term competitive
advantage
- whether there is detrimental merger/acquisition activity
- whether the security is fairly valued and funds are required
for a still more undervalued investment
- if the company's management appears to be engaging in conduct
not in the best interest of public shareholders
14 Janus Adviser prospectus
- if there is a need by the Fund to raise funds to cover
redemptions
- whether a sale at a loss will likely reduce taxable gains to
shareholders
6. WHAT DOES "MARKET CAPITALIZATION" MEAN?
Market capitalization is the most commonly used measure of the
size and value of a company. It is computed by multiplying the
current market price of a share of the company's stock by the
total number of its shares outstanding. International Equity Fund
typically invests in the securities of medium to large
capitalization companies, but it is not limited to investing in
the securities of companies of any particular size. U.S. Value
Fund does not emphasize companies of any particular size.
GENERAL PORTFOLIO POLICIES
In investing its portfolio assets, each Fund will follow the
general policies listed below. Except for the Funds' policies
with respect to investments in illiquid securities and borrowing,
the percentage limitations included in these policies and
elsewhere in this Prospectus apply at the time of purchase of a
security. So, for example, if a Fund exceeds a limit as a result
of market fluctuations or the sale of other securities, it will
not be required to dispose of any securities.
CASH POSITION
When a Fund's portfolio manager believes that market conditions
are unfavorable for profitable investing, or when the manager is
otherwise unable to identify attractive investment opportunities,
the Fund's cash or similar investments (including, but not
limited to, overnight repurchase agreements and short-term U.S.
Government securities) and fixed-income instruments may increase.
In other words, a Fund does not always stay fully invested in
equity securities. Cash or similar investments generally are a
residual -- they represent the assets that remain after a
portfolio manager has committed available assets to desirable
investment opportunities. However, a portfolio manager may also
Janus Adviser prospectus 15
temporarily increase a Fund's cash position to, for example,
protect its assets, maintain liquidity, or meet anticipated,
unusually large redemptions. A Fund's cash position may also
increase temporarily due to unusually large cash inflows.
When a Fund's investments in cash or similar investments
increase, it may not participate in market advances or declines
to the same extent that it would if the Fund remained more fully
invested in stocks or bonds.
OTHER TYPES OF INVESTMENTS
The Funds invest primarily in domestic and foreign equity
securities. To a lesser degree, the Funds may also invest in
other types of domestic and foreign securities and use other
investment strategies, which are described in the Glossary. These
securities may include:
- debt securities;
- convertible securities;
- indexed/structured securities;
- options, futures, forwards, swaps and other types of
derivatives and exchange traded funds individually or in
combination for hedging purposes (including to gain exposure to
the stock market pending investment of cash balances or to meet
liquidity needs) or for non-hedging purposes such as seeking to
enhance return; and
- securities purchased on a when-issued, delayed delivery or
forward commitment basis.
ILLIQUID INVESTMENTS
Each Fund may invest up to 15% of its net assets in illiquid
investments. An illiquid investment is a security or other
position that cannot be disposed of quickly in the normal course
of business. For example, some securities are not registered
under U.S. securities laws and cannot be sold to the U.S. public
because of SEC regulations (these are known as "restricted
securities").
16 Janus Adviser prospectus
Under procedures adopted by the Funds' Trustees, certain
restricted securities may be deemed liquid, and will not be
counted toward this 15% limit.
FOREIGN SECURITIES
Within the parameters of its specific investment policies, each
Fund may invest in foreign equity and debt securities. The Funds
may invest directly in foreign securities denominated in a
foreign currency and not publicly traded in the United States.
Other ways of investing in foreign securities include Depositary
Receipts or shares and passive foreign investment companies.
PORTFOLIO TURNOVER
Each Fund generally intends to purchase securities for long-term
investment, although, to a limited extent, a Fund may purchase
securities in anticipation of relatively short-term price gains.
Short-term transactions may also result from liquidity needs,
securities having reached a price or yield objective, changes in
interest rates or the credit standing of an issuer, or by reason
of economic or other developments not foreseen at the time of the
investment decision. A Fund may also sell one security and
simultaneously purchase the same or a comparable security to take
advantage of short-term differentials in bond yields or
securities prices. Portfolio turnover is affected by market
conditions, changes in the size of a Fund, the nature of a Fund's
investments and the investment style of its portfolio manager.
Changes are made in a Fund's portfolio whenever its portfolio
manager believes such changes are desirable. Portfolio turnover
rates are generally not a factor in making buy and sell
decisions.
Increased portfolio turnover may result in higher costs for
brokerage commissions, dealer mark-ups and other transaction
costs and may also result in taxable capital gains. Higher costs
associated with increased portfolio turnover may offset gains in
the Funds' performance. The Financial Highlights section of this
Prospectus shows the Funds' historical turnover rates.
Janus Adviser prospectus 17
RISKS
Because each Fund may invest substantially all of its assets in
common stocks, the main risk is the risk that the value of the
stocks it holds might decrease in response to the activities of
an individual company or in response to general market and/or
economic conditions. If this occurs, a Fund's share price may
also decrease. A Fund's performance may also be affected by risks
specific to certain types of investments, such as foreign
securities, derivative investments, [initial public offerings
(IPOs)] or companies with relatively small market
capitalizations. IPOs and other investment techniques may have a
magnified performance impact on a Fund with a small asset base. A
Fund may not experience similar performance as its assets grow.
The following questions and answers are designed to help you
better understand some of the risks of investing in the Funds.
1. HOW DOES THE NON-DIVERSIFICATION CLASSIFICATION OF U.S. VALUE FUND AFFECT ITS
RISK PROFILE?
Diversification is a way to reduce risk by investing in a broad
range of stocks or other securities. A fund classified as "non-
diversified" has the ability to take larger positions in a
smaller number of issuers than a fund classified as
"diversified". This gives U.S. Value Fund more flexibility to
focus its investments in the most attractive companies identified
by the portfolio manager. Because the appreciation or
depreciation of a single stock may have a greater impact on the
NAV of a nondiversified fund, its share price can be expected to
fluctuate more than a comparable diversified fund. This
fluctuation, if significant, may affect the performance of U.S.
Value Fund.
2. WHAT ARE THE RISKS ASSOCIATED WITH VALUE INVESTING?
If the portfolio manager's perception of a company's worth is not
realized in the expected time frame, the overall performance of
the Fund may suffer. In general, the portfolio manager believes
this risk is mitigated by investing in companies that are
undervalued in the market in relation to earnings, dividends
and/or assets.
18 Janus Adviser prospectus
As value managers, Vontobel believes the principal risk is in the
basic businesses of companies it acquires for the Fund. Vontobel
does not consider daily, weekly or monthly fluctuations in stock
price as a source of risk. The value of a Fund's portfolio may
decrease if Vontobel's belief about a company's intrinsic worth
is incorrect.
3. HOW COULD THE FUNDS' INVESTMENTS IN FOREIGN SECURITIES AFFECT THEIR
PERFORMANCE?
Within the parameters of its specific investment policies, each
Fund may invest without limit in foreign securities either
indirectly (e.g., Depositary Receipts) or directly in foreign
markets. Investments in foreign securities, including those of
foreign governments, may involve greater risks than investing in
domestic securities because a Fund's performance may depend on
factors other than the performance of a particular company. These
factors include:
- CURRENCY RISK. As long as a Fund holds a foreign security, its
value will be affected by the value of the local currency
relative to the U.S. dollar. When a Fund sells a foreign
denominated security, its value may be worth less in U.S.
dollars even if the security increases in value in its home
country. U.S. dollar denominated securities of foreign issuers
may also be affected by currency risk.
- POLITICAL AND ECONOMIC RISK. Foreign investments may be subject
to heightened political and economic risks, particularly in
emerging markets which may have relatively unstable
governments, immature economic structures, national policies
restricting investments by foreigners, different legal systems,
and economies based on only a few industries. In some
countries, there is the risk that the government may take over
the assets or operations of a company or that the government
may impose taxes or limits on the removal of a Fund's assets
from that country.
- REGULATORY RISK. There may be less government supervision of
foreign markets. As a result, foreign issuers may not be
subject
Janus Adviser prospectus 19
to the uniform accounting, auditing and financial reporting
standards and practices applicable to domestic issuers and
there may be less publicly available information about foreign
issuers.
- MARKET RISK. Foreign securities markets, particularly those of
emerging market countries, may be less liquid and more volatile
than domestic markets. Certain markets may require payment for
securities before delivery and delays may be encountered in
settling securities transactions. In some foreign markets,
there may not be protection against failure by other parties to
complete transactions.
- TRANSACTION COSTS. Costs of buying, selling and holding foreign
securities, including brokerage, tax and custody costs, may be
higher than those involved in domestic transactions.
- GEOGRAPHIC RISK. Investments in a selected region (such as
Western Europe), even though representing a number of different
countries within the region, may be affected by common economic
forces and other factors. A fund with a large portion of its
assets invested in a single region is subject to greater risks
of adverse events that occur in the region and may experience
greater volatility than a fund that is more broadly diversified
geographically. Political or economic disruptions, even in
countries in which a fund is not invested, may adversely affect
security values and thus a fund's NAV.
4. HOW DO THE FUNDS TRY TO REDUCE RISK?
The Funds' portfolio managers use a conservative valuation
discipline which incorporates a margin of safety between price
paid and value received in an attempt to protect the portfolio
from loss of capital. In addition, in the case of the
International Equity Fund, the portfolio manager employs
diversification by country and industry in an attempt to reduce
risk.
The Funds may also use futures, options, swaps and other
derivative instruments individually or in combination to "hedge"
or protect its portfolio from adverse movements in securities
prices and interest rates. The Funds may also use a variety of
20 Janus Adviser prospectus
currency hedging techniques, including forward currency
contracts, to manage exchange rate risk. The portfolio managers
believe that the use of these instruments can benefit the Funds.
However, a Fund's performance could be worse than if the Fund had
not used such instruments if its portfolio manager's judgment
proves incorrect.
Janus Adviser prospectus 21
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Janus Capital Management LLC ("Janus Capital"), 100 Fillmore
Street, Denver, Colorado 80206-4928, is the investment adviser to
each of the Funds. Janus Capital (together with its predecessors)
has served as investment adviser to Janus Fund since 1970 and
currently serves as investment adviser to all of the Janus funds,
acts as sub-adviser for a number of private-label mutual funds
and provides separate account advisory services for institutional
accounts.
Janus Capital has overall supervisory responsibility for the
investment program of each Fund. Janus Capital also furnishes
certain administrative, compliance and accounting services for
the Funds, and may be reimbursed by the Funds for its costs in
providing those services. In addition, Janus Capital employees
serve as officers of the Funds and Janus Capital provides office
space for the Funds and pays the salaries, fees and expenses of
all Fund officers and those Trustees who are interested persons
of Janus Capital.
From their own assets, Janus Capital, Janus Distributors LLC or
their affiliates may pay retirement plan service providers,
brokers, banks, financial advisers and other financial
intermediaries fees for providing recordkeeping, subaccounting
and other administrative services to their customers in
connection with investment in the Funds. Those fees may be in
addition to any distribution, administrative or shareholder
servicing fees paid from the Funds' assets to those financial
intermediaries.
SUBADVISER
Vontobel Asset Management, Inc., formerly named Vontobel USA Inc.
("Vontobel"), 450 Park Avenue, New York, NY 10022, serves as
subadviser to each of the Funds. As subadviser, Vontobel provides
day-to-day management of the investment operations of each Fund.
Vontobel is a wholly owned and controlled subsidiary of Vontobel
Holding AG, a Swiss bank holding company, having its registered
22 Janus Adviser prospectus
offices in Zurich, Switzerland. In addition to U.S. registered
investment companies, Vontobel also acts as the adviser to five
series of a Luxembourg SICAV that accepts investments from
non-U.S. investors only and that was organized by an affiliate of
Vontobel. Vontobel has provided investment advisory services to
mutual fund clients since 1990. As of [March 31, 2003,] Vontobel
managed in excess of [$1.3 billion] [TO BE UPDATED BY AMENDMENT].
Janus Capital and the Funds have applied for an exemptive order
from the Securities and Exchange Commission ("SEC") that would,
subject to certain conditions, permit Janus Capital and the
Funds, with the approval of the Trust's Board of Trustees, to
retain other subadvisers for the Funds, or subsequently change
the subadvisers, or continue the employment of existing
subadvisers after events that under the 1940 Act and the
subadvisory agreements would otherwise cause an automatic
termination of the subadvisory agreements, without submitting the
subadvisory agreements, or material amendments to those
agreements, to a vote of the shareholders of the Funds. Janus
Capital would notify shareholders of a Fund in the event of any
change in the identity of the subadviser of that Fund. In
addition, the exemptive order would prohibit Janus Capital from
entering into subadvisory agreements with affiliates of Janus
Capital without shareholder approval, except in certain instances
when such affiliates are substantially wholly owned by Janus
Capital. Although shareholder approval would not be required for
the termination of subadvisory agreements, shareholders of a Fund
will continue to have the right to terminate such subadvisory
agreements for the Fund at any time by a vote of a majority of
the outstanding voting securities of the Fund.
Until or unless the exemptive order is granted, if the subadviser
is terminated or otherwise ceases to advise a Fund, the Fund
would be required to submit the subadvisory agreement with a new
subadviser to the shareholders of the Fund for approval. There is
no guarantee that the SEC will grant the exemptive order.
Janus Adviser prospectus 23
PORTFOLIO MANAGERS
EDWIN WALCZAK
- --------------------------------------------------------------------------------
is a Senior Vice President of Vontobel and Portfolio
Manager of U.S. Value Fund. Mr. Walczak joined Vontobel in
1988 as Vice President and head of US equity research and
portfolio management. Mr. Walczak has been the President
and Portfolio Manager of U.S. Value Fund (or its
predecessor) since inception in March 1990. He received a
Bachelor of Arts in Government from Colby College, a
Masters in Art in International Politics and Economics
from Columbia University, and a Masters in Business
Administration in Finance from Columbia University.
RAJIV JAIN
- --------------------------------------------------------------------------------
is a Senior Vice President of Vontobel and Portfolio
Manager of International Equity Fund. Mr. Jain joined
Vontobel in 1994 as an equity analyst and Associate
Manager of its international equity portfolios. Mr. Jain
has been the President and Portfolio Manager of
International Equity Fund (or its predecessor) since
February 2002. He received a Bachelor of Commerce (Honors)
from Panjab University, India, a Master's Degree in
Finance from the University of Ajmer, India, a
Post-Graduate diploma in International Marketing from the
Delhi School of Economics, India, and received his Masters
in Business Administration from the University of Miami.
MANAGEMENT EXPENSES
Each Fund pays Janus Capital a management fee which is calculated
daily and paid monthly. Each Fund's advisory agreement spells out
the management fee and other expenses that the Fund must pay.
With respect to each Fund, Janus Capital pays Vontobel a
subadvisory fee from its management fee for managing the Fund.
24 Janus Adviser prospectus
Each Fund incurs expenses not assumed by Janus Capital, including
the distribution and services fee for certain classes of Shares,
transfer agent and custodian fees and expenses, legal and
auditing fees, printing and mailing costs of sending reports and
other information to existing shareholders, and independent
Trustees' fees and expenses. The Funds pay the following
management fees (expressed as an annual rate):
U.S. VALUE FUND
<Table>
<Caption>
Annual Rate Expense Limit
Average Daily Net Assets of U.S. Value Fund Percentage(%) Percentage(%)
- --------------------------------------------------------------------------
First $100 Million 0.96
Increment from $100 Million to $300 Million 0.85
Increment over $300 Million 0.75
</Table>
INTERNATIONAL EQUITY FUND
<Table>
<Caption>
Annual Rate Expense Limit
Average Daily Net Assets of International Equity Fund Percentage(%) Percentage(%)
- ------------------------------------------------------------------------------------
First $100 million 0.99
Increment from $100 million to $300 million 0.85
Increment over $300 million 0.75
</Table>
(1) Janus Capital has agreed to limit each Fund's total operating expenses
(excluding the [administrative services fee and distribution and shareholder
servicing fee applicable to Investor Shares,] brokerage commissions,
interest, taxes and extraordinary expenses) as indicated until at
least .
Janus Adviser prospectus 25
OTHER INFORMATION
- --------------------------------------------------------------------------------
CLASSES OF SHARES
Each Fund currently offers four classes of shares, one of which,
the Investor Shares, is offered pursuant to this prospectus. The
Shares offered by this prospectus are available to the general
public and in connection with investments through certain
distributors, such as "mutual fund supermarkets" and through
retirement plans. Class I Shares, Class A Shares and Class C
Shares of the Funds are available only in connection with
investments through retirement plans, brokers, bank trust
departments, financial advisers and other financial
intermediaries. Not all financial intermediaries offer each class
of shares. If you would like additional information about the
Class I Shares, Class A Shares or Class C Shares, please call
1-800-525-0020.
ADMINISTRATIVE SERVICES FEE -- INVESTOR SHARES
Janus Services LLC ("Janus Services"), the Funds' transfer agent,
receives an administrative services fee from each Fund at an
annual rate of up to 0.10% of the average daily net assets of
Investor Shares of a Fund.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
INVESTOR SHARES
Under distribution and shareholder servicing plan adopted in
accordance with Rule 12b-1 under the 1940 Act for Investor Shares
(the "Investor Shares Plan"), Investor Shares of each Fund may
pay Janus Distributors LLC ("Janus Distributors"), the Funds'
distributor, a fee at an annual rate of up to 0.25% of the
average daily net assets of Investor Shares of a Fund. Under the
terms of the Investor Shares Plan, each Fund is authorized to
make payments to Janus Distributors for remittance to retirement
plan service providers, brokers, bank trust departments,
financial advisers and other financial intermediaries, as
compensation for distribution services performed by such entities
for investors in Investor Shares of the Fund. Because 12b-1 fees
are paid out of the Funds' assets on an ongoing basis, they will
increase the cost
26 Janus Adviser prospectus
of your investment and may cost you more than paying other types
of sales charges.
DISTRIBUTION OF THE FUND
The Funds are distributed by Janus Distributors, a member of the
National Association of Securities Dealers, Inc. ("NASD"). To
obtain information about NASD member firms and their associated
persons, you may contact NASD Regulation, Inc. at www.nasdr.com,
or the Public Disclosure Hotline at 800-289-9999. An investor
brochure containing information describing the Public Disclosure
Program is available from NASD Regulation, Inc.
Janus Adviser prospectus 27
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DISTRIBUTIONS
To avoid taxation of the Funds, the Internal Revenue Code
requires each Fund to distribute net investment income and any
net capital gains realized on its investments at least annually.
A Fund's income from dividends and interest and any net realized
short-term gains are paid to shareholders as ordinary income
dividends. Net realized long-term gains are paid to shareholders
as capital gains distributions.
DISTRIBUTION SCHEDULE
Dividends and capital gains for each Fund are normally declared
and distributed in December.
HOW DISTRIBUTIONS AFFECT NAV
Distributions are paid to shareholders as of the record date of a
distribution of a Fund, regardless of how long the shares have
been held. Undistributed income and realized gains are included
in each Fund's daily NAV. The share price of a Fund drops by the
amount of the distribution, net of any subsequent market
fluctuations. As an example, assume that on December 31, a Fund
declared a dividend in the amount of $0.25 per share. If a Fund's
share price was $10.00 on December 30, the Fund's share price on
December 31 would be $9.75, barring market fluctuations. You
should be aware that distributions from a taxable mutual fund do
not increase the value of your investment and may create income
tax obligations.
"BUYING A DIVIDEND'
If you purchase shares of a Fund just before a distribution, you
will pay the full price for the shares and receive a portion of
the purchase price back as a taxable distribution. This is
referred to as "buying a dividend." In the above example, if you
bought shares on December 30, you would have paid $10.00 per
share. On December 31, the Fund would pay you $0.25 per share as
a dividend and your shares would now be worth $9.75 per share.
28 Janus Adviser prospectus
Unless your account is set up as a tax-deferred account,
dividends paid to you would be included in your gross income for
tax purposes, even though you may not have participated in the
increase in NAV of the Fund, whether or not you reinvested the
dividends.
DISTRIBUTION OPTIONS
When you open an account, it will automatically provide for
reinvestment of all distributions. You may change your
distribution option at any time by logging onto janus.com, by
calling a Janus Representative or by writing the Funds at one of
the addresses listed in the Shareholder's Manual section of this
Prospectus. The Funds offer the following options:
1. REINVESTMENT OPTION. You may reinvest your income dividends
and capital gains distributions in additional shares.
2. CASH OPTION. You may receive your income dividends and
capital gains distributions in cash.
3. REINVEST AND CASH OPTION. You may receive either your income
dividends or capital gains distributions in cash and reinvest
the other in additional shares.
4. REDIRECT OPTION. You may direct your dividends or capital
gains to purchase shares of another Janus fund.
The Funds reserve the right to reinvest into your account
undeliverable and uncashed dividend and distribution checks that
remain outstanding from six months in shares of the applicable
Fund at the NAV next computed after the check is cancelled.
Subsequent distributions may also be reinvested.
TAXES
As with any investment, you should consider the tax consequences
of investing in the Funds. Any time you sell or exchange shares
of a Fund in a taxable account, it is considered a taxable event.
Depending on the purchase price and the sale price, you may have
a gain or loss on the transaction. Any tax liabilities generated
by your transactions are your responsibility.
Janus Adviser prospectus 29
The following discussion does not apply to tax-deferred accounts,
nor is it a complete analysis of the federal tax implications of
investing in the Funds. You should consult your own tax adviser
if you have any questions. Additionally, state or local taxes may
apply to your investment, depending upon the laws of your state
of residence.
TAXES ON DISTRIBUTIONS
Dividends and distributions of the Funds are subject to federal
income tax, regardless of whether the distribution is made in
cash or reinvested in additional shares of a Fund. Distributions
of capital gains may be taxable at different rates depending on
the length of time the Fund held the securities on which the
gains were realized. In certain states, a portion of the
dividends and distributions (depending on the sources of a Fund's
income) may be exempt from state and local taxes. Information
regarding the tax status of income dividends and capital gains
distributions will be mailed to shareholders on or before January
31st of each year. Account tax information will also be sent to
the IRS.
TAXATION OF THE FUNDS
Dividends, interest and some gains received by the Funds on
foreign securities may be subject to tax withholding or other
foreign taxes. The Funds may from year to year make the election
permitted under Section 853 of the Internal Revenue Code to pass
through such taxes to shareholders as a foreign tax credit. If
such an election is not made, any foreign taxes paid or accrued
will represent an expense to the Fund.
The Funds do not expect to pay any federal income or excise taxes
because they intend to meet certain requirements of the Internal
Revenue Code. It is important that the Funds meet these
requirements so that any earnings on your investment will not be
taxed twice.
30 Janus Adviser prospectus
JANUS ADVISER
Shareholder's Manual
This section will help you
become familiar with the
different types of accounts
you can establish with Janus.
It also explains in detail the
wide array of services and
features you can establish on
your account, as well as
account policies and fees that
may apply to your account.
Account policies (including
fees), services and features
may be modified or
discontinued without
shareholder approval or prior
notice.
(JANUS LOGO)
DOING BUSINESS WITH JANUS
- --------------------------------------------------------------------------------
ONLINE - www.janus.com - 24 HOURS A DAY, 7 DAYS A WEEK
- --------------------------------------------------------------------------------
ON janus.com* YOU CAN:
- - Open individual, joint, UGMA/UTMA, Traditional and Roth IRA accounts,
Simplified Employee Pension Plan IRA accounts and Coverdell Education Savings
Accounts if you are a current Fund shareholder
- - Review your account or complete portfolio
- - Buy, sell and exchange Funds
- - View your personalized performance
- - Obtain Fund information and performance
- - Update personal information
- - Receive electronic daily, quarterly and year-end statements, semiannual and
annual reports, prospectuses and tax forms
* Certain account or transaction types may be restricted from being processed
through janus.com. If you would like more information about these
restrictions, please contact a Janus Representative.
JANUS XPRESSLINE(TM)
1-888-979-7737
24 HOUR AUTOMATED PHONE SYSTEM
JANUS REPRESENTATIVES
1-800-525-3713
TDD
For the speech and hearing impaired.
1-800-525-0056
MAILING ADDRESS
Janus
P.O. Box 173375
Denver, CO 80217-3375
FOR OVERNIGHT MAIL
Janus
3773 Cherry Creek Drive North, Suite 101
Denver, CO 80209-3821
32 Janus Adviser prospectus
MINIMUM INVESTMENTS*+
<Table>
To open a new Investor Shares
regular Fund account $2,500
To open a new Investor Shares
UGMA/UTMA, Traditional or Roth IRA,
Simplified Employee Pension Plan IRA
account or Coverdell Education
Savings Account $ 500
To add to any type of Investor
Shares Fund account $ 100
</Table>
* These minimums apply to each individual Fund in which you
invest. The Fund reserves the right to change the amount of
these minimums from time to time or to waive them in whole or
in part for certain types of Fund accounts.
+ Due to the proportionately higher costs of maintaining small
accounts, Janus reserves the right to deduct a $10 minimum
balance fee (or the value of the account if less than $10) from
Fund accounts with values below the minimums described above or
to close such Fund accounts.
TYPES OF ACCOUNT OWNERSHIP
INDIVIDUAL OR JOINT OWNERSHIP
Individual accounts are owned by one person. Joint accounts have
two or more owners.
CUSTODIAL ACCOUNTS (UGMA OR UTMA)
An UGMA/UTMA is a custodial account managed for the benefit of a
minor. To open an UGMA or UTMA, you must include the minor's
Social Security number on the application. You may open and
maintain this type of account on janus.com.
TRUST
An established trust can open an account. The names of each
trustee, the name of the trust and the date of the trust
agreement must be included on the application.
Janus Adviser prospectus 33
BUSINESS ACCOUNTS
Corporations and partnerships may also open an account. The
application must be signed by an authorized officer of the
corporation or a general partner of the partnership.
TAX-DEFERRED ACCOUNTS
If you are eligible, you may set up one or more tax-deferred
accounts. A tax-deferred account allows you to shelter your
investment income and capital gains from current income taxes. A
contribution to certain of these plans may also be tax
deductible. The types of tax-deferred accounts that may be opened
with Janus are described below. Investors should consult their
tax adviser or legal counsel before selecting a tax-deferred
account. You may handle corporate rollovers or a transfer of
assets from a tax-deferred account via janus.com.
INVESTING FOR YOUR RETIREMENT
Please visit janus.com for more complete information regarding
the different types of IRAs. Distributions from these plans may
be subject to income tax and to an additional tax if withdrawn
prior to age 59 1/2 or used for a nonqualifying purpose.
TRADITIONAL AND ROTH IRAS
Both IRAs allow most individuals with earned income to contribute
up to the lesser of $3,000 or 100% of compensation annually. In
addition, IRA holders age 50 or older may contribute $500 a year
more than these limits. You may open and maintain this type of
account via janus.com.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP)
This plan allows small business owners (including sole
proprietors) to make tax-deductible contributions for themselves
and any eligible employee(s). A SEP requires an IRA (a SEP-IRA)
to be set up for each SEP participant. You may open and maintain
this type of account via janus.com.
34 Janus Adviser prospectus
PROFIT SHARING OR MONEY PURCHASE PENSION PLAN
These plans are open to corporations, partnerships and small
business owners (including sole proprietors) to benefit their
employees and themselves.
SECTION 403(b)(7) PLAN
Employees of educational organizations or other qualifying, tax-
exempt organizations may be eligible to participate in a Section
403(b)(7) Plan.
INVESTING FOR A CHILD
COVERDELL EDUCATION SAVINGS ACCOUNT (FORMERLY EDUCATION IRA)
This plan allows individuals, subject to certain income
limitations, to contribute up to $2,000 annually on behalf of any
child under the age of 18. Contributions are also allowed on
behalf of children with special needs beyond age 18.
Distributions are generally subject to income tax if not used for
qualified education expenses. You may open and maintain this type
of account via janus.com.
PLEASE REFER TO THE CHART ON THE FOLLOWING PAGES FOR INFORMATION
ON OPENING AN ACCOUNT AND CONDUCTING BUSINESS WITH JANUS. WITH
CERTAIN LIMITED EXCEPTIONS, THE FUND IS AVAILABLE ONLY TO U.S.
CITIZENS OR RESIDENTS. WHEN YOU BUY, EXCHANGE, OR SELL SHARES,
YOUR REQUEST WILL BE PROCESSED AT THE NEXT NAV CALCULATED AFTER
YOUR ORDER IS DULY PROCESSED AFTER RECEIVED IN GOOD ORDER.
Janus Adviser prospectus 35
TO OPEN AN ACCOUNT OR BUY SHARES
ONLINE AT www.janus.com
------------------------------------------------------------------------------
- You may open a new Fund account or you may buy shares in an existing Fund
account. You may elect to have Janus automatically debit your designated
bank account. You may handle corporate rollovers or a transfer of assets
from a tax deferred account via janus.com. Janus.com will provide real-time
confirmation of your transaction.
BY TELEPHONE
------------------------------------------------------------------------------
- For an existing account, you may use Janus XpressLine(TM) to buy shares 24
hours a day, or you may call a Janus Representative during normal business
hours. Janus will automatically debit your designated bank account.
BY WIRE
------------------------------------------------------------------------------
- You may also buy shares by wiring money from your bank account to your Fund
account. For wiring instructions, call a Janus representative.
BY MAIL/IN WRITING
------------------------------------------------------------------------------
- To open your Fund account, complete and sign the appropriate application and
make your check payable to Janus.
- To buy additional shares, complete the remittance slip accompanying your
confirmation statement. If you are making a purchase into a retirement
account, please indicate whether the purchase is a rollover or a current or
prior year contribution. Send your check and remittance slip or written
instructions to the address listed on the slip.
BY AUTOMATIC INVESTMENT
------------------------------------------------------------------------------
- To buy additional shares through the Automatic Monthly Investment Program,
you select the day each month that your money ($100 minimum) will be
electronically transferred from your bank account to your Fund account. If
no date or dollar amount is specified on your application, investments of
$100 will be made on the 20th of each month. Your first automatic monthly
investment may take up to two weeks to establish.
- You may buy additional shares using Payroll Deduction if your employer can
initiate this type of transaction. You may have all or a portion of your
paycheck ($100 minimum) invested directly into your Fund account.
36 Janus Adviser prospectus
<Table>
TO EXCHANGE SHARES TO SELL SHARES
ONLINE AT www.janus.com ONLINE AT www.janus.com
--------------------------------------- ---------------------------------------
- Exchanges may be made online at - Redemptions may be made online at
janus.com. janus.com.
BY TELEPHONE BY TELEPHONE
--------------------------------------- ---------------------------------------
- All accounts are automatically - All accounts are automatically
eligible to exchange shares by tele- eligible to sell shares by telephone.
phone. To exchange all or a portion To sell all or a portion of your
of your shares into any other shares, call Janus XpressLine(TM) or
available Janus fund, call Janus a Janus Representative. The Funds
XpressLine(TM) or a Janus reserve the right to limit the dollar
Representative. amount of shares that you may redeem
from your account by telephone.
BY WIRE
---------------------------------------
- You can redeem shares by wire. For
wiring instructions call a Janus
Representative.
BY MAIL/IN WRITING BY MAIL/IN WRITING
--------------------------------------- ---------------------------------------
- To request an exchange in writing, - To request a redemption in writing,
please follow the instructions in the please follow the instructions in the
"Written Instructions" section of "Written Instructions" section of
this manual. this manual.
BY SYSTEMATIC EXCHANGE BY SYSTEMATIC REDEMPTION
--------------------------------------- ---------------------------------------
- You determine the amount of money you - This option allows you to sell shares
would like automatically exchanged worth a specific dollar amount from
from one Fund account to another on your account on a regular basis.
any day of the month. You may
establish this program for as little
as $100 per exchange.
--------------------------------------- ---------------------------------------
Note: For more information, refer to Note: Also refer to the "Payment of
the "Exchange Policies" sec- Redemption Proceeds" section of
tion of this manual. this manual for more
information.
</Table>
Janus Adviser prospectus 37
PAYING FOR SHARES
Please note the following when purchasing shares:
- Cash, credit cards, third party checks, travelers cheques,
credit card checks or money orders will not be accepted.
- All purchases must be made in U.S. dollars and checks must be
drawn on U.S. banks.
- We may make additional attempts to debit your predesignated
bank account for ACH purchases that initially fail. You are
liable for any costs associated with these additional attempts.
We will price your purchase at the next net asset value
determined after we receive good funds.
- The Fund may refuse any purchase order, including exchange
purchases, for any reason. For example, purchase orders may be
refused if the Fund would be unable to invest the money
effectively in accordance with its investment policies or would
otherwise be adversely affected due to the size of the
transaction, frequency of trading or other factors.
- If all or a portion of a purchase is received for investment
without a specific fund designation, for investment in one of
our closed funds, or for investment in a fund that is not yet
available for public sale, the undesignated amount or entire
investment, as applicable, will be invested in the Janus Money
Market Fund-Investor Shares ("Money Market Fund"). For
investments without a specific fund designation and for
investments in closed funds, unless you later direct Janus to
(1) buy shares of another Janus fund or (2) sell shares of the
Money Market Fund and return the proceeds (including any
dividends earned) to you, Janus will treat your inaction as
approval of the purchase of the Money Market Fund. If you hold
shares of a closed fund and submit an order directly to Janus
for a new account in that closed fund, your order must clearly
indicate that you are currently a shareholder of the closed
fund, or your money will be invested in the Money Market Fund.
If you submit an order to buy shares of a fund that is not yet
available
38 Janus Adviser prospectus
for investment (during a subscription period), your investment
will be held in the Money Market Fund until the new fund's
commencement of operations. At that time, your investment
(including any dividends) will be automatically exchanged from
the Money Market Fund to the new fund. All orders for purchase,
exchange, or sale will receive the NAV next calculated after
your order is received and accepted by the Fund.
- For Fund purchases by check, if your check does not clear for
any reason, your purchase will be cancelled.
- If your purchase is cancelled for any reason, you will be
responsible for any losses or fees imposed by your bank and may
be responsible for losses that may be incurred as a result of
any decline in the value of the cancelled purchase.
EXCHANGE POLICIES
Please note the following when exchanging shares:
- An exchange represents the sale of shares from one Fund and the
purchase of shares of another Fund, which may produce a taxable
gain or loss in a non-retirement account.
- New Fund accounts established by exchange must be opened with
$2,500 or the total account value if the value of the Janus
fund account you are exchanging from is less than $2,500.
- UGMA/UTMA accounts, Traditional or Roth IRAs, Simplified
Employee Pension Plan IRA accounts and Coverdell Education
Savings Accounts established by exchange must be opened with
$500 or the total account value if the value of the Fund
account you are exchanging from is less than $500.
- Exchanges between existing Fund accounts must meet the $100
subsequent investment requirement.
Janus Adviser prospectus 39
Note: For the fastest and easiest way to redeem shares, log on to
janus.com* 24 hours a day, 7 days a week.
* Certain account types do not allow transactions via janus.com.
For more information, access janus.com or refer to this
Shareholder's Manual.
- For Systematic Exchanges, if the balance in the Fund account
you are exchanging from falls below the Systematic Exchange
amount, all remaining shares will be exchanged and the program
will be discontinued.
- You may make four exchanges out of a Fund (exclusive of
Systematic Exchanges) per 12 month period. These limits are
designed to deter short-term trading. See our Excessive Trading
Policy below for more information.
- The Janus Funds reserve the right to reject any exchange
request and to modify or terminate the exchange privilege at
any time.
- An exchange from International Equity Fund held 3 months or
less may be subject to the Fund's 1.00% redemption fee. This
fee is paid to the Fund rather than Janus Capital, and is
designed to offset the brokerage commissions, market impact,
and other costs associated with changes in the Fund's asset
level and cash flow due to short-term trading. If you bought
shares on different days, the shares you held the longest will
be redeemed first for purposes of determining whether the
redemption fee applies. The redemption fee does not apply to
any shares purchased through: (1) certain employer-sponsored
retirement plans: (2) certain broker wrap fee and other
fee-based programs; (3) accounts where employees of Janus
Capital or any of its subsidiaries are listed in the account
registration; and (4) reinvested distributions (dividends and
capital gains). Janus Capital reserves the right to waive the
redemption fee in other circumstances at its discretion.
- Exchanges between Fund accounts will be accepted only if the
registrations are identical. If you are exchanging into a
closed
40 Janus Adviser prospectus
Fund, you may be required to demonstrate eligibility to
purchase shares of that Fund.
EXCESSIVE TRADING POLICY
Frequent trades in your account or accounts controlled by you can
disrupt portfolio investment strategies and increase Fund
expenses for all Fund shareholders. The Fund is not intended for
market timing or excessive trading. To deter these activities,
the Fund or its agents may temporarily or permanently suspend or
terminate exchange privileges of any investor who makes more than
four exchanges out of the Fund in a calendar year and bar future
purchases into the Fund by such investor. In addition, the Fund
or its agents also may reject any purchase orders (including
exchange purchases) by any investor or group of investors
indefinitely for any reason, including, in particular, purchase
orders that they believe are attributable to market timers or are
otherwise excessive or potentially disruptive to the Fund.
Orders placed by investors in violation of the exchange limits or
the excessive trading policies or by investors that the Fund
believes are market timers may be revoked or cancelled by the
Fund on the next business day after receipt of the order. For
transactions placed directly with the Fund, the Fund may consider
the trading history of accounts under common ownership or control
for the purpose of enforcing these policies. Transactions placed
through the same financial intermediary on an omnibus basis may
be deemed part of a group for the purpose of this policy and may
be rejected in whole or in part by the Fund.
PAYMENT OF REDEMPTION PROCEEDS
- BY ELECTRONIC TRANSFER - All accounts are automatically
eligible for the electronic redemption option if bank
information is provided. Your redemption proceeds can be
electronically transferred to your predesignated bank account
on the next bank business day after receipt of your redemption
request (wire transfer) or the second bank business day after
receipt of your redemption request (ACH transfer - not
available on retirement accounts).
Janus Adviser prospectus 41
Wire transfers will be charged an $8 fee per wire and your bank
may charge an additional fee to receive the wire.
- BY CHECK - Redemption proceeds will be sent to the
shareholder(s) of record at the address of record within seven
days after receipt of a valid redemption request. During the 10
days following an address change, requests for redemption
checks to be sent to a new address require a signature
guarantee.
- As discussed under "Exchange Policies," International Equity
Fund may deduct a redemption fee of 1.00% from your redemption
proceeds. Your shares will be sold at the NAV next calculated
after your order is received in proper form, minus the
redemption fee, if applicable.
SHARES MAY BE SOLD AT ANY TIME ON janus.com, BY TELEPHONE OR IN
WRITING. IF THE SHARES BEING SOLD WERE PURCHASED BY CHECK OR ACH
TRANSFER, THE FUND CAN DELAY THE PAYMENT OF YOUR SALE PROCEEDS
FOR UP TO 15 DAYS FROM THE DAY OF PURCHASE TO ALLOW THE PURCHASE
TO CLEAR. Unless you provide alternate instructions, your
proceeds will be invested in the Investor Shares Class of Janus
Money Market Fund during the 15 day hold period.
Note: For the fastest and easiest way to redeem shares, log on to
janus.com* 24 hours a day, 7 days a week.
* Certain account types do not allow transactions via janus.com.
For more information, access janus.com or refer to this
Shareholder's Manual.
WRITTEN INSTRUCTIONS
To sell or exchange all or part of your shares in writing, your
request should be sent to one of the addresses listed under
"Doing Business with Janus" and must include the following
information:
- the name of the Janus fund(s) being sold or exchanged
- the account number(s)
- the amount of money or number of shares being sold or exchanged
42 Janus Adviser prospectus
- the name(s) on the account
- the signature(s) of all registered account owners (see account
application for signature requirements)
- your daytime telephone number
SIGNATURE GUARANTEE
A SIGNATURE GUARANTEE IS REQUIRED if any of the following is
applicable:
- You request a redemption by check above a certain dollar
amount.
- You would like a check made payable to anyone other than the
shareholder(s) of record.
- You would like a check mailed to an address which has been
changed within 10 days of the redemption request.
- You would like a check mailed to an address other than the
address of record.
- You would like your redemption proceeds wired to a bank account
other than a bank account of record.
THE FUND RESERVES THE RIGHT TO REQUIRE A SIGNATURE GUARANTEE
UNDER OTHER CIRCUMSTANCES OR TO REJECT OR DELAY A REDEMPTION ON
CERTAIN LEGAL GROUNDS.
A SIGNATURE GUARANTEE MAY BE REFUSED if any of the following is
applicable:
- It does not appear valid or in good form.
- The transaction amount exceeds the surety bond limit of the
signature guarantee.
- The guarantee stamp has been reported as stolen, missing or
counterfeit.
Janus Adviser prospectus 43
HOW TO OBTAIN A SIGNATURE GUARANTEE
A signature guarantee assures that a signature is genuine. The
signature guarantee protects shareholders from unauthorized
account transfers. The following financial institutions may
guarantee signatures: banks, savings and loan associations, trust
companies, credit unions, broker-dealers, and member firms of a
national securities exchange. Call your financial institution to
see if they have the ability to guarantee a signature. A
signature guarantee cannot be provided by a notary public.
If you live outside the United States, a foreign bank properly
authorized to do business in your country of residence or a U.S.
consulate may be able to authenticate your signature.
PRICING OF FUND SHARES
All purchases, sales and exchanges will be duly processed at the
NAV next calculated after your request is received in good order
by the Fund (or the Fund's agent). The Fund's NAV is calculated
at the close of the regular trading session of the NYSE (normally
4:00 p.m. New York time) each day that the NYSE is open. In order
to receive a day's price, your order must be received by the
close of the regular trading session of the NYSE. Securities are
valued at market value or, if a market quotation is not readily
available, or if events or circumstances that may affect the
value of portfolio securities are identified between the closing
of their principal markets and the time the NAV is determined, at
their fair value determined in good faith under procedures
established by and under the supervision of the Trustees.
Short-term instruments maturing within 60 days are valued at
amortized cost, which approximates market value.
Because foreign securities markets may operate on days that are
not business days in the United States, the value of the Fund's
holdings may change on days when you will not be able to purchase
or redeem the Fund's shares.
44 Janus Adviser prospectus
SHAREHOLDER SERVICES AND ACCOUNT POLICIES
TRANSACTIONS THROUGH PROCESSING ORGANIZATIONS
You may buy or sell Fund shares through a broker-dealer, bank or
other financial institution, or an organization that provides
recordkeeping and consulting services to 401(k) plans or other
employee benefit plans (a "Processing Organization"). Processing
Organizations may charge you a fee for this service and may
require different minimum initial and subsequent investments than
the Fund. Processing Organizations may also impose other charges
or restrictions different from those applicable to shareholders
who invest in the Fund directly. For International Equity Fund,
certain Processing Organizations have agreed to charge the Fund's
1.00% redemption fee on their customers' accounts. In this case,
the amount of the fee and the holding period will generally be
consistent with the Fund's. However, the Processing
Organizations' methods for tracking and calculating the fee may
differ in some respects from the Fund's.
A Processing Organization, rather than its customers, may be the
shareholder of record of your shares. The Fund is not responsible
for the failure of any Processing Organization to carry out its
obligations to its customers. Certain Processing Organizations
may receive compensation from Janus Capital or its affiliates,
and certain Processing Organizations may receive compensation
from the Fund for shareholder recordkeeping and similar services.
TAXPAYER IDENTIFICATION NUMBER
On the application or other appropriate forms, you will be asked
to certify that your Social Security or taxpayer identification
number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you are
subject to backup withholding, or you did not certify your
taxpayer identification number, the IRS requires the Fund to
withhold a certain percentage (currently, 30%) of any dividends
paid and redemption or exchange proceeds. In addition to this
Janus Adviser prospectus 45
backup withholding, you may be subject to a $50 fee to reimburse
the Fund for any penalty that the IRS may impose.
INVOLUNTARY REDEMPTIONS
The Fund reserves the right to close an account if the
shareholder is deemed to engage in activities which are illegal
or otherwise believed to be detrimental to the Fund, such as
market timing.
ONLINE OR TELEPHONE TRANSACTIONS
You may initiate many transactions through janus.com or by
calling Janus XpressLine.(TM) You may also contact a Janus
Representative. All new accounts automatically receive online and
telephone transaction privileges including redemption privileges.
If you do not want to receive these privileges, please visit
janus.com or call a Janus Representative. The Fund and its agents
will not be responsible for any losses, costs or expenses
resulting from unauthorized transactions when reasonable
procedures designed to verify the identity of the online user or
caller are followed.
Your account information should be kept private, and you should
immediately review any account statements that you receive from
Janus. Someone other than you could act on your account if they
are able to provide the required identifying information. Contact
Janus immediately about any transactions you believe to be
unauthorized.
Occasionally, we experience high call volumes due to unusual
market activity or other events that may make it difficult for
you to reach a Janus Representative by telephone. If you are
unable to reach a Janus Representative by telephone, please
consider visiting janus.com, calling Janus XpressLine(TM) or
sending written instructions.
DISTRIBUTIONS
Generally, all income dividends and capital gains will
automatically be reinvested in your Fund account. If you wish to
change your distribution option, please visit janus.com, call a
Janus
46 Janus Adviser prospectus
Representative or send a written request signed by the
shareholder(s) of record.
If you receive Fund distributions from an open Fund account by
check, and a distribution check sent to you at your address of
record has been returned to Janus and you have failed to respond
to follow up mailings from Janus, the distribution check will
automatically be reinvested in your Fund account. Your
distribution checks will also be reinvested in your Fund account
if you do not cash them within six months of the date they were
written. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
TEMPORARY SUSPENSION OF SERVICES
The Fund or its agents may, in case of emergency, temporarily
suspend telephone transactions and other shareholder services.
The Fund may postpone payment of redemption proceeds for up to
seven calendar days. In addition, the Fund may suspend
redemptions and/or postpone payment of redemption proceeds beyond
seven calendar days when the New York Stock Exchange is closed or
during emergency circumstances, as determined by the Securities
and Exchange Commission. The exchange privilege may also be
suspended in these circumstances.
ADDRESS CHANGES
For the easiest way to change the address on your account, visit
janus.com. You may also call a Janus Representative or send a
written request signed by the shareholder(s) of record. Include
the name of the Janus fund(s) you hold, the account number(s),
the name(s) on the account and both the old and new addresses.
Certain options may be suspended for 10 days following an address
change unless a signature guarantee is provided.
REGISTRATION CHANGES
To change the name on an account, the shares are generally
transferred to a new account. In some cases, legal documentation
Janus Adviser prospectus 47
may be required. Please visit janus.com or call a Janus
Representative for further instructions.
BANK ACCOUNT CHANGES
For the easiest way to change your bank account of record or add
new bank account information to your account, visit janus.com.
You may also call a Janus Representative or send a written
request signed by the shareholder(s) of record. Please note that
you may change or add bank information online at janus.com or
over the telephone for purchases only. We cannot accept changes
or additions to bank account redemption options online at
janus.com or over the telephone. If the added bank account is a
joint tenant/ tenants in common account, at least one name on the
bank account must match one name on the Fund account.
STATEMENTS AND REPORTS
We will send you quarterly confirmations of all transactions. You
may elect on janus.com to discontinue delivery of your paper
statements, and instead receive them online. In addition, on
janus.com, the Fund will send you an immediate transaction
confirmation statement after every non-systematic transaction. If
you have not elected to receive online statements, your
confirmation will be mailed within two days of the transaction.
The Fund distributes dividend information annually.
The Fund produces financial reports, which include a list of the
Fund's portfolio holdings, semiannually and updates its
prospectus annually. You may elect to receive these reports and
prospectus updates electronically on janus.com.
Unless you instruct Janus otherwise by contacting a Janus
Representative, the Fund will acknowledge this as your consent
and will mail only one report or prospectus to your household,
even if more than one person in your household has a Fund
account. This process is known as "householding." Please visit
janus.com or call a Janus Representative if you would like to
receive additional reports or prospectuses. Individual copies
will
48 Janus Adviser prospectus
be sent within thirty (30) days after the Fund receives your
instructions. The Fund reserves the right to charge a fee for
additional account statement requests.
Janus Adviser prospectus 49
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
[TO BE UPDATED BY AMENDMENT]
The financial highlights table is intended to help you understand
the Funds' financial performance. Please note that the financial
highlights information in the following tables represents
financial highlights of the Class A Shares of Vontobel U.S. Value
Fund and Vontobel International Equity Fund through .
Items through reflect financial results for a single share of
each Fund. The total returns in the table represent the rate that
an investor would have earned (or lost) on an investment in the
Fund (assuming reinvestment of all dividends and distributions).
The information has been derived from the financial statements of
the Class A Shares of Vontobel U.S. Value Fund and Vontobel
International Equity Fund, which were reorganized into the Funds
on . Vontobel U.S. Value Fund and Vontobel
International Equity Fund each had a fiscal year end of December
31. As part of the reorganization, the Funds have changed their
fiscal year end to the last day of February.
This information was audited by , whose report, along
with Vontobel U.S. Value Fund's and Vontobel International Equity
Fund's financial statements, is incorporated by reference into
the SAI, which is available upon request.
50 Janus Adviser prospectus
GLOSSARY OF INVESTMENT TERMS
- --------------------------------------------------------------------------------
This glossary provides a more detailed description of some of the
types of securities, investment strategies and other instruments
in which the Funds may invest. The Funds may invest in these
instruments to the extent permitted by their investment
objectives and policies. The Funds are not limited by this
discussion and may invest in any other types of instruments not
precluded by the policies discussed elsewhere in this Prospectus.
I. EQUITY AND DEBT SECURITIES
BONDS are debt securities issued by a company, municipality,
government or government agency. The issuer of a bond is required
to pay the holder the amount of the loan (or par value of the
bond) at a specified maturity and to make scheduled interest
payments.
COMMERCIAL PAPER is a short-term debt obligation with a maturity
ranging from 1 to 270 days issued by banks, corporations and
other borrowers to investors seeking to invest idle cash. The
Funds may purchase commercial paper issued in private placements
under Section 4(2) of the Securities Act of 1933.
COMMON STOCKS are equity securities representing shares of
ownership in a company and usually carry voting rights and earn
dividends. Unlike preferred stock, dividends on common stock are
not fixed but are declared at the discretion of the issuer's
board of directors.
CONVERTIBLE SECURITIES are preferred stocks or bonds that pay a
fixed dividend or interest payment and are convertible into
common stock at a specified price or conversion ratio.
DEBT SECURITIES are securities representing money borrowed that
must be repaid at a later date. Such securities have specific
maturities and usually a specific rate of interest or an original
purchase discount.
DEPOSITARY RECEIPTS are receipts for shares of a foreign-based
corporation that entitle the holder to dividends and capital
gains on the underlying security. Receipts include those issued
by domestic banks (American Depositary Receipts), foreign banks
Janus Adviser prospectus 51
(Global or European Depositary Receipts) and broker-dealers
(depositary shares).
EQUITY SECURITIES generally include domestic and foreign common
stocks; preferred stocks; securities convertible into common
stocks or preferred stocks; warrants to purchase common or
preferred stocks; and other securities with equity
characteristics.
EXCHANGE TRADED FUNDS are index-based investment companies which
hold substantially all of their assets in securities with equity
characteristics. As a shareholder of another investment company,
a Fund would bear its pro rata portion of the other investment
company's expenses, including advisory fees, in addition to the
expenses the Fund bears directly in connection with its own
operations.
FIXED-INCOME SECURITIES are securities that pay a specified rate
of return. The term generally includes short- and long-term
government, corporate and municipal obligations that pay a
specified rate of interest, dividends or coupons for a specified
period of time. Coupon and dividend rates may be fixed for the
life of the issue or, in the case of adjustable and floating rate
securities, for a shorter period.
MORTGAGE- AND ASSET-BACKED SECURITIES are shares in a pool of
mortgages or other debt. These securities are generally pass-
through securities, which means that principal and interest
payments on the underlying securities (less servicing fees) are
passed through to shareholders on a pro rata basis. These
securities involve prepayment risk, which is the risk that the
underlying mortgages or other debt may be refinanced or paid off
prior to their maturities during periods of declining interest
rates.
In that case, a Fund may have to reinvest the proceeds from the
securities at a lower rate. Potential market gains on a security
subject to prepayment risk may be more limited than potential
market gains on a comparable security that is not subject to
prepayment risk.
52 Janus Adviser prospectus
PASSIVE FOREIGN INVESTMENT COMPANIES (PFICS) are any foreign
corporations which generate certain amounts of passive income or
hold certain amounts of assets for the production of passive
income. Passive income includes dividends, interest, royalties,
rents and annuities. To avoid taxes and interest that the Funds
must pay if these investments are profitable, the Funds may make
various elections permitted by the tax laws. These elections
could require that the Funds recognize taxable income, which in
turn must be distributed, before the securities are sold and
before cash is received to pay the distributions.
PAY-IN-KIND BONDS are debt securities that normally give the
issuer an option to pay cash at a coupon payment date or give the
holder of the security a similar bond with the same coupon rate
and a face value equal to the amount of the coupon payment that
would have been made.
PREFERRED STOCKS are equity securities that generally pay
dividends at a specified rate and have preference over common
stock in the payment of dividends and liquidation. Preferred
stock generally does not carry voting rights.
RULE 144A SECURITIES are securities that are not registered for
sale to the general public under the Securities Act of 1933, but
that may be resold to certain institutional investors.
STANDBY COMMITMENTS are obligations purchased by a Fund from a
dealer that give the Fund the option to sell a security to the
dealer at a specified price.
STEP COUPON BONDS are debt securities that trade at a discount
from their face value and pay coupon interest. The discount from
the face value depends on the time remaining until cash payments
begin, prevailing interest rates, liquidity of the security and
the perceived credit quality of the issuer.
STRIP BONDS are debt securities that are stripped of their
interest (usually by a financial intermediary) after the
securities are issued. The market value of these securities
generally fluctuates more in
Janus Adviser prospectus 53
response to changes in interest rates than interest-paying
securities of comparable maturity.
TENDER OPTION BONDS are relatively long-term bonds that are
coupled with the option to tender the securities to a bank,
broker-dealer or other financial institution at periodic
intervals and receive the face value of the bond. This investment
structure is commonly used as a means of enhancing a security's
liquidity.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
government that are supported by its full faith and credit.
Treasury bills have initial maturities of less than one year,
Treasury notes have initial maturities of one to ten years and
Treasury bonds may be issued with any maturity but generally have
maturities of at least ten years. U.S. government securities also
include indirect obligations of the U.S. government that are
issued by federal agencies and government sponsored entities.
Unlike Treasury securities, agency securities generally are not
backed by the full faith and credit of the U.S. government. Some
agency securities are supported by the right of the issuer to
borrow from the Treasury, others are supported by the
discretionary authority of the U.S. government to purchase the
agency's obligations and others are supported only by the credit
of the sponsoring agency.
VARIABLE AND FLOATING RATE SECURITIES have variable or floating
rates of interest and, under certain limited circumstances, may
have varying principal amounts. Variable and floating rate
securities pay interest at rates that are adjusted periodically
according to a specified formula, usually with reference to some
interest rate index or market interest rate (the "underlying
index"). The floating rate tends to decrease the security's price
sensitivity to changes in interest rates.
WARRANTS are securities, typically issued with preferred stock or
bonds, that give the holder the right to buy a proportionate
amount of common stock at a specified price. The specified price
is usually higher than the market price at the time of issuance
of the warrant. The right may last for a period of years or
indefinitely.
54 Janus Adviser prospectus
ZERO COUPON BONDS are debt securities that do not pay regular
interest at regular intervals, but are issued at a discount from
face value. The discount approximates the total amount of
interest the security will accrue from the date of issuance to
maturity. The market value of these securities generally
fluctuates more in response to changes in interest rates than
interest-paying securities.
II. FUTURES, OPTIONS AND OTHER DERIVATIVES
FORWARD CONTRACTS are contracts to purchase or sell a specified
amount of a financial instrument for an agreed upon price at a
specified time. Forward contracts are not currently exchange
traded and are typically negotiated on an individual basis. The
Funds may enter into forward currency contracts to hedge against
declines in the value of securities denominated in, or whose
value is tied to, a currency other than the U.S. dollar or to
reduce the impact of currency appreciation on purchases of such
securities. They may also enter into forward contracts to
purchase or sell securities or other financial indices.
FUTURES CONTRACTS are contracts that obligate the buyer to
receive and the seller to deliver an instrument or money at a
specified price on a specified date. The Funds may buy and sell
futures contracts on foreign currencies, securities and financial
indices including indices of U.S. government, foreign government,
equity or fixed-income securities. The Funds may also buy options
on futures contracts. An option on a futures contract gives the
buyer the right, but not the obligation, to buy or sell a futures
contract at a specified price on or before a specified date.
Futures contracts and options on futures are standardized and
traded on designated exchanges.
INDEXED/STRUCTURED SECURITIES are typically short- to
intermediate-term debt securities whose value at maturity or
interest rate is linked to currencies, interest rates, equity
securities, indices, commodity prices or other financial
indicators. Such securities may be positively or negatively
indexed (i.e., their value may increase or decrease if the
reference index or instrument appreci-
Janus Adviser prospectus 55
ates). Indexed/structured securities may have return
characteristics similar to direct investments in the underlying
instruments and may be more volatile than the underlying
instruments. A Fund bears the market risk of an investment in the
underlying instruments, as well as the credit risk of the issuer.
INTEREST RATE SWAPS involve the exchange by two parties of their
respective commitments to pay or receive interest (e.g., an
exchange of floating rate payments for fixed rate payments).
INVERSE FLOATERS are debt instruments whose interest rate bears
an inverse relationship to the interest rate on another
instrument or index. For example, upon reset the interest rate
payable on a security may go down when the underlying index has
risen. Certain inverse floaters may have an interest rate reset
mechanism that multiplies the effects of change in the underlying
index. Such mechanism may increase the volatility of the
security's market value.
OPTIONS are the right, but not the obligation, to buy or sell a
specified amount of securities or other assets on or before a
fixed date at a predetermined price. The Funds may purchase and
write put and call options on securities, securities indices and
foreign currencies. The Funds may purchase or write such options
individually or in combination.
III. OTHER INVESTMENTS, STRATEGIES AND/OR TECHNIQUES
REPURCHASE AGREEMENTS involve the purchase of a security by a
Fund and a simultaneous agreement by the seller (generally a bank
or dealer) to repurchase the security from the Fund at a
specified date or upon demand. This technique offers a method of
earning income on idle cash. These securities involve the risk
that the seller will fail to repurchase the security, as agreed.
In that case, a Fund will bear the risk of market value
fluctuations until the security can be sold and may encounter
delays and incur costs in liquidating the security.
REVERSE REPURCHASE AGREEMENTS involve the sale of a security by a
Fund to another party (generally a bank or dealer) in return for
56 Janus Adviser prospectus
cash and an agreement by the Fund to buy the security back at a
specified price and time. This technique will be used primarily
to provide cash to satisfy unusually high redemption requests, or
for other temporary or emergency purposes.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
generally involve the purchase of a security with payment and
delivery at some time in the future - i.e., beyond normal
settlement. The Funds do not earn interest on such securities
until settlement and bear the risk of market value fluctuations
in between the purchase and settlement dates. New issues of
stocks and bonds, private placements and U.S. government
securities may be sold in this manner.
Janus Adviser prospectus 57
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You can request other information, including a
Statement of Additional Information, Annual
Report or Semiannual Report, free of charge, by
contacting your plan sponsor, broker or financial
institution or visiting our Web site at
janus.com. In the Funds' Annual and Semiannual
Reports, you will find a discussion of the market
conditions and investment strategies that
significantly affected the performance of each
Fund during the last fiscal year. Other
information is also available from financial
intermediaries that sell shares of the Funds.
The Statement of Additional Information provides
detailed information about the Trust and is
incorporated into this Prospectus by reference.
You may review and copy information about the
Funds (including the Statement of Additional
Information) at the Public Reference Room of the
SEC or get text only copies, after paying a
duplicating fee, by sending an electronic request
by e-mail to publicinfo@sec.gov or by writing to
the Public Reference Room, Washington, D.C.
20549-0102 (information on the operation of the
Public Reference Room may be obtained by calling
1-202-942-8090). You may also obtain reports and
other information about the Funds from the
Electronic Data Gathering Analysis and Retrieval
(EDGAR) Database on the SEC's Web site at
http://www.sec.gov.
(JANUS LOGO)
www.janus.com
100 Fillmore Street
Denver, Colorado 80206-4928
1-800-525-0020
[Investment Company Act File No. ]
PART B
STATEMENT OF ADDITIONAL INFORMATION
JANUS ADVISER -- U.S. VALUE FUND
JANUS ADVISER -- INTERNATIONAL EQUITY FUND
EACH A SERIES OF
JANUS ADVISER
100 FILLMORE STREET
DENVER, COLORADO 80206-4928
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus/Proxy Statement dated , 2003,
relating to the proposed transfer of all or substantially all of the assets and
liabilities of Vontobel U.S. Value Fund and Vontobel International Equity Fund,
each a series of Vontobel Funds, Inc., to Janus Adviser -- U.S. Value Fund and
Janus Adviser -- International Equity Fund, respectively, in exchange for shares
of Janus Adviser -- U.S. Value Fund and Janus Adviser -- International Equity
Fund. A copy of the Prospectus/Proxy Statement may be obtained without charge by
contacting Janus Capital Management LLC ("Janus") at 100 Fillmore Street,
Denver, Colorado 80206-4928 or by telephoning Janus toll free at 1-800-525-3713.
The date of this Statement of Additional Information is , 2003.
B-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Exhibits.................................................... B-3
Introduction................................................ B-3
Incorporation by Reference.................................. B-3
Additional Information about Janus Adviser -- U.S. Value
Fund and Janus Adviser -- International Equity Fund....... B-3
Fund History........................................... B-3
Description of the Funds and Their Investments and
Risks................................................. B-3
Management of the Funds................................ B-4
Control Persons and Principal Holders of Securities.... B-4
Investment Advisory and Other Services................. B-4
Brokerage Allocation and Other Practices............... B-4
Capital Stock and Other Securities..................... B-4
Purchase, Redemption and Pricing of Shares............. B-4
Taxation of the Fund................................... B-4
Underwriters........................................... B-4
Calculation of Performance Data........................ B-4
Financial Statements................................... B-5
Additional Information about Vontobel U.S. Value Fund and
Vontobel International Equity Fund........................ B-5
Fund History........................................... B-5
Description of the Funds and Their Investments and
Risks................................................. B-5
Management of the Funds................................ B-5
Control Persons and Principal Holders of Securities.... B-5
Investment Advisory and Other Services................. B-5
Brokerage Allocation and Other Practices............... B-5
Capital Stock and Other Securities..................... B-5
Purchase, Redemption and Pricing of Shares............. B-5
Taxation of the Fund................................... B-5
Underwriters........................................... B-5
Calculation of Performance Data........................ B-6
Financial Statements................................... B-6
</Table>
B-2
EXHIBITS
The following documents are attached as exhibits to this Statement of
Additional Information:
<Table>
Exhibit A: Preliminary Statement of Additional Information, dated June
, 2003, of Janus Adviser with respect to Janus
Adviser -- U.S. Value Fund and Janus
Adviser -- International Equity Fund (the "Janus Adviser
SAI")
Exhibit B: Annual Report, dated December 31, 2002, of Vontobel Funds,
Inc.
Exhibit C: Statement of Additional Information, dated May 1, 2003, of
Vontobel Funds, Inc. (the "Vontobel SAI")
</Table>
PRO FORMA FINANCIAL STATEMENTS
Pro forma financial statements are not included since Vontobel U.S. Value
Fund and Vontobel International Equity Fund are being combined with Janus
Adviser -- U.S. Value Fund and Janus Adviser -- International Equity Fund,
respectively, which are newly created funds that do not have any assets or
liabilities.
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in a Prospectus/Proxy Statement dated , 2003 (the
"Prospectus/Proxy Statement") relating to the proposed reorganization of
Vontobel U.S. Value Fund and Vontobel International Equity Fund, each a series
of Vontobel Funds, Inc., into Janus Adviser -- U.S. Value Fund and Janus
Adviser -- International Equity Fund, each a series of Janus Adviser. The
Prospectus/Proxy Statement has been sent to the shareholders of Vontobel U.S.
Value Fund and Vontobel International Equity Fund in connection with the
solicitation by the management of those funds of proxies to be voted at the
Special Meeting of Shareholders of Vontobel U.S. Value Fund and Vontobel
International Equity Fund to be held on , 2003.
INCORPORATION BY REFERENCE
The following documents are incorporated by reference into this Statement
of Additional Information:
- The Vontobel SAI (file no. 002-78931), filed with the Securities and
Exchange Commission on May 14, 2003 (accession number:
0001108086-03-000034)
- Annual Report, dated December 31, 2002, of Vontobel Funds, Inc. (file no.
811-03551) filed with the Securities and Exchange Commission on March 7,
2003 (accession number: 0000705455-03-000001)
- The Janus Adviser SAI (file no. 333-106142), filed with the Securities
and Exchange Commission on June 16, 2003 (accession number:
0000950134-03-009198)
ADDITIONAL INFORMATION ABOUT JANUS ADVISER -- U.S. VALUE FUND AND
JANUS ADVISER -- INTERNATIONAL EQUITY FUND
FUND HISTORY
For additional information about Janus Adviser -- U.S. Value Fund and Janus
Adviser -- International Equity Fund generally and their history, see the
introduction to the Janus Adviser SAI.
DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
For additional information about the investment objective, policies, risks
and restrictions of Janus Adviser -- U.S. Value Fund and Janus
Adviser -- International Equity Fund, see "Classification, Investment Policies
and Restrictions, and Investment Strategies and Risks" in the Janus Adviser SAI.
B-3
MANAGEMENT OF THE FUNDS
For additional information regarding the management of Janus Adviser --
U.S. Value Fund and Janus Adviser -- International Equity Fund, see "Trustee and
Officers" in the Janus Adviser SAI.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For additional information regarding ownership of shares of Janus Adviser
- -- U.S. Value Fund and Janus Adviser -- International Equity Fund, see
"Principal Shareholders" in the Janus Adviser SAI.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about investment advisory and other services,
see "Investment Adviser and Subadviser" in the Janus Adviser SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
For additional information regarding brokerage allocation practices of
Janus Adviser -- U.S. Value Fund and Janus Adviser -- International Equity Fund,
see "Portfolio Transactions and Brokerage" in the Janus Adviser SAI.
CAPITAL STOCK AND OTHER SECURITIES
For additional information regarding voting rights and other aspects of
shares of Janus Adviser -- U.S. Value Fund and Janus Adviser -- International
Equity Fund, see "Miscellaneous Information -- Shares of the Trust",
"Miscellaneous Information -- Shareholder Meetings" and "Miscellaneous
Information -- Voting Rights" in the Janus Adviser SAI.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about share purchase, redemption and pricing of
shares of Janus Adviser -- U.S. Value Fund and Janus Adviser -- International
Equity Fund, see "Shares of the Trust" in the Janus Adviser SAI.
TAXATION OF THE FUND
For additional information regarding tax matters, see "Income Dividends,
Capital Gains Distributions and Tax Status" in the Janus Adviser SAI.
UNDERWRITERS
For additional information about underwriting of shares of Janus Adviser --
U.S. Value Fund and Janus Adviser -- International Equity Fund, see "Custodian,
Transfer Agent and Certain Affiliations" and Shares of the Funds" in the Janus
Adviser SAI.
CALCULATION OF PERFORMANCE DATA
For additional information regarding the investment performance of Janus
Adviser -- U.S. Value Fund and Janus Adviser -- International Equity Fund, see
"Performance Information" in the Janus Adviser SAI.
B-4
FINANCIAL STATEMENTS
For additional information, see "Financial Statements" in the Janus Adviser
SAI.
ADDITIONAL INFORMATION ABOUT VONTOBEL U.S. VALUE FUND AND
VONTOBEL INTERNATIONAL EQUITY FUND
FUND HISTORY
For additional information about Vontobel U.S. Value Fund and Vontobel
International Equity Fund generally and their history, see "General Information"
in the Vontobel SAI.
DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
For additional information about the investment objective, policies, risks
and restrictions of Vontobel U.S. Value Fund and Vontobel International Equity
Fund, see "Investment Objectives", "Strategies and Risks", "Investment Programs"
and "Investment Restrictions" in the Vontobel SAI.
MANAGEMENT OF THE FUNDS
For additional information regarding the management of Vontobel U.S. Value
Fund and Vontobel International Equity Fund, see "Management of the Company" in
the Vontobel SAI.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For additional information regarding ownership of shares of Vontobel U.S.
Value Fund and Vontobel International Equity Fund, see "Principal Securities
Holders" in the Vontobel SAI.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about investment advisory and other services,
see "Investment Adviser and Advisory Agreement" and "Management-Related
Services" in the Vontobel SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
For additional information regarding brokerage allocation practices of
Vontobel U.S. Value Fund and Vontobel International Equity Fund, see "Portfolio
Transactions" in the Vontobel SAI.
CAPITAL STOCK AND OTHER SECURITIES
For additional information regarding voting rights and other aspects of
shares of Vontobel U.S. Value Fund and Vontobel International Equity Fund, see
"Capital Stock and Dividends" in the Vontobel SAI.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about share purchase, redemption and pricing of
shares of Vontobel U.S. Value Fund and Vontobel International Equity Fund, see
"Additional Information about Purchases and Sales" in the Vontobel SAI.
TAXATION OF THE FUND
For additional information regarding tax matters, see "Tax Status" in the
Vontobel SAI.
UNDERWRITERS
For additional information about underwriting of shares of Vontobel U.S.
Value Fund and Vontobel International Equity Fund, see "Management-Related
Services" and "Distribution" in the Vontobel SAI.
B-5
CALCULATION OF PERFORMANCE DATA
For additional information regarding the investment performance of Vontobel
U.S. Value Fund and Vontobel International Equity Fund, see "Investment
Performance" in the Vontobel SAI.
FINANCIAL STATEMENTS
For additional information, see "Financial Information" in the Vontobel
SAI.
B-6
September , 2003
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 16, 2003
U.S. Value Fund
International Equity Fund
JANUS ADVISER
INVESTOR SHARES
CLASS I SHARES
CLASS A SHARES
CLASS C SHARES
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the current Prospectuses for
Investor Shares and Class I Shares, Class A Shares and Class C Shares
(collectively, the "Shares") of Janus Adviser (the "Trust"), which is
organized as a Delaware statutory trust. Janus Capital Management LLC
("Janus Capital") is the investment adviser of each Fund of the Trust.
In addition, Vontobel Asset Management, Inc. ("Vontobel") is the
subadviser for each Fund of the Trust and is responsible for the Funds'
day to day investment operations.
It is currently contemplated that the Funds will participate in a
tax-free reorganization of Vontobel U.S. Value Fund and Vontobel
International Equity Fund into U.S. Value Fund and International Equity
Fund, respectively. As a result of the reorganization, existing Vontobel
Class A shareholders who purchased their shares without a sales charge
will receive Investor Class shares, existing Vontobel Class A
shareholders who purchased their shares with a sales charge will receive
Class A Shares, and existing Vontobel Class C shareholders will receive
Class C Shares of the corresponding Fund(s). The reorganization is
subject to approval by the shareholders of Vontobel U.S. Value Fund and
Vontobel International Equity Fund, and is expected to become effective
on or about September , 2003. The Funds will not commence operations
until the effective date of the reorganization.
Class I Shares, Class A Shares and Class C Shares of the Funds may be
purchased only through institutional channels such as qualified and
non-qualified retirement and pension plans, mutual funds "supermarkets,"
bank trust departments, brokers, financial advisers and other financial
intermediaries. Investor Shares may be purchased directly with the
Funds.
This SAI is not a Prospectus and should be read in conjunction with the
Funds' Prospectus dated September , 2003, which is incorporated by
reference into this SAI and may be obtained from the Funds on janus.com,
by calling 1-800-525-3713, or by writing the Funds at the address shown
on the back cover of the SAI, or from your plan sponsor, broker or other
financial intermediary. This SAI contains additional and more detailed
information about each Fund's operations and activities than the
Prospectus. Certain portions of the Annual and Semiannual Reports of
Vontobel U.S. Value Fund and Vontobel International Equity Fund, which
contain important financial information about U.S. Value Fund and
International Equity Fund, respectively, are incorporated by reference
into this SAI, and such Reports are also available, without charge, from
the Funds or from your plan sponsor or other financial intermediary.
(JANUS LOGO)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<Table>
Classification, Investment Policies and
Restrictions, and Investment Strategies and
Risks............................................ 2
Investment Adviser and Subadviser................ 35
Custodian, Transfer Agent and Certain
Affiliations..................................... 45
Portfolio Transactions and Brokerage............. 47
Trustees and Officers............................ 52
Shares of the Trust.............................. 60
Net Asset Value Determination................. 60
Purchases..................................... 61
Distribution and Shareholder Servicing
Plans......................................... 65
Redemptions................................... 68
Income Dividends, Capital Gains Distributions and
Tax Status....................................... 72
Principal Shareholders........................... 73
Miscellaneous Information........................ 74
Shares of the Trust........................... 74
Shareholder Meetings.......................... 75
Voting Rights................................. 76
Independent Accountants....................... 76
Registration Statement........................ 76
Performance Information.......................... 77
Financial Statements............................. 85
Appendix A....................................... 86
Explanation of Rating Categories.............. 86
</Table>
1
CLASSIFICATION, INVESTMENT POLICIES AND RESTRICTIONS, AND INVESTMENT STRATEGIES
AND RISKS
- --------------------------------------------------------------------------------
CLASSIFICATION
Each Fund is an open-end, management investment company. The
Investment Company Act of 1940 ("1940 Act") classifies mutual
funds as either diversified or non-diversified. U.S. Value Fund
is classified as non-diversified. U.S. Value Fund will be
operated in a manner consistent with the diversification
requirements of Subchapter M of the Internal Revenue Code of
1986, as amended, and the regulations thereunder (the "Code").
International Equity Fund is classified as diversified.
Janus Capital is the investment adviser and Vontobel is the
investment subadviser for each Fund.
INVESTMENT POLICIES AND RESTRICTIONS
Unless otherwise indicated, the following investment restrictions
have been adopted by each Fund. Except as otherwise stated, these
investment restrictions are "fundamental" policies. A
"fundamental" policy is defined in the 1940 Act to mean that the
restriction cannot be changed without the vote of a "majority of
the outstanding voting securities" of a Fund. A majority of the
outstanding voting securities is defined in the 1940 Act as the
lesser of (a) 67% or more of the voting securities present at a
meeting if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy, or (b) more than
50% of the outstanding voting securities.
(1) With respect to 75% of its total assets, International Equity
Fund may not purchase securities of an issuer (other than the
U.S. government, its agencies, instrumentalities or authorities
or repurchase agreements collateralized by U.S. government
securities, and other investment companies) if: (a) such purchase
would, at the time, cause more than 5% of the Fund's total assets
taken at market value to be invested in the securities of such
issuer; or (b) such purchase would, at the time, result in more
than 10% of the outstanding voting securities of such issuer
being held by the Fund.
2
Each Fund may not:
(2) Borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulation [or
exemptive order relief obtained from the Securities and Exchange
Commission ("SEC")] from time to time.
(3) Issue "senior securities," except as permitted under the 1940
Act, as amended, and as interpreted or modified by regulation [or
exemptive relief obtained from the SEC] from time to time.
(4) Engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be considered to
be an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities or in connection
with its investments in other investment companies.
(5) Purchase or sell real estate, except that the Fund may (i)
invest in securities of issuers that invest in real estate or
interests therein, (ii) invest in mortgage-related securities and
other securities that are secured by real estate or interests
therein, and (iii) hold and sell real estate acquired by the Fund
as a result of the ownership of securities.
(6) Purchase or sell commodities or commodity contracts, except
the Fund may purchase and sell derivatives (including but not
limited to options, futures contracts and options on futures
contracts) whose value is tied to the value of a financial index
or a financial instrument or other asset (including, but not
limited to, securities indexes, interest rates, securities,
currencies and physical commodities).
(7) Make loans, except that the Fund may (i) lend portfolio
securities, (ii) enter into repurchase agreements, (iii) purchase
all or a portion of an issue of debt securities, bank loan
participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities and
(iv) participate in an interfund lending program with other
registered investment companies.
3
(8) Purchase a security if, after giving effect to the purchase,
more than 25% of its total assets would be invested in the
securities of one or more issuers conducting their principal
business activities in the same industry (other than U.S.
Government securities).
If any percentage restriction described above for a Fund is
adhered to at the time of investment, a subsequent increase or
decrease in the percentage resulting from a change in the value
of the Fund's assets will not constitute a violation of the
restriction. In addition, a Fund may invest substantially all of
its assets in the securities of a single open-end registered
investment company with similar investment objectives and
policies without violating any of the foregoing investment
restrictions.
The Trustees have adopted additional investment restrictions for
the Funds. These restrictions are operating policies of the Funds
and may be changed by the Trustees without shareholder approval.
The additional investment restrictions adopted by the Trustee to
date include the following:
(a) A Fund will not (i) enter into any futures contracts and
related options for purposes other than bona fide hedging
transactions within the meaning of Commodity Futures Trading
Commission ("CFTC") regulations, except that a Fund may enter
into futures contracts and related options for purposes other
than for bona fide hedging as permitted under CFTC Rule 4.5; and
(ii) enter into any futures contracts if the aggregate amount of
such Fund's commitments under outstanding futures contracts
positions would exceed the market value of its total assets.
(b) The Funds may sell securities short if they own or have the
right to obtain securities equivalent in kind and amount to the
securities sold short without the payment of any additional
consideration therefor ("short sales against the box"). In
addition, the Equity Funds may engage in "naked" short sales,
which involve selling a security that a Fund borrows and does not
own. The total market value of all of a Fund's naked short sale
positions will not exceed 8% of its assets. Transactions in
futures,
4
options, swaps and forward contracts are not deemed to constitute
selling securities short.
(c) The Funds do not currently intend to purchase securities on
margin, except that the Funds may obtain such short-term credits
as are necessary for the clearance of transactions, and provided
that margin payments and other deposits in connection with
transactions in futures, options, swaps and forward contracts
shall not be deemed to constitute purchasing securities on
margin.
(d) A Fund may not mortgage or pledge any securities owned or
held by such Fund in amounts that exceed, in the aggregate, 15%
of that Fund's net asset value, provided that this limitation
does not apply to reverse repurchase agreements, deposits of
assets to margin, guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection
with such contracts.
(e) The Funds do not currently intend to purchase any security or
enter into a repurchase agreement if, as a result, more than 15%
of their respective net assets would be invested in repurchase
agreements not entitling the holder to payment of principal and
interest within seven days and in securities that are illiquid by
virtue of legal or contractual restrictions on resale or the
absence of a readily available market. The Trustees, or the
Funds' investment adviser acting pursuant to authority delegated
by the Trustees, may determine that a readily available market
exists for securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities"), or any
successor to such rule, Section 4(2) commercial paper and
municipal lease obligations. Accordingly, such securities may not
be subject to the foregoing limitation.
(f) The Funds may not invest in companies for the purpose of
exercising control of management.
Under the terms of an exemptive order received from the SEC, each
of the Funds may borrow money from or lend money to other funds
that permit such transactions and for which Janus Capital serves
as investment adviser. All such borrowing and
5
lending will be subject to the above limits. A Fund will borrow
money through the program only when the costs are equal to or
lower than the cost of bank loans. Interfund loans and borrowings
normally extend overnight, but can have a maximum duration of
seven days. A Fund will lend through the program only when the
returns are higher than those available from other short-term
instruments (such as repurchase agreements). A Fund may have to
borrow from a bank at a higher interest rate if an interfund loan
is called or not renewed. Any delay in repayment to a lending
Fund could result in a lost investment opportunity or additional
borrowing costs.
INVESTMENT STRATEGIES AND RISKS
Convertible Securities
Each Fund may invest in convertible securities. Traditional
convertible securities include corporate bonds, notes and
preferred stocks that may be converted into or exchanged for
common stock, and other securities that also provide an
opportunity for equity participation. These securities are
convertible either at a stated price or a stated rate (that is,
for a specific number of shares of common stock or other
security). As with other fixed income securities, the price of a
convertible security generally varies inversely with interest
rates. While providing a fixed income stream, a convertible
security also affords the investor an opportunity, through its
conversion feature, to participate in the capital appreciation of
the common stock into which it is convertible. As the market
price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis and so 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, a Fund may have to pay more for a convertible
security than the value of the underlying common stock.
6
Warrants
Each 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.
Debt Securities
Under normal circumstances, U.S. Value Fund will have at least
[80%] of its net assets invested in equity securities. U.S. Value
Fund may also acquire debt securities. Debt securities include
obligations of governments, instrumentalities and corporations.
The debt securities in which U.S. Value Fund may invest will be
rated at the time of purchase Baa or higher by Moody's Investors
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 investment adviser believes
are of comparable quality. Debt securities rated Baa by Moody's
or BBB by S&P are generally considered to be investment grade
securities, although they have speculative characteristics and
changes in economic conditions or circumstances are more likely
to lead to a weakened capacity to make principal and interest
payments than is the case for higher rated debt obligations.
Cash Position
As discussed in the Prospectus, a Fund's cash position may
temporarily increase under various circumstances. Securities that
each Fund may invest in as a means of receiving a return on idle
cash include domestic or foreign denominated commercial paper,
certificates of deposit, repurchase agreements or other
short-term debt obligations. These securities may include U.S.
and foreign short-term cash instruments. Each Fund may also
invest in money
7
market funds, including funds managed by Janus Capital (see
"Investment Company Securities").
Illiquid Investments
Each Fund may invest up to 15% of its net assets in illiquid
investments (i.e., securities that are not readily marketable).
The Trustees have authorized [Janus Capital] to make liquidity
determinations with respect to certain securities, including Rule
144A Securities, commercial paper and municipal lease obligations
purchased by the Funds. Under the guidelines established by the
Trustees, [Janus Capital] will consider the following factors:
(1) the frequency of trades and quoted prices for the obligation;
(2) the number of dealers willing to purchase or sell the
security and the number of other potential purchasers; (3) the
willingness of dealers to undertake to make a market in the
security; and (4) the nature of the security and the nature of
the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers and the mechanics
of the transfer. In the case of commercial paper, [Janus Capital]
will also consider whether the paper is traded flat or in default
as to principal and interest and any ratings of the paper by a
nationally recognized statistical rating organization ("NRSRO").
A foreign security that may be freely traded on or through the
facilities of an offshore exchange or other established offshore
securities market is not deemed to be a restricted security
subject to these procedures.
If illiquid securities exceed 15% of a Fund's net assets after
the time of purchase, the Fund will take steps to reduce in an
orderly fashion its holdings of illiquid securities. Because
illiquid securities may not be readily marketable, the portfolio
manager may not be able to dispose of them in a timely manner. As
a result, the Fund may be forced to hold illiquid securities
while their price depreciates. Depreciation in the price of
illiquid securities may cause the net asset value of the Fund to
decline.
8
Securities Lending
Under procedures adopted by the Trustees, each Fund may lend
securities to qualified parties (typically brokers or other
financial institutions) who need to borrow securities in order to
complete certain transactions such as covering short sales,
avoiding failures to deliver securities or completing arbitrage
activities. A Fund may seek to earn additional income through
securities lending. There is the risk of delay in recovering a
loaned security or the risk of loss in collateral rights if the
borrower fails financially. Loans will only be made if Vontobel
believes the benefit from granting such loans justifies the risk.
A Fund will not have the right to vote on securities while they
are being lent, but it may call a loan if the benefits of voting
outweigh the benefits to the Fund by leaving the securities on
loan. All loans will be continuously secured by collateral which
consists of cash, U.S. Government securities, letters of credit
and such other collateral as permitted by the SEC.
Zero Coupon, Step Coupon and Pay-In-Kind Securities
Each Fund may invest up to 10% of its assets in zero coupon,
pay-in-kind and step coupon securities. Zero coupon bonds are
issued and traded at a discount from their face value. They do
not entitle the holder to any periodic payment of interest prior
to maturity. Step coupon bonds trade at a discount from their
face value and pay coupon interest. The coupon rate is low for an
initial period and then increases to a higher coupon rate
thereafter. The discount from the face amount or par value
depends on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. Pay-in-kind bonds
normally give the issuer an option to pay cash at a coupon
payment date or give the holder of the security a similar bond
with the same coupon rate and a face value equal to the amount of
the coupon payment that would have been made.
Current federal income tax law requires holders of zero coupon
securities and step coupon securities to report the portion of
the original issue discount on such securities that accrue during
a
9
given year as interest income, even though the holders receive no
cash payments of interest during the year. In order to qualify as
a "regulated investment company" under the Code, a Fund must
distribute its investment company taxable income, including the
original issue discount accrued on zero coupon or step coupon
bonds. Because a Fund will not receive cash payments on a current
basis in respect of accrued original-issue discount on zero
coupon bonds or step coupon bonds during the period before
interest payments begin, in some years the Fund may have to
distribute cash obtained from other sources in order to satisfy
the distribution requirements under the Code. The Fund might
obtain such cash from selling other portfolio holdings which
might cause the Fund to incur capital gains or losses on the
sale. Additionally, these actions are likely to reduce the assets
to which Fund expenses could be allocated and to reduce the rate
of return for the Fund. In some circumstances, such sales might
be necessary in order to satisfy cash distribution requirements
even though investment considerations might otherwise make it
undesirable for the Fund to sell the securities at the time.
Generally, the market prices of zero coupon, step coupon and
pay-in-kind securities are more volatile than the prices of
securities that pay interest periodically and in cash and are
likely to respond to changes in interest rates to a greater
degree than other types of debt securities having similar
maturities and credit quality.
Investment Company Securities
From time to time, the Funds may invest in securities of other
investment companies, subject to the provisions of Section
12(d)(1) of the 1940 Act. The Funds may invest in securities of
money market funds managed by Janus Capital in excess of the
limitations of Section 12(d)(1) under the terms of an SEC
exemptive order obtained by Janus Capital and the Janus funds.
As a shareholder of another investment company, a Fund would bear
its pro rata portion of the other investment company's expenses,
including advisory fees, in addition to the expenses the
10
Fund bears directly in connection with its own operations.
Investment companies in which the Funds may invest may include
index-based investments such as exchange traded funds ("ETFs"),
which hold substantially all of their assets in securities
representing their specific index. The main risk of investing in
index-based investment is the same as investing in a portfolio of
equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both
changes in the market value of their underlying portfolio
securities and due to supply and demand for the instruments on
the exchanges on which they are traded (which may result in their
trading at a discount to their NAVs). Index-based investments may
not replicate exactly the performance of their specific index
because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Depositary Receipts
Each Fund may invest in sponsored and unsponsored American
Depositary Receipts ("ADRs"), which are receipts issued by an
American bank or trust company evidencing ownership of underlying
securities issued by a foreign issuer. ADRs, in registered form,
are designed for use in U.S. securities markets. Unsponsored ADRs
may be created without the participation of the foreign issuer.
Holders of these ADRs generally bear all the costs of the ADR
facility, whereas foreign issuers typically bear certain costs in
a sponsored ADR. The bank or trust company depositary of an
unsponsored ADR may be under no obligation to distribute
shareholder communications received from the foreign issuer or to
pass through voting rights. Each Fund may also invest in European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs")
and in other similar instruments representing securities of
foreign companies. EDRs and GDRs are securities that are
typically issued by foreign banks or foreign trust companies,
although U.S. banks or U.S. trust companies may issue them. EDRs
and GDRs are structured similar to the arrangements of ADRs.
EDRs, in bearer form, are designed for use in European securities
markets.
11
Depositary Receipts are generally subject to the same sort of
risks as direct investments in a foreign country, such as,
currency risk, political and economic risk, and market risk,
because their values depend on the performance of a foreign
security denominated in its home currency. The risks of foreign
investing are addressed in the Funds' prospectus.
Other Income-Producing Securities
Other types of income producing securities that each Fund may
purchase include, but are not limited to, the following types of
securities:
VARIABLE AND FLOATING RATE OBLIGATIONS. These types of securities
have variable or floating rates of interest and, under certain
limited circumstances, may have varying principal amounts.
Variable and floating rate securities pay interest at rates that
are adjusted periodically according to a specified formula,
usually with reference to some interest rate index or market
interest rate (the "underlying index"). The floating rate tends
to decrease the security's price sensitivity to changes in
interest rates. These types of securities are relatively
long-term instruments that often carry demand features permitting
the holder to demand payment of principal at any time or at
specified intervals prior to maturity.
In order to most effectively use these investments, a portfolio
manager must correctly assess probable movements in interest
rates. This involves different skills than those used to select
most portfolio securities. If a portfolio manager incorrectly
forecasts such movements, a Fund could be adversely affected by
the use of variable or floating rate obligations.
STANDBY COMMITMENTS. These instruments, which are similar to a
put, give a Fund the option to obligate a broker, dealer or bank
to repurchase a security held by the Fund at a specified price.
TENDER OPTION BONDS. Tender option bonds are relatively long-
term bonds that are coupled with the option to tender the
securities to a bank, broker-dealer or other financial
institution at periodic intervals and receive the face value of
the bond. This
12
investment structure is commonly used as a means of enhancing a
security's liquidity.
INVERSE FLOATERS. Inverse floaters are debt instruments whose
interest bears an inverse relationship to the interest rate on
another security. A Fund will not invest more than 5% of its
assets in inverse floaters. Similar to variable and floating rate
obligations, effective use of inverse floaters requires skills
different from those needed to select most portfolio securities.
If movements in interest rates are incorrectly anticipated, a
Fund could lose money or its NAV could decline by the use of
inverse floaters.
STRIP BONDS. Strip bonds are debt securities that are stripped of
their interest (usually by a financial intermediary) after the
securities are issued. The market value of these securities
generally fluctuates more in response to changes in interest
rates than interest-paying securities of comparable maturity.
A Fund may purchase standby commitments, tender option bonds and
instruments with demand features primarily for the purpose of
increasing the liquidity of its holdings.
Repurchase and Reverse Repurchase Agreements
In a repurchase agreement, a Fund purchases a security and
simultaneously commits to resell that security to the seller at
an agreed upon price on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. The
resale price consists of the purchase price plus an agreed upon
incremental amount that is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon
price, which obligation is in effect secured by the value (at
least equal to the amount of the agreed upon resale price and
marked-to-market daily) of the underlying security or
"collateral." A risk associated with repurchase agreements is the
failure of the seller to repurchase the securities as agreed,
which may cause a Fund to suffer a loss if the market value of
such securities declines before they can be liquidated on the
open market. In the event of
13
bankruptcy or insolvency of the seller, a Fund may encounter
delays and incur costs in liquidating the underlying security.
Repurchase agreements that mature in more than seven days are
subject to the 15% limit on illiquid investments. While it is not
possible to eliminate all risks from these transactions, it is
the policy of each Fund to limit repurchase agreements to those
parties whose creditworthiness has been reviewed and found
satisfactory by Vontobel or its agent.
Each Fund may use reverse repurchase agreements to obtain cash to
satisfy unusually heavy redemption requests or for other
temporary or emergency purposes without the necessity of selling
portfolio securities, or to earn additional income on portfolio
securities, such as Treasury bills or notes. In a reverse
repurchase agreement, a Fund sells a portfolio security to
another party, such as a bank or broker-dealer, in return for
cash and agrees to repurchase the instrument at a particular
price and time. While a reverse repurchase agreement is
outstanding, a Fund will maintain cash and appropriate liquid
assets in a segregated custodial account to cover its obligation
under the agreement. A Fund will enter into reverse repurchase
agreements only with parties that Vontobel or its agent deems
creditworthy. Using reverse repurchase agreements to earn
additional income involves the risk that the interest earned on
the invested proceeds is less than the expense of the reverse
repurchase agreement transaction. This technique may also have a
leveraging effect on the Funds, although the Funds' intent to
segregate assets in the amount of the reverse repurchase
agreement minimizes this effect.
Futures, Options and Other Derivative Instruments
FUTURES CONTRACTS. Each Fund may enter into contracts for the
purchase or sale for future delivery of equity securities, fixed-
income securities, foreign currencies or contracts based on
financial indices, including indices of U.S. Government
securities, foreign government securities, equity or fixed-income
securities. U.S. futures contracts are traded on exchanges which
have been designated "contract markets" by the CFTC and must be
executed through a futures commission merchant ("FCM"), or
brokerage
14
firm, which is a member of the relevant contract market. Through
their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
The buyer or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract
is held until the delivery date. However, both the buyer and
seller are required to deposit "initial margin" for the benefit
of the FCM when the contract is entered into. Initial margin
deposits are equal to a percentage of the contract's value, as
set by the exchange on which the contract is traded, and may be
maintained in cash or certain other liquid assets by a Fund's
custodian or subcustodian for the benefit of the FCM. Initial
margin payments are similar to good faith deposits or performance
bonds. Unlike margin extended by a securities broker, initial
margin payments do not constitute purchasing securities on margin
for purposes of the Funds' investment limitations. If the value
of either party's position declines, that party will be required
to make additional "variation margin" payments for the benefit of
the FCM to settle the change in value on a daily basis. The party
that has a gain may be entitled to receive all or a portion of
this amount. In the event of the bankruptcy of the FCM that holds
margin on behalf of a Fund, the Fund may be entitled to return of
margin owed to the Fund only in proportion to the amount received
by the FCM's other customers. [Janus Capital] will attempt to
minimize the risk by careful monitoring of the creditworthiness
of the FCMs with which the Funds do business and by depositing
each Fund's margin payments in a segregated account with the
Fund's custodian.
Each Fund intends to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool
operator" adopted by the CFTC and the National Futures
Association, which regulate trading in the futures markets. The
Funds will use futures contracts and related options primarily
for bona fide hedging purposes within the meaning of CFTC
regulations. To the extent that the Funds hold positions in
futures contracts and related options that do not fall within the
definition
15
of bona fide hedging transactions, the Funds intend to comply
with the requirements of CFTC Rule 4.5. Rule 4.5 currently
provides that the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of the fair market
value of a Fund's net assets, after taking into account
unrealized profits and unrealized losses on any such contracts it
has entered into. The CFTC recently proposed amendments to Rule
4.5 that also would permit the Funds to use futures and related
options for non-hedging purposes provided that the notional value
of such positions does not exceed the liquidation value of a
Fund's portfolio. The CFTC has indicated that the Funds may
currently rely on this alternative test, pending adoption of the
final amendments to Rule 4.5.
Although each Fund will segregate cash and liquid assets in an
amount sufficient to cover its open futures obligations, the
segregated assets would be available to the Fund immediately upon
closing out the futures position, while settlement of securities
transactions could take several days. However, because a Fund's
cash that may otherwise be invested would be held uninvested or
invested in other liquid assets so long as the futures position
remains open, the Fund's return could be diminished due to the
opportunity losses of foregoing other potential investments.
A Fund may enter into futures contracts to gain exposure to the
stock market pending investment of cash balances or to meet
liquidity needs. A Fund may also enter into futures contracts to
protect the Fund from fluctuations in the value of individual
securities or the securities markets generally, or interest rates
without actually buying or selling the underlying debt or equity
security. For example, if a Fund anticipates an increase in the
price of stocks, and it intends to purchase stocks at a later
time, the Fund could enter into a futures contract to purchase a
stock index as a temporary substitute for stock purchases. If an
increase in the market occurs that influences the stock index as
anticipated, the value of the futures contracts will increase,
thereby serving as a hedge against the Fund not participating in
a market advance. This technique is sometimes known as an
anticipatory
16
hedge. A Fund may also use this technique with respect to an
individual company's stock. To the extent a Fund enters into
futures contracts for this purpose, the segregated assets
maintained to cover the Fund's obligations with respect to the
futures contracts will consist of other liquid assets from its
portfolio in an amount equal to the difference between the
contract price and the aggregate value of the initial and
variation margin payments made by the Fund with respect to the
futures contracts. Conversely, if a Fund holds stocks and seeks
to protect itself from a decrease in stock prices, the Fund might
sell stock index futures contracts, thereby hoping to offset the
potential decline in the value of its portfolio securities by a
corresponding increase in the value of the futures contract
position. Similarly, if a Fund holds an individual company's
stock and expects the price of that stock to decline, the Fund
may sell a futures contract on that stock in hopes of offsetting
the potential decline in the company's stock price. A Fund could
protect against a decline in stock prices by selling portfolio
securities and investing in money market instruments, but the use
of futures contracts enables it to maintain a defensive position
without having to sell portfolio securities.
If a Fund owns bonds and the portfolio manager expects interest
rates to increase, the Fund may take a short position in interest
rate futures contracts. Taking such a position would have much
the same effect as the Fund selling bonds in its portfolio. If
interest rates increase as anticipated, the value of the bonds
would decline, but the value of the Fund's interest rate futures
contract will increase, thereby keeping the net asset value of
the Fund from declining as much as it may have otherwise. If, on
the other hand, a portfolio manager expects interest rates to
decline, a Fund may take a long position in interest rate futures
contracts in anticipation of later closing out the futures
position and purchasing the bonds. Although a Fund can accomplish
similar results by buying securities with long maturities and
selling securities with short maturities, given the greater
liquidity of the futures market than the cash market, it may be
possible to accomplish the same result more easily and more
quickly by using futures contracts as an investment tool to
reduce risk.
17
The ordinary spreads between prices in the cash and futures
markets, due to differences in the nature of those markets, are
subject to distortions. First, all participants in the futures
market are subject to initial margin and variation margin
requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal price
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery of the instrument underlying a futures contract. To the
extent participants decide to make or take delivery, liquidity in
the futures market could be reduced and prices in the futures
market distorted. Third, from the point of view of speculators,
the margin deposit requirements in the futures market are less
onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures
market may cause temporary price distortions. Due to the
possibility of the foregoing distortions, a correct forecast of
general price trends by the portfolio manager still may not
result in a successful use of futures.
Futures contracts entail risks. Although each Fund believes that
use of such contracts will benefit the Fund, the Fund's overall
performance could be worse than if the Fund had not entered into
futures contracts if the portfolio manager's investment judgment
proves incorrect. For example, if a Fund has hedged against the
effects of a possible decrease in prices of securities held in
its portfolio and prices increase instead, the Fund will lose
part or all of the benefit of the increased value of these
securities because of offsetting losses in its futures positions.
This risk may be magnified for single stock futures transactions,
as the portfolio manager must predict the direction of the price
of an individual stock, as opposed to securities prices
generally. In addition, if the Fund has insufficient cash, it may
have to sell securities from its portfolio to meet daily
variation margin requirements. Those sales may be, but will not
necessarily be, at increased prices which
18
reflect the rising market and may occur at a time when the sales
are disadvantageous to the Fund.
The prices of futures contracts depend primarily on the value of
their underlying instruments. Because there are a limited number
of types of futures contracts, it is possible that the
standardized futures contracts available to a Fund will not match
exactly the Fund's current or potential investments. A Fund may
buy and sell futures contracts based on underlying instruments
with different characteristics from the securities in which it
typically invests -- for example, by hedging investments in
portfolio securities with a futures contract based on a broad
index of securities -- which involves a risk that the futures
position will not correlate precisely with the performance of the
Fund's investments.
Futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments
closely correlate with a Fund's investments, such as with a
single stock futures contract. Futures prices are affected by
factors such as current and anticipated short-term interest
rates, changes in volatility of the underlying instruments and
the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures
prices. Imperfect correlations between a Fund's investments and
its futures positions also may result from differing levels of
demand in the futures markets and the securities markets, from
structural differences in how futures and securities are traded,
and from imposition of daily price fluctuation limits for futures
contracts. A Fund may buy or sell futures contracts with a
greater or lesser value than the securities it wishes to hedge or
is considering purchasing in order to attempt to compensate for
differences in historical volatility between the futures contract
and the securities, although this may not be successful in all
cases. If price changes in a Fund's futures positions are poorly
correlated with its other investments, its futures positions may
fail to produce desired gains or result in losses that are not
offset by the gains in the Fund's other investments.
Because futures contracts are generally settled within a day from
the date they are closed out, compared with a settlement period
of
19
three days for some types of securities, the futures markets can
provide superior liquidity to the securities markets.
Nevertheless, there is no assurance that a liquid secondary
market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish
daily price fluctuation limits for futures contracts and may halt
trading if a contract's price moves upward or downward more than
the limit in a given day. On volatile trading days when the price
fluctuation limit is reached, it may be impossible for a Fund to
enter into new positions or close out existing positions. If the
secondary market for a futures contract is not liquid because of
price fluctuation limits or otherwise, a Fund may not be able to
promptly liquidate unfavorable futures positions and potentially
could be required to continue to hold a futures position until
the delivery date, regardless of changes in its value. As a
result, the Fund's access to other assets held to cover its
futures positions also could be impaired.
OPTIONS ON FUTURES CONTRACTS. Each Fund may buy and write put and
call options on futures contracts. An option on a future gives a
Fund the right (but not the obligation) to buy or sell a futures
contract at a specified price on or before a specified date. The
purchase of a call option on a futures contract is similar in
some respects to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based
or the price of the underlying instrument, ownership of the
option may or may not be less risky than ownership of the futures
contract or the underlying instrument. As with the purchase of
futures contracts, when a Fund is not fully invested it may buy a
call option on a futures contract to hedge against a market
advance.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign
currency which is deliverable under, or of the index comprising,
the futures contract. If the futures price at the expiration of
the option is below the exercise price, a Fund will retain the
full
20
amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Fund's
holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the
security or foreign currency which is deliverable under, or of
the index comprising, the futures contract. If the futures price
at expiration of the option is higher than the exercise price, a
Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of
securities which the Fund is considering buying. If a call or put
option a Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between the
change in the value of its portfolio securities and changes in
the value of the futures positions, a Fund's losses from existing
options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in
some respects to the purchase of protective put options on
portfolio securities. For example, a Fund may buy a put option on
a futures contract to hedge its portfolio against the risk of
falling prices or rising interest rates.
The amount of risk a Fund assumes when it buys an option on a
futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that
changes in the value of the underlying futures contract will not
be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A forward contract is an agreement between two
parties in which one party is obligated to deliver a stated
amount of a stated asset at a specified time in the future and
the other party is obligated to pay a specified amount for the
assets at the time of delivery. Each Fund may enter into forward
contracts to purchase and sell government securities, equity or
income securities, foreign currencies or other financial
instruments. Forward contracts generally are traded in an
interbank market
21
conducted directly between traders (usually large commercial
banks) and their customers. Unlike futures contracts, which are
standardized contracts, forward contracts can be specifically
drawn to meet the needs of the parties that enter into them. The
parties to a forward contract may agree to offset or terminate
the contract before its maturity, or may hold the contract to
maturity and complete the contemplated exchange.
The following discussion summarizes the Funds' principal uses of
forward foreign currency exchange contracts ("forward currency
contracts"). Each Fund may enter into forward currency contracts
with stated contract values of up to the value of the Fund's
assets. A forward currency contract is an obligation to buy or
sell an amount of a specified currency for an agreed price (which
may be in U.S. dollars or a foreign currency). A Fund will
exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy
and sell currencies through forward currency contracts in order
to fix a price for securities it has agreed to buy or sell
("transaction hedge"). A Fund also may hedge some or all of its
investments denominated in a foreign currency or exposed to
foreign currency fluctuations against a decline in the value of
that currency relative to the U.S. dollar by entering into
forward currency contracts to sell an amount of that currency (or
a proxy currency whose performance is expected to replicate or
exceed the performance of that currency relative to the U.S.
dollar (a "proxy hedge")) approximating the value of some or all
of its portfolio securities denominated in that currency
("position hedge") or by participating in options or futures
contracts with respect to the currency. A Fund also may enter
into a forward currency contract with respect to a currency where
the Fund is considering the purchase or sale of investments
denominated in that currency but has not yet selected the
specific investments ("anticipatory hedge"). These types of
hedging minimize the effect of currency appreciation as well as
depreciation, but do not eliminate fluctuations in the underlying
U.S. dollar equivalent value of the proceeds of or rates of
return on a Fund's foreign currency denominated portfolio
securities. The matching of the increase in value of a forward
contract and the decline in the
22
U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be
precise.
In any of these circumstances a Fund may, alternatively, enter
into a forward currency contract to purchase or sell one foreign
currency for a second currency that is expected to perform more
favorably relative to the U.S. dollar if the portfolio manager
believes there is a reasonable degree of correlation between
movements in the two currencies ("cross-hedge"). Shifting a
Fund's currency exposure from one foreign currency to another
removes the Fund's opportunity to profit from increases in the
value of the original currency and involves a risk of increased
losses to the Fund if its portfolio manager's projection of
future exchange rates is inaccurate. Proxy hedges and
cross-hedges may result in losses if the currency used to hedge
does not perform similarly to the currency in which hedged
securities are denominated. Unforeseen changes in currency prices
may result in poorer overall performance for a Fund than if it
had not entered into such contracts.
A Fund may cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in or whose
value is tied to the currency underlying the forward contract or
the currency being hedged. To the extent that a Fund is not able
to cover its forward currency positions with underlying portfolio
securities, the Fund's custodian will segregate cash or other
liquid assets having a value equal to the aggregate amount of the
Fund's commitments under forward contracts entered into with
respect to position hedges, cross-hedges and anticipatory hedges.
If the value of the securities used to cover a position or the
value of segregated assets declines, the Fund will find
alternative cover or segregate additional cash or other liquid
assets on a daily basis so that the value of the covered and
segregated assets will be equal to the amount of the Fund's
commitments with respect to such contracts. As an alternative to
segregating assets, a Fund may buy call options permitting the
Fund to buy the amount of foreign currency being hedged by a
forward sale contract or a Fund may
23
buy put options permitting it to sell the amount of foreign
currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC,
the CFTC may in the future assert authority to regulate forward
contracts. In such event, the Funds' ability to utilize forward
contracts may be restricted. In addition, a Fund may not always
be able to enter into forward contracts at attractive prices and
may be limited in its ability to use these contracts to hedge
Fund assets.
OPTIONS ON FOREIGN CURRENCIES. Each Fund may buy and write
options on foreign currencies in a manner similar to that in
which futures or forward contracts on foreign currencies will be
utilized. For example, a decline in the U.S. dollar value of a
foreign currency in which portfolio securities are denominated
will reduce the U.S. dollar value of such securities, even if
their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio
securities, a Fund may buy put options on the foreign currency.
If the value of the currency declines, the Fund will have the
right to sell such currency for a fixed amount in U.S. dollars,
thereby offsetting, in whole or in part, the adverse effect on
its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in
which securities to be acquired are denominated is projected,
thereby increasing the cost of such securities, a Fund may buy
call options on the foreign currency. The purchase of such
options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to a Fund from purchases
of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, if currency
exchange rates do not move in the direction or to the extent
projected, a Fund could sustain losses on transactions in foreign
currency options that would require the Fund to forego a portion
or all of the benefits of advantageous changes in those rates.
24
A Fund may also write options on foreign currencies. For example,
to hedge against a potential decline in the U.S. dollar value of
foreign currency denominated securities due to adverse
fluctuations in exchange rates, a Fund could, instead of
purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most
likely not be exercised and the decline in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a
potential increase in the U.S. dollar cost of securities to be
acquired, a Fund could write a put option on the relevant
currency which, if rates move in the manner projected, should
expire unexercised and allow the Fund to hedge the increased cost
up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium.
If exchange rates do not move in the expected direction, the
option may be exercised and the Fund would be required to buy or
sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on
foreign currencies, a Fund also may lose all or a portion of the
benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Each Fund may write covered call options on foreign currencies. A
call option written on a foreign currency by a Fund is "covered"
if the Fund owns the foreign currency underlying the call or has
an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currencies held in its
portfolio. A call option is also covered if the Fund has a call
on the same foreign currency in the same principal amount as the
call written if the exercise price of the call held (i) is equal
to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written, if the
difference is
25
maintained by the Fund in cash or other liquid assets in a
segregated account with the Fund's custodian.
Each Fund also may write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is designed to provide a hedge
against a decline due to an adverse change in the exchange rate
in the U.S. dollar value of a security which a Fund owns or has
the right to acquire and which is denominated in the currency
underlying the option. Call options on foreign currencies which
are entered into for cross-hedging purposes are not covered.
However, in such circumstances, a Fund will collateralize the
option by segregating cash or other liquid assets in an amount
not less than the value of the underlying foreign currency in
U.S. dollars marked-to-market daily.
OPTIONS ON SECURITIES. In an effort to increase current income
and to reduce fluctuations in net asset value, a Fund may write
covered put and call options and buy put and call options on
securities that are traded on United States and foreign
securities exchanges and over-the-counter. A Fund may write and
buy options on the same types of securities that the Fund may
purchase directly.
A put option written by a Fund is "covered" if the Fund (i)
segregates cash not available for investment or other liquid
assets with a value equal to the exercise price of the put with
the Fund's custodian or (ii) holds a put on the same security and
in the same principal amount as the put written and the exercise
price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the buyer of an
option will reflect, among other things, the relationship of the
exercise price to the market price and the volatility of the
underlying security, the remaining term of the option, supply and
demand and interest rates.
A call option written by a Fund is "covered" if the Fund owns the
underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash
26
consideration (or for additional cash consideration held in a
segregated account by the Fund's custodian) upon conversion or
exchange of other securities held in its portfolio. A call option
is also deemed to be covered if the Fund holds a call on the same
security and in the same principal amount as the call written and
the exercise price of the call held (i) is equal to or less than
the exercise price of the call written or (ii) is greater than
the exercise price of the call written if the difference is
maintained by the Fund in cash and other liquid assets in a
segregated account with its custodian.
A Fund also may write call options that are not covered for
cross-hedging purposes. A Fund collateralizes its obligation
under a written call option for cross-hedging purposes by
segregating cash or other liquid assets in an amount not less
than the market value of the underlying security,
marked-to-market daily. A Fund would write a call option for
cross-hedging purposes, instead of writing a covered call option,
when the premium to be received from the cross-hedge transaction
would exceed that which would be received from writing a covered
call option and its portfolio manager believes that writing the
option would achieve the desired hedge.
The writer of an option may have no control over when the
underlying securities must be sold, in the case of a call option,
or bought, in the case of a put option, since with regard to
certain options, the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or
not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a
covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from
the sale of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
27
The writer of an option that wishes to terminate its obligation
may effect a "closing purchase transaction." This is accomplished
by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position
will be canceled by the clearing corporation. However, a writer
may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who
is the holder of an option may liquidate its position by
effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously
bought. There is no guarantee that either a closing purchase or a
closing sale transaction can be effected.
In the case of a written call option, effecting a closing
transaction will permit a Fund to write another call option on
the underlying security with either a different exercise price or
expiration date or both. In the case of a written put option,
such transaction will permit a Fund to write another put option
to the extent that the exercise price is secured by deposited
liquid assets. Effecting a closing transaction also will permit a
Fund to use the cash or proceeds from the concurrent sale of any
securities subject to the option for other investments. If a Fund
desires to sell a particular security from its portfolio on which
it has written a call option, the Fund will effect a closing
transaction prior to or concurrent with the sale of the security.
A Fund will realize a profit from a closing transaction if the
price of the purchase transaction is less than the premium
received from writing the option or the price received from a
sale transaction is more than the premium paid to buy the option.
A Fund will realize a loss from a closing transaction if the
price of the purchase transaction is more than the premium
received from writing the option or the price received from a
sale transaction is less than the premium paid to buy the option.
Because increases in the market price of a call option generally
will 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
28
or in part by appreciation of the underlying security owned by
the Fund.
An option position may be closed out only where a secondary
market for an option of the same series exists. If a secondary
market does not exist, a Fund may not be able to effect closing
transactions in particular options and the Fund would have to
exercise the options in order to realize any profit. If a Fund is
unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon
exercise. The absence of a liquid secondary market may be due to
the following: (i) insufficient trading interest in certain
options, (ii) restrictions imposed by a national securities
exchange ("Exchange") on which the option is traded on opening or
closing transactions or both, (iii) trading halts, suspensions or
other restrictions imposed with respect to particular classes or
series of options or underlying securities, (iv) unusual or
unforeseen circumstances that interrupt normal operations on an
Exchange, (v) the facilities of an Exchange or of the Options
Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume, or (vi) one or more Exchanges
could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a
particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options on
that Exchange that had been issued by the OCC as a result of
trades on that Exchange would continue to be exercisable in
accordance with their terms.
A Fund may write options in connection with buy-and-write
transactions. In other words, a Fund may buy a security and then
write a call option against that security. The exercise price of
such call will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security
at the time the option is written. Buy-and-write transactions
using
29
in-the-money call options may be used when it is expected that
the price of the underlying security will remain flat or decline
moderately during the option period. Buy-and-write transactions
using at-the-money call options may be used when it is expected
that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write
transactions using out-of-the-money call options may be used when
it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the
underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, a Fund's
maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between
the Fund's purchase price of the security and the exercise price.
If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset by
the amount of premium received.
The writing of covered put options is similar in terms of risk
and return characteristics to buy-and-write transactions. If the
market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and a Fund's gain will be limited to the premium received. If the
market price of the underlying security declines or otherwise is
below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price
and the Fund's return will be the premium received from the put
options minus the amount by which the market price of the
security is below the exercise price.
A Fund may buy put options to hedge against a decline in the
value of its portfolio. By using put options in this way, a Fund
will reduce any profit it might otherwise have realized in the
underlying security by the amount of the premium paid for the put
option and by transaction costs.
A Fund may buy call options to hedge against an increase in the
price of securities that it may buy in the future. The premium
30
paid for the call option plus any transaction costs will reduce
the benefit, if any, realized by the Fund upon exercise of the
option, and, unless the price of the underlying security rises
sufficiently, the option may expire worthless to the Fund.
A Fund may write straddles (combinations of put and call options
on the same underlying security), which are generally a non-
hedging technique used for purposes such as seeking to enhance
return. Because combined options positions involve multiple
trades, they result in higher transaction costs and may be more
difficult to open and close out than individual options
contracts. The straddle rules of the Internal Revenue Code
require deferral of certain losses realized on positions of a
straddle to the extent that the Fund has unrealized gains in
offsetting positions at year end. The holding period of the
securities comprising the straddle will be suspended until the
straddle is terminated.
EURODOLLAR INSTRUMENTS. Each Fund may make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-
denominated futures contracts or options thereon which are linked
to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed
rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. A Fund might use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many
interest rate swaps and fixed-income instruments are linked.
SWAPS AND SWAP-RELATED PRODUCTS. Each Fund may enter into
interest rate swaps, caps and floors on either an asset-based or
liability-based basis, depending upon whether it is hedging its
assets or its liabilities, and will usually enter into interest
rate swaps on a net basis (i.e., the two payment streams are
netted out, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments). The net amount of
the excess, if any, of a Fund's obligations over its entitlement
with respect to each interest rate swap will be calculated on a
daily basis and an amount of cash or other liquid assets having
an aggregate net asset value at least equal to the accrued excess
will
31
be maintained in a segregated account by the Fund's custodian. If
a Fund enters into an interest rate swap on other than a net
basis, it would maintain a segregated account in the full amount
accrued on a daily basis of its obligations with respect to the
swap. A Fund will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in one
of the three highest rating categories of at least one NRSRO at
the time of entering into such transaction. Vontobel will monitor
the creditworthiness of all counterparties on an ongoing basis.
If there is a default by the other party to such a transaction,
the Fund will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively
liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps. To the extent a
Fund sells (i.e., writes) caps and floors, it will segregate cash
or other liquid assets having an aggregate net asset value at
least equal to the full amount, accrued on a daily basis, of its
obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap
transactions that may be entered into by a Fund. These
transactions may in some instances involve the delivery of
securities or other underlying assets by a Fund or its
counterparty to collateralize obligations under the swap. Under
the documentation currently used in those markets, the risk of
loss with respect to interest rate swaps is limited to the net
amount of the payments that a Fund is contractually obligated to
make. If the other party to an interest rate swap that is not
collateralized defaults, the Fund would risk the loss of the net
amount of the payments that it contractually is entitled to
receive. A Fund may buy and sell (i.e., write) caps and
32
floors without limitation, subject to the segregation requirement
described above.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD
CONTRACTS AND FOREIGN INSTRUMENTS. Unlike transactions entered
into by a Fund in futures contracts, options on foreign
currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain
foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded
on certain Exchanges, such as the Philadelphia Stock Exchange and
the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the
protections afforded to Exchange participants will not be
available. For example, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the buyer of
an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost.
Moreover, an option writer and a buyer or seller of futures or
forward contracts could lose amounts substantially in excess of
any premium received or initial margin or collateral posted due
to the potential additional margin and collateral requirements
associated with such positions.
Options on foreign currencies traded on Exchanges are within the
jurisdiction of the SEC, as are other securities traded on
Exchanges. As a result, many of the protections provided to
traders on organized Exchanges will be available with respect to
such transactions. In particular, all foreign currency option
positions entered into on an Exchange are cleared and guaranteed
by the OCC, thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on an
Exchange may be more readily available than in the over-the-
counter market, potentially permitting a Fund to liquidate open
33
positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency
options, however, is subject to the risks of the availability of
a liquid secondary market described above, as well as the risks
regarding adverse market movements, margining of options written,
the nature of the foreign currency market, possible intervention
by governmental authorities and the effects of other political
and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of
such options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that
foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
In addition, options on U.S. Government securities, futures
contracts, options on futures contracts, forward contracts and
options on foreign currencies may be traded on foreign exchanges
and over-the-counter in foreign countries. Such transactions are
subject to the risk of governmental actions affecting trading in
or the prices of foreign currencies or securities. The value of
such positions also could be adversely affected by (i) other
complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make
trading decisions, (iii) delays in the Funds' ability to act upon
economic events occurring in foreign markets during non-business
hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) low trading
volume.
34
Temporary Defensive Positions
When the portfolio manager of a Fund believes that investments
should be deployed in a temporary defensive posture because of
economic or market conditions, the Fund may invest up to 100% of
its assets in U.S. Government securities (such as bills, notes,
or bonds of the U.S. Government and its agencies) or other forms
of indebtedness such as bonds, certificates of deposits or
repurchase agreements. When a Fund is in a temporary defensive
position, it is not pursuing its stated investment policies. A
portfolio manager decides when it is appropriate to be in a
defensive position. It is impossible to predict how long such
alternative strategies will be utilized.
U.S. Government Securities
Each Fund may invest in U.S. Government Securities. The term
"U.S. Government Securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Treasury, by various
agencies of the U.S. Government, and by various instrumentalities
which have been established or sponsored by the U.S. Government.
U.S. Treasury securities are backed by the full faith and credit
of the United States. Securities issued or guaranteed by U.S.
Government agencies or U.S. Government sponsored
instrumentalities may or may not be backed by the full faith and
credit of the United States. In the case of securities not backed
by the full faith and credit of the United States, the investor
must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment, and may not
be able to assert a claim directly against the United States in
the event the agency or instrumentality does not meet its
commitment. An instrumentality of the U.S. Government is a
government agency organized under Federal charter with government
supervision.
INVESTMENT ADVISER AND SUBADVISER
Investment Adviser - Janus Capital Management LLC
As stated in the Prospectus, each Fund has an Investment Advisory
Agreement with Janus Capital, 100 Fillmore Street,
35
Denver, Colorado 80206-4928. Janus Capital is a direct subsidiary
of Janus Capital Group Inc. ("JCGI"), a publicly traded company
with principal operations in financial asset management
businesses. JCGI owns approximately 95% of Janus Capital, with
the remaining 5% held by Janus Management Holdings Corporation.
Each Advisory Agreement provides that Janus Capital will have
overall supervisory responsibility for the investment program of
the Funds, provide office space for the Funds, and pay the
salaries, fees and expenses of the Funds' officers and of those
Trustees who are interested persons of Janus Capital. Janus
Capital also may make payments from its own resources to selected
broker-dealer firms or institutions which were instrumental in
the acquisition of shareholders for the Funds or other Janus
funds or which perform recordkeeping or other services with
respect to shareholder accounts. The minimum aggregate size
required for eligibility for such payments, and the factors in
selecting the broker-dealer firms and institutions to which they
will be made, are determined from time to time by Janus Capital.
Janus Capital is also authorized to perform the management and
administrative services necessary for the operation of the Funds.
As discussed below, Janus Capital has delegated certain of these
duties to Vontobel Asset Management, Inc. pursuant to a
subadvisory agreement between Janus Capital and Vontobel.
From their own assets, Janus Capital, Janus Distributors LLC or
their affiliates may pay retirement plan service providers,
brokers, banks, financial advisers and other financial
intermediaries fees for providing recordkeeping, subaccounting
and other administrative services to their customers in
connection with investment in the Funds. These fees may be in
addition to any distribution, administrative or shareholder
servicing fees paid from the Funds' assets to these financial
intermediaries.
The Funds pay custodian and transfer agent fees and expenses,
brokerage commissions and dealer spreads and other expenses in
connection with the execution of portfolio transactions, legal
and accounting expenses, interest, taxes, trade or other
investment company dues and expenses, registration fees, expenses
of
36
shareholders' meetings and reports to shareholders, fees and
expenses of Funds' Trustees who are not interested persons of
Janus Capital, trade or other investment company organization
dues and expenses and other costs of complying with applicable
laws regulating the sale of Funds' shares. Pursuant to the
Advisory Agreements, Janus Capital furnishes certain other
services, including net asset value determination, portfolio
accounting, recordkeeping, and blue sky registration and
monitoring services, for which the Funds may reimburse Janus
Capital for its costs.
Each Fund has agreed to compensate Janus Capital for its services
by the monthly payment of a fee at the following annual rates:
U.S. Value Fund
<Table>
<Caption>
Average Daily Net Assets of
U.S. Value Fund Annual Rate Percentage (%)
- -----------------------------------------------------------------------------------------
First $100 Million 0.96
Increment from $100 Million to $300 Million 0.85
Increment over $300 Million 0.75
</Table>
International Equity Fund
<Table>
<Caption>
Average Daily Net Assets of
International Equity Fund Annual Rate Percentage (%)
- -----------------------------------------------------------------------------------------
First $100 Million 0.99
Increment from $100 Million to $300 Million 0.85
Increment over $300 Million 0.75
</Table>
Until at least [ ] (or until the next annual renewal of
the advisory agreements), provided that Janus Capital remains
investment adviser to the Funds, Janus Capital has agreed by
contract to waive the advisory fee payable by each Fund in an
amount equal to the amount, if any, that such Fund's normal
operating expenses in any fiscal year, including the investment
advisory fee, but excluding the [administrative services fee
applicable to Investor Shares and Class I Shares, and the
distribution and shareholder servicing fee applicable to Investor
Shares, Class I Shares, Class A
37
Shares and Class C Shares], brokerage commissions, interest,
taxes and extraordinary expenses, exceed the following annual
rates:
<Table>
<Caption>
Expense Limit
Fund Name Percentage (%)
- -----------------------------------------------------------------------------
U.S. Value Fund
International Equity Fund
</Table>
[The following table shows the total dollar amounts of advisory
fees paid by Vontobel U.S. Value Fund (the "U.S. Value
Predecessor Fund") and Vontobel International Equity Fund (the
"International Equity Predecessor Fund") before their
reorganization into U.S. Value Fund and International Equity
Fund, respectively, for the periods indicated. Information is
based on the advisory fee rates formerly charged by the U.S.
Value Predecessor Fund's and the International Equity Predecessor
Fund's former investment adviser, Vontobel. -- TO BE UPDATED BY
AMENDMENT]
<Table>
<Caption>
Fiscal year ended Fiscal year ended Fiscal year ended
December 31, 2000 December 31, 2001 December 31, 2002
Fees Fees Fees
Payable/Waived Payable/Waived Payable/Waived
- --------------------------------------------------------------------------------------------------
U.S. Value Predecessor Fund $ $
International Equity Predecessor
Fund $ $
</Table>
Each Fund's Advisory Agreement is dated , 2003, and will
continue in effect until , 2005, and thereafter from
year to year so long as such continuance is approved annually by
a majority of the Funds' Trustees who are not parties to the
Advisory Agreements or interested persons of any such party, and
by either a majority of the outstanding voting shares of that
Fund or the Trustees of the Funds. Each Advisory Agreement (i)
may be terminated without the payment of any penalty by the Fund
or Janus Capital on 60 days' written notice; (ii) terminates
automatically in the event of its assignment; and (iii)
generally, may not be amended without the approval by vote of a
majority of the Trustees, including the Trustees who are not
interested persons of that Fund or Janus Capital and, to the
extent required by the 1940 Act, the vote of a majority of the
outstanding voting securities of that Fund.
38
Subadviser - Vontobel Asset Management, Inc.
Vontobel Asset Management, Inc., formerly named Vontobel USA Inc.
("Vontobel"), 450 Park Avenue, New York, New York 10022, is each
Fund's subadviser. Vontobel is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended.
Vontobel is a wholly owned subsidiary of Vontobel Holding AG, a
Swiss bank holding company which is traded on the Swiss Stock
Exchange.
Janus Capital has entered into a subadvisory agreement (a
"Subadvisory Agreement") on behalf of each Fund with Vontobel.
The Subadvisory Agreements obligates Vontobel to: (i) make
investment decisions on behalf of the Funds (ii) place all orders
for the purchase and sale of investments for the Funds with
brokers or dealers selected by Vontobel; (iii) vote all proxies
for portfolio securities; and (iv) perform certain limited
related administrative functions in connection therewith.
The Funds pay no fees directly to Vontobel as the subadviser.
Under the Subadvisory Agreements, Vontobel is compensated with
respect to the Funds by Janus Capital at the following annual
rates:
U.S. Value Fund
<Table>
<Caption>
Average Daily Net Assets of Annual Rate
U.S. Value Fund Percentage(%)
- -----------------------------------------------------------------------------
First $100 Million 0.96
Increment from $100 Million to $300 Million 0.85
Increment over $300 Million 0.75
</Table>
International Equity Fund
<Table>
<Caption>
Average Daily Net Assets of the Annual Rate
International Equity Fund Percentage(%)
- ---------------------------------------------------------------------------------
First $100 Million 0.99
Increment from $100 Million to $300 Million 0.85
Increment over $300 Million 0.75
</Table>
39
Each Subadvisory Agreement is dated [ , 2003]. The
initial term of each Subadvisory Agreement will continue until
, 2005. Each Subadvisory Agreement is subject to
termination by Janus Capital or Vontobel on 60 days' written
notice and terminates automatically in the event of its
assignment and in the event of termination of the Investment
Advisory Agreement with respect to the relevant Fund.
Approval of Investment Advisory Agreement
[TO BE UPDATED BY AMENDMENT]
The Funds' Advisory Agreements were unanimously approved by the
vote of the Trustees cast in person at a meeting held
[ , 2003]. In approving the Funds' Advisory Agreements,
the Trustees requested and considered a wide range of information
provided by Janus Capital and certain of its affiliates. Among
other things, the Trustees considered information about:
- Janus Capital and its personnel (including particularly those
personnel with responsibilities for providing services to the
Funds), resources and investment process;
- the terms of each Advisory Agreement;
- the scope and quality of the services that Janus Capital
provides to the Funds;
- the advisory fee rates payable to Janus Capital by the Funds
and by other funds and client accounts managed by Janus
Capital, and payable by comparable funds managed by other
advisers;
- the total expense ratio of each Fund and of comparable funds
managed by other advisers;
- compensation payable by the Funds to affiliates of Janus
Capital for other services; and
- the profitability to Janus Capital and its affiliates of their
relationships with the Funds.
In addition, the Independent Trustees received advice from
independent legal counsel. Based on the Trustees' deliberations
40
and their evaluation of the information described above, the
Trustees, including all of the Independent Trustees, unanimously
approved each Advisory Agreement and concluded that the
compensation under each Advisory Agreement is fair and reasonable
in light of such services and expenses and such other matters as
the Trustees considered to be relevant in the exercise of their
reasonable judgment.
Approval of Subadvisory Agreement
[TO BE UPDATED BY AMENDMENT]
The Funds' Subadvisory Agreements were unanimously approved by
the vote of the Trustees cast in person at a meeting held
[ , 2003]. In preparation for their meeting, the
Trustees requested and reviewed a wide variety of materials,
including:
- information regarding Vontobel and its personnel and investment
processes;
- the terms of the Subadvisory Agreements;
- the scope and quality of the services that Vontobel provides to
the Funds;
- the historical investment performance of the Funds;
- the rate of fees paid to Vontobel by Janus Capital and by other
client accounts managed by Vontobel; and
- the procedures followed by Vontobel with respect to portfolio's
brokerage and trade allocations.
In addition, the Independent Trustees received advice from
independent legal counsel. Based on the Trustees' deliberations
and their evaluation of the information described above, the
Trustees, including all of the Independent Trustees, unanimously
approved the Subadvisory Agreements and concluded that the
compensation under the Subadvisory Agreements is fair and
reasonable in light of such services and expenses and such other
matters as the Trustees considered to be relevant in the exercise
of their reasonable judgment.
41
ADDITIONAL INFORMATION ABOUT JANUS CAPITAL AND VONTOBEL
Janus Capital acts as sub-adviser for a number of private-label
mutual funds and provides separate account advisor services for
institutional accounts. Each account managed by Janus Capital has
its own investment objective and policies and is managed
accordingly by a particular portfolio manager or team of
portfolio managers. As a result, from time to time two or more
different managed accounts may pursue divergent strategies with
respect to investments or categories of investments.
Pursuant to an exemptive order granted by the SEC, the Funds and
other funds advised by Janus Capital may also transfer daily
uninvested cash balances into one or more joint trading accounts.
Assets in the joint trading accounts are invested in money market
instruments and the proceeds are allocated to the participating
portfolios on a pro rata basis.
Janus Capital and Janus Distributors currently have in place
Ethics Rules, which are comprised of the Personal Trading Code of
Ethics, Gift Policy and Outside Employment Policy. The Rules are
designed to ensure that their personnel (i) at all times place
first the interests of the Funds and other clients of Janus
Capital; (ii) conduct all personal trading consistent with the
Ethics Rules and in such a manner as to avoid any actual or
potential conflict of interest or any abuse of their position of
trust and responsibility; and (iii) not use any material
non-public information in securities trading. The Ethics Rules
are on file with and available from the SEC through the SEC Web
site at www.sec.gov.
Under the Personal Trading Code of Ethics (the "Code of Ethics"),
all Janus Capital and Janus Distributors personnel, as well as
the Trustees and Officers of the Funds, are required to conduct
their personal investment activities in a manner that Janus
Capital believes is not detrimental to the Funds. In addition,
Janus Capital and Janus Distributors personnel are not permitted
to transact in securities held by the Funds for their personal
accounts except under circumstances specified in the Code of
Ethics. All personnel of Janus Capital, Janus Distributors and
the Funds and certain
42
other designated employees deemed to have access to current
trading information are required to pre-clear all transactions in
securities not otherwise exempt. Requests for trading
authorization will be denied when, among other reasons, the
proposed personal transaction would be contrary to the provisions
of the Code of Ethics.
In addition to the pre-clearance requirement described above, the
Code of Ethics subjects such personnel to various trading
restrictions and reporting obligations. All reportable
transactions are reviewed for compliance with the Code of Ethics
and under certain circumstances Janus Capital and Janus
Distributors personnel may be required to forfeit their profits
made from personal trading.
Employees of Vontobel are not subject to the Janus Code of
Ethics. Vontobel has adopted its own Code of Ethics ("Code")
which it has certified complies with Rule 17j-1 under the 1940
Act. The Code establishes policies and procedures which govern
certain types of personal securities transactions by employees of
Vontobel. Subject to the requirements and restrictions of the
Code, individuals are permitted to make personal securities
transactions, including transactions in securities that may be
purchased or held by the Funds. The Code has provisions that
require the employees of Vontobel to conduct their personal
securities transactions in a manner that does not operate
adversely to the interests of the Funds and to avoid serving
their own personal interests ahead of the Funds and their
shareholders.
Janus Capital and the Funds have applied for an exemptive order
from the SEC that would, subject to certain conditions, permit
Janus Capital and the Funds, with the approval of the Trustees,
to retain other subadvisers for the Funds, or subsequently change
the subadvisers, or continue the employment of existing
subadvisers after events that under the 1940 Act and the
subadvisory agreements would otherwise cause an automatic
termination of the subadvisory agreements, without submitting the
subadvisory agreements, or material amendments to those
agreements, to a vote of the shareholders of the Funds. Janus
Capital would notify
43
shareholders of a Fund in the event of any change in the identity
of the subadviser of that Fund. In addition, the exemptive order
would prohibit Janus Capital from entering into subadvisory
agreements with affiliates of Janus Capital without shareholder
approval, unless such affiliates are substantially wholly-owned
by Janus Capital. Although shareholder approval would not be
required for the termination of subadvisory agreements,
shareholders of a Fund will continue to have the right to
terminate such subadvisory agreements for such Fund at any time
by a vote of a majority of the outstanding voting securities of
the Fund.
Until or unless the exemptive order is granted, if the subadviser
is terminated or otherwise ceases to advise a Fund, the Fund
would be required to submit the subadvisory agreement with a new
subadviser to the shareholders of the Fund for approval. There is
no guarantee that the SEC will grant the exemptive order.
Vontobel acts as adviser for other mutual funds and provides
separate account advisor services for institutional accounts.
Investment decisions for each account managed by Vontobel,
including the Funds, are made independently from those for any
other account that is or may in the future become managed by
Vontobel. If a number of accounts managed by Vontobel are
contemporaneously engaged in the purchase or sale of the same
security, Vontobel may consolidate or bunch brokerage orders of
different clients. Bunching such orders may result in
administrative efficiency, lower commission rates and
minimization of performance differentials between similar
accounts. Vontobel does not bunch orders of proprietary or
employee accounts with client accounts. Overall execution costs
on bunched trades will generally be equivalent to or lower than
those incurred for individually placed trades. Vontobel has
adopted policies and procedures designed to assure that trade
allocations take place on a reasonable and equitable basis.
Vontobel's portfolio managers determine the number of shares
required to be purchased or sold for each account eligible to
participate in bunched trades, and place orders for the number or
shares determined by the pre-trade allocation for each
participating account. Vontobel's operations
44
staff transmits allocation instructions to the executing broker
in accordance with the pre-trade allocation by the end of the
trade day. Each participating account will generally receive the
average price for the bunched trade during the day, including
commissions. If less than the total order is executed during the
day, Vontobel will allocated to each account the proportion of
the partially executed trade that corresponds to the account's
original allocation. From time to time, Vontobel's portfolio
managers may be obliged to deviate from this pre-trade allocation
policy; in such cases Vontobel requires that the reason for any
such deviation be noted on the trade ticket and that the trade in
question be handled in the most reasonable and equitable manner
permitted by the circumstances.
Each account managed by Vontobel has its own investment objective
and policies and is managed accordingly by a particular portfolio
manager or team of portfolio managers. As a result, from time to
time two or more different managed accounts may pursue divergent
investment strategies with respect to investments or categories
of investments.
CUSTODIAN, TRANSFER AGENT AND CERTAIN AFFILIATIONS
[To be determined] is the custodian of the domestic securities
and cash of each Fund. [ ] is the designated Foreign Custody
Manager (as the term is defined in Rule 17f-5 under the 1940 Act)
of the Funds' securities and cash held outside the United States.
The Funds' Trustees have delegated to [ ] certain
responsibilities for such assets, as permitted by Rule 17f-5.
[ ] and the foreign subcustodians selected by it hold the
Funds' assets in safekeeping and collect and remit the income
thereon, subject to the instructions of each Fund.
[INFORMATION ON CUSTODIAN FEE CREDITS TO BE ADDED BY AMENDMENT]
Janus Services LLC ("Janus Services"), P.O. Box 173375, Denver,
Colorado 80217-3375, a wholly-owned subsidiary of Janus Capital,
is the Funds' transfer agent. In addition, Janus Services
provides certain other administrative, recordkeeping and share-
45
holder services for the Funds. Janus Services receives an
administrative services fee [with respect to Investor Shares of
each Fund at an annual rate of up to [0.10%] of the average daily
net assets of Investor Shares of the Fund and with respect to
Class I Shares of each Fund at an annual rate of up to 0.25% of
the average daily net assets of Class I Shares of the Fund, for
providing or procuring recordkeeping, subaccounting and other
administrative services to investors in Investor Shares and Class
I Shares. Janus Services expects to use a significant portion of
this fee to compensate retirement plan service providers,
brokers, bank trust departments, financial advisers and other
financial intermediaries for providing these services (at annual
rates of [up to 0.10% of the average daily net assets of the
Investor Shares attributable to their customers and] up to 0.25%
of the average daily net assets of the Class I Shares
attributable to their customers). Services provided by these
financial intermediaries may include but are not limited to
recordkeeping, processing and aggregating purchase and redemption
transactions, providing periodic statements, forwarding
prospectuses, shareholder reports and other materials to existing
customers, and other administrative services and for distribution
related expenses.
[The Funds pay DST Systems, Inc. ("DST"), a minority owned
subsidiary of JCGI, license fees at the annual rate of $3.06 per
shareholder account for the Funds.]
The Trustees have authorized the Funds to use an affiliate of DST
as introducing broker for certain Funds' transactions. Brokerage
commissions paid on such transactions may be used as a means to
reduce Funds' expenses through credits against the charges of DST
and its affiliates. The Funds receive the benefit of any such
credits. See "Portfolio Transactions and Brokerage."
Janus Distributors LLC ("Janus Distributors"), 100 Fillmore
Street, Denver, Colorado 80206-4928, a wholly-owned subsidiary of
Janus Capital, is the Funds' distributor. Janus Distributors is
registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities
Dealers, Inc. Janus Distributors acts as the agent of the Funds
in
46
connection with the sale of Shares in all states in which such
Shares are registered and in which Janus Distributors is
qualified as a broker-dealer. Under the Distribution Agreement,
Janus Distributors continuously offers each Fund's Shares and
accepts orders at net asset value per Share of the relevant
Class.
Financial intermediaries such as retirement plan service
providers, brokers, banks, and financial advisers, may be paid
fees by Janus Distributors from its assets or from the assets of
Janus Capital or other Janus affiliates. These fees are paid to
financial intermediaries for providing distribution-related or
shareholder services, in addition to fees which are paid by the
Funds for these purposes. These payments may be based upon such
factors as the number or value of Funds' Shares that the
financial intermediary sells; the value of client assets invested
in the Funds; the type and nature of sales or marketing services
or shareholder services furnished by the financial intermediary;
or may be paid in reimbursement for certain marketing or
service-related expenses incurred by the financial
intermediaries.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Vontobel places the portfolio transactions of the Funds.
Vontobel has a policy of seeking to obtain the "best execution"
of all portfolio transactions (the best net prices under the
circumstances based upon a number of factors including and
subject to the factors discussed below) except to the extent that
Vontobel may be permitted to pay higher commissions for research
services as described below. The Funds may trade foreign
securities in foreign countries because the best available market
for these securities is often on foreign exchanges. In
transactions on foreign stock exchanges, brokers' commissions are
frequently fixed and are often higher than in the United States,
where commissions are negotiated.
It is the general policy of Vontobel to select broker-dealers
that Vontobel believes will obtain the best execution for the
client, taking into consideration numerous factors, including
price paid or received for a security, commissions charged,
financial integrity
47
and condition of the firm, ability to consummate and clear trades
in an orderly and satisfactory manner, consistent quality of
service, and broad market coverage resulting in a continuous flow
of information concerning bids and offers. When Vontobel buys
securities directly from or sells them to a dealer, trades are
made on a net basis and there is a spread, which is the
equivalent of a commission.
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 a
Fund may obtain better prices or executions on a commission basis
or by dealing with other than a primary market maker.
In addition to the factors set forth above, Vontobel may consider
brokerage and research services in selecting broker/dealers,
subject to Section 28(e) of the Securities Exchange Act of 1934
("Section 28(e)"). These services include advice, either directly
or through publications or writings, as to the value of
securities, the advisability of purchasing or selling securities,
and the availability of securities or purchasers or sellers of
securities; analyses and reports concerning issuers, securities,
industries or specific country markets; information on economic
factors and trends, accounting and tax law interpretations,
political developments, legal developments affecting portfolio
securities; assistance with portfolio strategies, performance
analysis and risk measurement analysis. Furthermore, such
research services may be provided in the form of access to
various computer-generated data, computer software and hardware
used in security analyses; portfolio performance evaluation
services; technical market analyses; and meetings arranged with
corporate and industry spokepersons, economists, academicians and
government representatives. These services may be produced or
provided by the broker-dealer or produced by a third party and
provided by the broker-dealer in accordance with Section 28(e).
Vontobel may pay a broker-dealer that provides brokerage and
research services commissions in excess of the
48
amount another broker-dealer might have charged for effecting the
same securities transaction if Vontobel determines in good faith
that the amount paid is reasonable in relation to the services
provided. Some of the brokerage and research services may benefit
Vontobel's clients as a whole, while others may benefit a
specific segment of Vontobel's clients. Vontobel does not attempt
to match a particular client's trade executions with
broker-dealers that provide brokerage and research services
directly benefiting such client's account.
To the extent that Vontobel uses a particular research product or
service for non-research purposes (as defined in Section 28(e)),
Vontobel makes a reasonable allocation of the cost of the product
or service according to its use and pays cash for that portion
attributable to non-research or administrative uses.
Vontobel currently use approximately 30 brokerage firms and
independent consulting firms in addition to its internal
professional staff, including Vontobel's affiliates for brokerage
and research services. Vontobel periodically evaluates the
execution performance of the broker-dealers it selects for client
transactions. Vontobel attempts to maintain a constant awareness
of general street practices and policies with regard to
commission levels and rates charged by most reputable brokerage
firms, which allows Vontobel to take full advantage of the
competitive environment and obtain rates that are considered fair
and reasonable for its clients.
While there is no formula, agreement or undertaking to do so, and
when it can be done consistent with the policy of obtaining best
price and execution, a Fund may consider sales of its shares as a
factor in the selection of brokers to execute portfolio
transactions. Vontobel may be authorized, when placing portfolio
transactions for a 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.
49
[During the former fiscal year ended December 31, 2002, of the
brokerage commissions paid by the U.S. Value Predecessor Fund and
the International Equity Predecessor Fund prior to their
reorganization into U.S. Value Fund and International Equity
Fund, respectively, the following amounts were paid to brokers
who provided to the Predecessor Funds selected brokerage or
research services prepared by the broker or subscribed or paid
for by the broker on behalf of the Predecessor Funds:
<Table>
<Caption>
Amount of Amount of
Transactions Commissions
- -------------------------------------------------------------------------------------------
U.S. Value Predecessor Fund $ $
International Equity Predecessor Fund $ $ ]
</Table>
[The Funds' Trustees have authorized Vontobel to place
transactions with DST Securities, Inc. ("DSTS"), a wholly-owned
broker-dealer subsidiary of DST. Vontobel may do so if it
reasonably believes that the quality of the transaction and the
associated commission are fair and reasonable and if, overall,
the associated transaction costs, net of any credits described
above under "Custodian, Transfer Agent and Certain Affiliations,"
are lower than the net costs that would be incurred through other
brokerage firms.]
[The following table lists the total amount of brokerage
commissions paid by the U.S. Value Predecessor Fund and the
International Equity Predecessor Fund prior to their
reorganization into U.S. Value Fund and International Equity
Fund, respectively, for the former fiscal periods ending on
December 31 of each year:
[TO BE UPDATED BY AMENDMENT]
<Table>
<Caption>
2000 2001 2002
- -----------------------------------------------------------------------------------------
U.S. Value Predecessor Fund $ $
International Equity Predecessor Fund $ $ ]
</Table>
[No commissions or expenses were paid by the Funds to DSTS during
the fiscal year ended December 31, 2002.]
50
TRUSTEES AND OFFICERS
The following are the names of the Trustees and officers of the
Trust, together with a brief description of their principal
occupations during the last five years. Each Trustee has served
in that capacity since he or she was originally elected or
appointed. The Trustees do not serve a specified term of office.
Each Trustee will hold office until the termination of the Trust
or his or her earlier death, resignation, retirement, incapacity
or removal. The retirement age for Trustees is 72. The Trust's
Nominating and Governance Committee will consider nominees for
the position of Trustee recommended by shareholders. Shareholders
may submit the name of a candidate for consideration by the
Committee by submitting their recommendations to the Trust's
Secretary.
51
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trust's officers are elected annually by the Trustees for a
one-year term. Certain officers also serve as officers of three
other registered investment companies advised by Janus Capital:
Janus Investment Fund, Janus Aspen Series and Janus Adviser
Series.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
TRUSTEES
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
NAME, AGE AS OF PRINCIPAL OCCUPATIONS DURING FUND COMPLEX OTHER
DECEMBER 31, 2002 POSITIONS HELD LENGTH OF TIME THE PAST OVERSEEN BY DIRECTORSHIPS
AND ADDRESS WITH FUNDS SERVED FIVE YEARS TRUSTEE HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
- ------------------------------------------------------------------------------------------------------------------------
Thomas H. Bailey* Trustee 5/03-Present Formerly, President N/A
100 Fillmore Street (1978-2002) and Chief
Denver, CO 80206 Executive Officer (1994-2002)
Age 64 of Janus Capital or Janus
Capital Corporation. Formerly,
Chairman and Director (1978-
2002) of Janus Capital
Corporation; and Director
(1997-2001) of Janus
Distributors, Inc.; President
and Director (1994-2002) of
the Janus Foundation.
- ------------------------------------------------------------------------------------------------------------------------
Sam Boyd, Jr. Trustee 8/03- Present Manager (since 1978) of [ ] Director, World
450 Park Avenue Customer Service Accounting Funds, Vontobel
New York, NY Division, Potomac Electric Funds USA and
10022 Power Company, Washington, Satuit Capital
Age 62 D.C. Management
Trust
- ------------------------------------------------------------------------------------------------------------------------
</Table>
* The Funds will treat Mr. Bailey as an "interested person" of the Trust by
virtue of his past positions and continuing relationships with Janus Capital.
52
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
TRUSTEES
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
NAME, AGE AS OF PRINCIPAL OCCUPATIONS DURING FUND COMPLEX OTHER
DECEMBER 31, 2002 POSITIONS HELD LENGTH OF TIME THE PAST OVERSEEN BY DIRECTORSHIPS
AND ADDRESS WITH FUNDS SERVED FIVE YEARS TRUSTEE HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES (CNTD.)
- ------------------------------------------------------------------------------------------------------------------------
Mark B. Whiston Trustee 5/03-Present President, Chief Executive [ ] N/A
100 Fillmore Street Officer and Director Janus
Denver, CO 80206 Capital Group Inc. (since
Age 41 1/1/03); President and Chief
Executive Officer, Janus
Capital Management LLC (since
9/1/02). Formerly, President
of Retail and Institutional
Services, Janus Capital
(11/00-9/02); Vice President
and Chief Marketing Officer of
Janus Capital Corporation
(Janus Capital's predecessor)
(3/91-11/00)
- ------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
- ------------------------------------------------------------------------------------------------------------------------
Thomas I. Florence Trustee 5/03-Present Consultant. Formerly, N/A
280 Maple Row President Morningstar
Northfield, IL Investment Services
60093 Age 40 (3/00-12/02) and Managing
Director, Pilgrim Baxter &
Associates (12/96-3/00)
- ------------------------------------------------------------------------------------------------------------------------
Arthur F. Lerner Trustee 5/03-Present Retired. Formerly, Senior Vice [ ] Director,
13868 East Degas President Arnhold and S. Sthenos Capital
Drive Bleichroeder (investment (United
Palm Beach Gardens, manager) (12/69-1/03) Kingdom)
FL 33410
Age 61
- ------------------------------------------------------------------------------------------------------------------------
</Table>
53
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
TRUSTEES
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
NAME, AGE AS OF PRINCIPAL OCCUPATIONS DURING FUND COMPLEX OTHER
DECEMBER 31, 2002 POSITIONS HELD LENGTH OF TIME THE PAST OVERSEEN BY DIRECTORSHIPS
AND ADDRESS WITH FUNDS SERVED FIVE YEARS TRUSTEE HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CNTD.)
- ------------------------------------------------------------------------------------------------------------------------
Dennis B. Mullen Trustee 5/03-Present Private Investor. Formerly [ ] Director, Red
100 Fillmore Street (1997-1998) Chief Financial Robin Gourmet
Denver, CO 80206 Officer- Boston Market Burgers, Inc.
Age 58 Concepts, Boston Chicken Inc.,
Golden, CO (a restaurant
chain)
- ------------------------------------------------------------------------------------------------------------------------
James T. Rothe Trustee 5/03-Present Professor of Business, [ ] Director,
100 Fillmore Street University of Colorado, Optika, Inc.
Denver, CO 80206 Colorado Springs, CO. (since and Neocore
Age 58 2002). Formerly, Distinguished Corp.
Visiting Professor of Business
(2001-2002), Thunderbird
(American Graduate School of
International Management),
Phoenix, AZ; and Principal
(1988-1999) of Phillips-Smith
Retail Group, Addison, TX (a
venture capital firm)
- ------------------------------------------------------------------------------------------------------------------------
Maureen T. Upton Trustee 5/03-Present Formerly, Director of Sales [ ] N/A
100 Fillmore Street and Marketing, Intelligent
Denver, CO 80206 Markets, Inc. (3/00-3/03);
Age 38 Associate Equities Division,
Goldman Sachs & Co. (8/98-
1/00)
- ------------------------------------------------------------------------------------------------------------------------
</Table>
54
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------
OFFICERS
- ---------------------------------------------------------------------------------------------------------------
NAME, AGE AS OF
DECEMBER 31, 2002 TERM OF OFFICE* AND PRINCIPAL OCCUPATIONS DURING THE
AND ADDRESS POSITIONS HELD WITH FUNDS LENGTH OF TIME SERVED PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------
Thomas A. Early Vice President and 05/03-Present Vice President, General Counsel,
100 Fillmore Street General Counsel Chief Corporate Affairs Officer,
Denver, CO 80206 Secretary and Interim Director of
Age 47 Janus Capital; Vice President,
General Counsel and Secretary of
Janus Services LLC, Janus Capital
International LLC and Janus
Institutional Services LLC; Vice
President, General Counsel and
Director to Janus International
(Asia) Limited and Janus
International Limited; Vice
President, General Counsel and
Secretary to Janus Distributors LLC
and the Janus Foundation; and
Director for Janus Capital Trust
Manager Limited and Janus World
Funds. Formerly, Director (2001) of
Janus Distributors, Inc. and Janus
Services, Inc.; Vice President,
General Counsel, Secretary and
Director (2000-2002) of Janus
International Holding, Inc.;
Executive Vice President and
General Counsel (1997-1998) of
Prudential Investments Fund
Management LLC.
- ---------------------------------------------------------------------------------------------------------------
Bonnie M. Howe Vice President 05/03-Present Vice President and Assistant
100 Fillmore Street General Counsel to Janus Capital,
Denver, CO 80206 Janus Distributors and Janus
Age 37 Services. Formerly, Assistant Vice
President (1997-1999) and Associate
Counsel (1995-1999) for Janus
Capital Corporation and Assistant
Vice President (1998-2000) for
Janus Service Corporation.
- ---------------------------------------------------------------------------------------------------------------
</Table>
* Officers are elected annually by the Trustees for a one-year term.
55
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------
OFFICERS
- ---------------------------------------------------------------------------------------------------------------
NAME, AGE AS OF
DECEMBER 31, 2002 TERM OF OFFICE* AND PRINCIPAL OCCUPATIONS DURING THE
AND ADDRESS POSITIONS HELD WITH FUNDS LENGTH OF TIME SERVED PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------
Anita E. Falicia Vice President, Chief 05/03-Present Vice President of Investment
100 Fillmore Street Financial Officer and Accounting of Janus Capital.
Denver, CO 80206 Principal Accounting Formerly, Assistant Vice President
Age 34 Officer (2000-2002) of Investment
Accounting of Janus Capital or
Janus Capital Corporation; Director
(1999-2000) of Investment
Accounting of Janus Capital
Corporation; and Director
(1997-1999) of Fund Accounting of
Janus Capital Corporation.
- ---------------------------------------------------------------------------------------------------------------
Kelley Abbott Howes Vice President and 05/03-Present Vice President of Domestic Funds
100 Fillmore Street Secretary and Assistant General Counsel to
Denver, CO 80206 Janus Capital, Janus Distributors
Age 37 and Janus Services. Formerly,
Assistant Vice President
(1997-1999) of Janus Capital
Corporation; Chief Compliance
Officer, Director and President
(1997-1999) of Janus Distributors,
Inc.; and Assistant Vice President
(1998-2000) of Janus Service
Corporation.
- ---------------------------------------------------------------------------------------------------------------
David R. Kowalski Vice President and Chief 05/03-Present Vice President and Chief Compliance
100 Fillmore Street Compliance Officer Officer of Janus Capital and Janus
Denver, CO 80206 Distributors LLC; and Assistant
Age 45 Vice President of Janus Services
LLC. Formerly, Senior Vice
President and Director (1985-2000)
of Mutual Fund Compliance for Van
Kampen Funds.
- ---------------------------------------------------------------------------------------------------------------
</Table>
* Officers are elected annually by the Trustees for a one-year term.
56
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------
OFFICERS
- ---------------------------------------------------------------------------------------------------------------
NAME, AGE AS OF
DECEMBER 31, 2002 TERM OF OFFICE* AND PRINCIPAL OCCUPATIONS DURING THE
AND ADDRESS POSITIONS HELD WITH FUNDS LENGTH OF TIME SERVED PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------
Loren M. Starr President and Chief 05/03-Present Vice President of Finance,
100 Fillmore Street Executive Officer Treasurer, Chief Financial Officer
Denver, CO 80206 and Interim Director of Janus
Age 41 Capital; Vice President of Finance,
Treasurer and Chief Financial
Officer of Janus Services, Janus
Distributors, Janus Capital
International LLC, Janus
Institutional Services LLC and
Janus International Limited; and
Director of Janus Capital Trust
Manager Limited, Janus World
Principal Protected Funds and Janus
World Funds. Formerly, Vice
President of Finance, Treasurer,
Chief Financial Officer (2001-2002)
and Director (2002) for Janus
International Holding, Inc.;
Managing Director, Treasurer and
Head of Corporate Finance and
Reporting (1998-2001) for Putnam
Investments; and Senior Vice
President of Financial Planning and
Analysis (1996-1998) for Lehman
Brothers, Inc.
- ---------------------------------------------------------------------------------------------------------------
Heidi J. Walter Vice President 05/03-Present Vice President and Assistant
100 Fillmore Street General Counsel to Janus Capital
Denver, CO 80206 and Janus Services. Formerly, Vice
Age 35 President and Senior Legal Counsel
(1995-1999) for Stein Roe &
Farnham, Inc.
- ---------------------------------------------------------------------------------------------------------------
</Table>
* Officers are elected annually by the Trustees for a one-year term.
57
The Trustees are responsible for major decisions relating to each
Fund's objective, policies and techniques. The Trustees also
supervise the operation of the Funds by their officers and review
the investment decisions of the officers, although they do not
actively participate on a regular basis in making such decisions.
The Board of Trustees has three standing committees that each
perform specialized functions: an Audit Committee, a Nominating
and Governance Committee and a Pricing Committee. Each committee
is comprised entirely of Independent Trustees. Information about
each of these committee functions is provided in the following
table:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------
NUMBER OF
MEETINGS HELD
DURING LAST
FUNCTIONS MEMBERS FISCAL YEAR
- ----------------------------------------------------------------------------------------
AUDIT Reviews the financial reporting
COMMITTEE process, the system of internal
control, the audit process, and the
Funds' process for monitoring
compliance with investment
restrictions and applicable laws
and the Funds' Code of Ethics. The
Committee's review of the audit
process includes, among other
things, the appointment,
compensation and oversight of the
auditors and pre-approval of all
audit and non-audit services above
a certain cost threshold.
- ----------------------------------------------------------------------------------------
NOMINATING Identifies and recommends
AND individuals for Trustee membership,
GOVERNANCE consults with Management in
COMMITTEE planning Trustee meetings, and
oversees the administration of, and
ensures the compliance with, the
Governance Procedures and
Guidelines adopted by the Funds.
- ----------------------------------------------------------------------------------------
PRICING Determines fair values of
COMMITTEE restricted securities and other
securities for which market
quotations are not readily
available, pursuant to procedures
adopted by the Trustees.
- ----------------------------------------------------------------------------------------
</Table>
58
The table below gives the dollar range of shares of all funds
advised and sponsored by Janus Capital (collectively, the "Janus
Funds"), owned by each Trustee as of December 31, 2002. [As of
December 31, 2002, none of the Trustees owned Shares of the Funds
described in this SAI as the Funds did not commence operations
until .] [TO BE UPDATED BY AMENDMENT]
<Table>
<Caption>
- --------------------------------------------------------------------
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED
INVESTMENT COMPANIES OVERSEEN BY
NAME OF TRUSTEE TRUSTEE IN JANUS FUNDS
- --------------------------------------------------------------------
INTERESTED TRUSTEES
- --------------------------------------------------------------------
- --------------------------------------------------------------------
INDEPENDENT TRUSTEES
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</Table>
As of December 31, 2002, none of the Independent Trustees or
their immediate family members owned shares of Janus Capital,
Janus Distributors or their control persons.
The following table shows the aggregate compensation earned by
and paid to each Trustee by the Funds described in this SAI and
all Janus Funds for the periods indicated. None of the Trustees
59
receives pension or retirement benefits from the Funds or other
Janus Funds.
<Table>
<Caption>
Aggregate Compensation Aggregate Compensation
from the Funds for from the Janus Funds for
fiscal year ended calendar year ended
Name of Person, Position February 29, 2004(1) December 31, 2002
- --------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
Thomas H. Bailey $ 0 $ 0
Sam Boyd, Jr.(4) $ 0 $ 0
Mark B. Whiston(4) $ 0 $ 0
INDEPENDENT TRUSTEES
Thomas I. Florence(4) $45,000 $ 0
Arthur F. Lerner(4) $45,000 $ 0
Dennis B. Mullen $45,000 $183,667
James T. Rothe $45,000 $176,667
Maureen T. Upton(4) $45,000 $ 0
</Table>
(1) Since the Funds had not commenced operations as of February 28, 2003, no
fees were paid during this fiscal year. The aggregate compensation from the
Funds is estimated for the period ended February 29, 2004 and for the
Funds' first full year March 1, 2004 through February 28, 2005 as follows:
Thomas I. Florence $50,000; Arthur F. Lerner $50,000; Dennis B. Mullen
$50,000; James T. Rothe $50,000; and Maureen T. Upton $50,000.
(2) As of December 31, 2002, Janus Funds consisted of three registered
investment companies comprised of a total of 59 funds.
(3) Mr. Bailey is being treated as an interested person of the Funds and Janus
Capital and is compensated by Janus Capital.
(4) Messrs. Boyd, Whiston, Florence, Lerner and Ms. Upton were appointed as
Trustees of the Trust on May , 2003 and did not serve as Trustees of any
Janus Funds prior to this date. Therefore they did not receive any
compensation from the Janus Funds prior to .
SHARES OF THE TRUST
Net Asset Value Determination
As stated in the Funds' Prospectuses, the net asset value ("NAV")
of Shares of each class of each Fund is determined once each day
on which the NYSE is open, at the close of its regular trading
session (normally 4:00 p.m., New York time, Monday through
Friday). The NAV of the Shares of each class of each Fund is not
determined on days the NYSE is closed. The per share NAV of
Shares of each class of each Fund is determined by dividing the
total value of the Fund's securities and other assets
attributable to that class, less liabilities, by the total number
of shares outstanding. Valuations of securities are furnished by
one or more pricing
60
services employed by the Funds and approved by the Trustees and
are based upon last trade or closing sales prices or a
computerized matrix system or other information obtained by a
pricing service, in each case in reliance upon information
concerning market transactions and quotations from recognized
broker-dealers. In determining NAV, securities listed on an
Exchange, the Nasdaq National Market and foreign markets are
generally valued at the closing prices on such markets, or if
such price is lacking for the trading period immediately
preceding the time of determination, such securities are valued
at their current bid price. Other securities that are traded on
the over-the-counter market are generally valued at their closing
bid prices. Foreign securities and currencies are converted to
U.S. dollars using the applicable exchange rate. Short-term
securities maturing within 60 days are valued on an amortized
cost basis. Securities for which market quotations are not
readily available or are deemed unreliable are valued at fair
value determined in good faith under procedures established by
and under the supervision of the Trustees (the "Valuation
Procedures").
A Fund calculates its NAV per share, and therefore effects sales,
redemptions and repurchases of its shares, as of the close of the
NYSE once on each day on which the NYSE is open. Such calculation
may not take place contemporaneously with the determination of
the prices of the foreign portfolio securities used in such
calculation. If an event that is expected to affect the value of
a portfolio security occurs after the close of the exchange or
market on which that security is traded, and before the Fund
calculates its NAV per Share of each class, then that security
may be valued in good faith under the Valuation Procedures.
Purchases
Investor Shares of each Fund may be purchased directly. The
Shareholder's Manual section of the Funds' Investor Shares
Prospectus contains detailed information about the purchase of
shares.
61
Class I Shares, Class A Shares and Class C Shares of each Fund
can be purchased only through retirement plans, brokers, bank
trust departments, financial advisers or similar financial
intermediaries. Not all financial intermediaries offer all four
classes. Certain designated organizations are authorized to
receive purchase orders on the Funds' behalf and those
organizations are authorized to designate their agents and
affiliates as intermediaries to receive purchase orders. Purchase
orders are deemed received by a Fund when authorized
organizations, their agents or affiliates receive the order,
provided that such designated organizations or their agents or
affiliates transmit the order to the Fund within contractually
specified periods. The Funds are not responsible for the failure
of any designated organization or its agents or affiliates to
carry out its obligations to its customers. Your financial
intermediary may charge you a separate or additional fee for
purchases of Class I Shares, Class A Shares or Class C Shares.
Your financial intermediary or plan documents will provide you
with detailed information about investing in Shares of the Funds.
In order to receive a day's price, your order for any class of
Shares must be received by the close of the regular trading
session of the NYSE as described above in "Net Asset Value
Determination."
Investor Shares and Class I Shares
Investor Shares and Class I Shares are purchased at the NAV per
share as determined at the close of the regular trading session
of the NYSE next occurring after a purchase order is received in
good order by a Fund or its authorized agent.
Class A Shares
CLASS A SHARES SALES CHARGE
The price you pay for Class A Shares is the public offering
price, which is the NAV next determined after a Fund or its agent
receives in good order your order plus an initial sales charge,
if applicable, based on the amount invested as set forth below.
The Fund receives the net asset value. The sales charge is
allocated between your financial intermediary and Janus
Distributors, the
62
Trust's distributor, as shown in the table below, except where
Janus Distributors, in its discretion, allocates up to the entire
amount to your financial intermediary.
<Table>
<Caption>
Sales Charge as a Amount of Sales Charge Reallowed
Percentage of to Financial Intermediaries as a
Offering Price* Percentage of Offering Price
Amount of Purchase at Offering Price ----------------- --------------------------------
Under $50,000 5.75% 5.00%
$50,000 but under $100,000 4.50% 3.75%
$100,000 but under $250,000 3.50% 2.75%
$250,000 but under $500,000 2.50% 2.00%
$500,000 but under $1,000,000 2.00% 1.60%
$1,000,000 and above None** None
</Table>
* Offering Price includes the initial sales charge.
** A deferred sales charge of 1.00% may apply to Class A Shares purchased
without an initial sales charge if redeemed within 18 months of purchase.
CLASS A SALES CHARGE REDUCTIONS AND WAIVERS
If you are making a large purchase, there are several ways you
can combine multiple purchases of Class A Shares in the Funds and
other Janus funds that are offered within a sale charge to take
advantage of lower sales charges. These are described below.
RIGHT OF ACCUMULATION. Investors may purchase Class A shares of a
Fund at a reduced sales charge determined by aggregating the
dollar amount of the new purchase and the total net asset value
of all Class A Shares of the Fund and of other Janus funds that
are offered with a sales charge (as currently listed under
"Exchanges" in the Prospectus for Class I, Class A and Class C
Shares) then held by such investor and applying the sales charge
applicable to such aggregate. In order to obtain such discount,
the investor must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for
the reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all
shares purchased thereafter.
LETTER OF INTENT. An investor may obtain a reduced sales charge
by signing a Letter of Intent indicating the investor's intention
to purchase Class A Shares of $50,000 or more aggregating
investments over a 13 month period. The investor must refer to
63
such Letter when placing orders. For purposes of a Letter of
Intent, the amount of investment for purposes of applying the
sales load schedule includes (i) [all Class A Shares of the Funds
and other Janus funds offered with a sales charge acquired during
the term of the Letter] plus (ii) the value of all Class A Shares
previously purchased and still owned. Each investment made during
the period receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is not achieved
within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the
charges previously paid, or an appropriate number of escrowed
shares will be redeemed. The term of the Letter will commence
upon the date the Letter is signed, or at the option of the
investor, up to 90 days before such date. Please contact your
financial intermediary to obtain a Letter of Intent application.
Class C Shares
The price you pay for Class C Shares is the public offering
price, which is the NAV next determined after a Fund or its agent
receives in good order your order plus the 1.00% initial sales
charge, if applicable. (The Prospectus describes when initial
sales charges may be waived.) Janus Distributors, the Funds'
distributor, re-allows the 1.00% initial sales charge to
financial intermediaries. In addition, Janus Distributors may
compensate your financial intermediary at the time of sale at an
additional commission rate of 1.00% of the net asset value of the
Class C Shares purchased. In total, at the time of purchase, your
financial intermediary may receive 2.00% of the net asset value
of the Class C Shares purchased unless the financial intermediary
has agreed to waive the 1.00% sales charge, in which case the
financial intermediary will receive 1.00% of the net asset value
of the Class C Shares purchased. Service providers to qualified
plans will not receive either of these amounts if they receive
12b-1 fees from the time of initial investment of qualified plan
assets in Class C Shares.
64
Investor Shares
REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
If investors do not elect online at janus.com, in writing or by
phone to receive their dividends and distributions in cash, all
income dividends and capital gains distributions, if any, on the
Funds' shares are reinvested automatically in additional shares
of the Funds at the NAV determined on the payment date. Checks
for cash dividends and distributions and confirmations of
reinvestments are usually mailed to shareholders within ten days
after the record date. Any election of the manner in which a
shareholder wishes to receive dividends and distributions (which
may be made online at janus.com or by phone) will apply to
dividends and distributions the record dates of which fall on or
after the date that a Fund receives such notice. Changes to
distribution options must be received at least three days prior
to the record date to be effective for such date. Investors
receiving cash distributions and dividends may elect online at
janus.com, in writing or by phone to change back to automatic
reinvestment at any time.
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS
INVESTOR SHARES, CLASS I SHARES AND CLASS A SHARES
Under distribution and shareholder servicing plans adopted in
accordance with Rule 12b-1 under the 1940 Act for each of
Investor Shares, Class I Shares and Class A Shares (the "Investor
Shares Plan", "Class I Plan" and the "Class A Plan",
respectively), Investor Shares, Class I and Class A Shares of the
Funds may pay Janus Distributors, the Trust's distributor, a fee
at an annual rate of up to 0.25% of the average daily net assets
of Investor Shares, Class I Shares or Class A Shares of the Fund.
Under the terms of the Investor Shares Plan, Class I Plan and the
Class A Plan, the Trust is authorized to make payments to Janus
Distributors for remittance to retirement and pension plan
service providers, bank trust departments, brokers, financial
advisers and other financial intermediaries as compensation for
distribution and shareholder servicing performed with respect to
Investor Shares, Class I Shares or Class A Shares by such service
providers. The Investor Shares Plan, Class I Plan and the Class A
Plan are compensation type
65
plans that permit the payment at an annual rate of up to 0.25% of
the average daily net assets of Investor Shares, Class I Shares
or Class A Shares of a Fund for activities which are primarily
intended to result in sales of Investor Shares, Class I Shares or
Class A Shares of the Fund, including but not limited to
preparing, printing and distributing prospectuses, statements of
additional information, shareholder reports, and educational
materials to prospective and existing investors; responding to
inquiries by investors; receiving and answering correspondence
and similar activities. Payments under the Investor Shares Plan,
Class I Plan or the Class A Plan are not tied exclusively to
actual distribution and service expenses, and the payments may
exceed distribution and service expenses actually incurred.
CLASS C SHARES
Under a distribution plan (the "Class C Plan") adopted in
accordance with Rule 12b-1 under the 1940 Act, Class C Shares of
each Fund pay Janus Distributors, the Funds' distributor, a fee
at an annual rate of up to 1.00% of the average daily net assets
of Class C Shares of the Fund. Up to 0.75% of this fee is for
distribution services and up to 0.25% of this fee is for
shareholder account services. All or a portion of such fees may
be remitted to financial intermediaries who assist in the
distribution of Class C Shares or who provide shareholder account
services to existing Class C shareholders. Financial
intermediaries may from time to time be required to meet certain
other criteria in order to receive these 12b-1 fees. Janus
Distributors is entitled to retain some or all fees payable under
the Class C Plan in certain circumstances, including when there
is no broker of record or when certain qualification standards
have not been met by the broker of record. Janus Distributors is
entitled to retain all fees paid under the Plan for the first 12
months on any investment in Class C Shares to recoup its expenses
with respect to the payment of commissions on sales of Class C
Shares. Financial intermediaries will become eligible for
compensation under the Class C Plan beginning in the 13th month
following the purchase of Class C Shares, although Janus
Distributors may, pursuant to a written agreement between Janus
Distributors and a particular financial intermediary, pay
66
such financial intermediary 12b-1 fees prior to the 13th month
following the purchase of Class C Shares. The Class C Plan is a
compensation type plan and permits the payment at an annual rate
of up to 0.75% of the average daily net assets of Class C Shares
of a Fund for activities which are primarily intended to result
in sales of Class C Shares of the Fund. In addition, the Class C
Plan permits the payment of up to 0.25% of the average daily net
assets of Class C Shares of a Fund for shareholder servicing
activities, such as providing facilities to answer questions from
existing investors about the Fund; receiving and answering
correspondence; assisting investors in changing dividend and
other account options and any other activities for which "service
fees" may be paid under Rule 2830 of the NASD Conduct Rules.
Payments under the Class C Plan are not tied exclusively to
actual distribution and service expenses, and the payments may
exceed distribution and service expenses actually incurred.
The Plans and any Rule 12b-1 related agreement that is entered
into by the Funds or Janus Distributors in connection with the
Plans will continue in effect for a period of more than one year
only so long as continuance is specifically approved at least
annually by a vote of a majority of the Trustees, and of a
majority of the Trustees who are not interested persons (as
defined in the 1940 Act) of the Trust and who have no direct or
indirect financial interest in the operation of the Plans or any
related agreements ("12b-1 Trustees"). All material amendments to
each Plan must be approved by a majority vote of the Trustees,
including a majority of the 12b-1 Trustees, at a meeting called
for that purpose. In addition, each Plan may be terminated as to
any Fund at any time, without penalty, by vote of a majority of
the outstanding Shares of the relevant class of that Fund or by
vote of a majority of the 12b-1 Trustees.
Janus Distributors also receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions
of Class C and Class A Shares.
67
Redemptions
Redemptions of Investor Shares may be effected directly with the
Funds. Procedures for selling shares are set forth in the
Shareholder's Manual section of the Funds' Investor Shares
Prospectus.
Redemptions of Class I Shares, Class A Shares and Class C Shares,
like purchases, may only be effected through retirement plans,
brokers, bank trust departments, financial advisers and other
financial intermediaries. Certain designated organizations are
authorized to receive redemption orders on the Funds' behalf and
those organizations are authorized to designate their agents and
affiliates as intermediaries to receive redemption orders.
Redemption orders are deemed received by a Fund when authorized
organizations, their agents or affiliates receive the order. The
Funds are not responsible for the failure of any designated
organization or its agents or affiliates to carry out its
obligations to its customers.
Shares normally will be redeemed for cash, although each Fund
retains the right to redeem some or all its Shares in kind under
unusual circumstances, in order to protect the interests of
remaining shareholders, or to accommodate a request by a
particular shareholder that does not adversely affect the
interest of the remaining shareholders by delivery of securities
selected from its assets at its discretion. However, each Fund is
governed by Rule 18f-1 under the 1940 Act, which requires a Fund
to sell Shares solely in cash up to the lesser of $250,000 or 1%
of the NAV of the Fund during any 90-day period for any one
shareholder. Should redemptions by any shareholder exceed such
limitation, a Fund will have the option of selling the excess in
cash or in kind. If Shares are sold in kind, the redeeming
shareholder might incur brokerage costs in converting the assets
to cash. The method of valuing securities used to make
redemptions in kind will be the same as the method of valuing
portfolio securities described under "Shares of the Funds - Net
Asset Value Determination" and such valuation will be made as of
the same time the redemption price is determined.
68
The right to require the Funds to sell their Shares may be
suspended, or the date of payment may be postponed, whenever (1)
trading on the NYSE is restricted, as determined by the SEC, or
the NYSE is closed except for holidays and weekends, (2) the SEC
permits such suspension and so orders, or (3) an emergency exists
as determined by the SEC so that disposal of securities or
determination of NAV is not reasonably practicable.
INVESTOR SHARES AND CLASS I SHARES
A redemption fee of 1.00% will be deducted with respect to
Investor Shares and Class I Shares of International Equity Fund
redeemed within three months of purchase, unless waived, as
discussed in the respective Prospectus.
CLASS C SHARES AND CLASS A SHARES
A contingent deferred sales charge ("CDSC") of 1.00% will be
deducted with respect to Class C Shares redeemed within 18 months
of purchase, unless waived as discussed in the Prospectus. A CDSC
of 1.00% will be deducted with respect to Class A Shares
purchased without a sales load and redeemed within 18 months of
purchase, unless waived as discussed in the Prospectus. The CDSC
will be based on the lower of the original purchase price or the
value of the redemption of the Class C Shares or Class A Shares
redeemed.
INVESTOR SHARES SHAREHOLDER ACCOUNTS
Detailed information about the general procedures for shareholder
accounts and specific types of accounts is set forth in the
Funds' Investor Shares Prospectus and at janus.com. Applications
for specific types of accounts may be obtained by visiting
janus.com, calling a Janus Representative or writing to the Fund
at P.O. Box 173375, Denver, Colorado 80217-3375.
ONLINE AND TELEPHONE TRANSACTIONS
As stated in the Investor Shares Prospectus, shareholders may
initiate a number of transactions at janus.com and by telephone.
The Funds, their transfer agent and their distributor disclaim
responsibility for the authenticity of instructions received at
janus.com and by telephone. Such entities will employ reasonable
69
procedures to confirm that instructions communicated online at
janus.com and by telephone are genuine. Such procedures may
include, among others, requiring personal identification prior to
acting upon online and telephone instructions, providing written
confirmation of online and telephone transactions and tape
recording telephone conversations. Your account information
should be kept private, and you should immediately review any
account statements that you receive from Janus. Someone other
than you could act on your account if they are able to provide
the required identifying information. Contact Janus immediately
about any transactions you believe to be unauthorized.
SYSTEMATIC REDEMPTIONS
As stated in the Shareholder's Manual section of the Investor
Shares Prospectus, if you have a regular account or are eligible
for distributions from a retirement plan, you may establish a
systematic redemption option. The payments will be made from the
proceeds of periodic redemptions of shares in the account at the
NAV. Depending on the size or frequency of the disbursements
requested, and the fluctuation in value of the Funds' portfolio,
redemptions for the purpose of making such disbursements may
reduce or even exhaust the shareholder's account. Either an
investor or the Fund, by written notice to the other, may
terminate the investor's systematic redemption option without
penalty at any time.
Information about requirements to establish a systematic
redemption option may be obtained by visiting janus.com, calling
a Janus Representative or writing the Funds.
TAX-DEFERRED ACCOUNTS
The Funds offer several different types of tax-deferred accounts
that an investor may establish to invest in Fund shares,
depending on rules prescribed by the Code. Traditional and Roth
Individual Retirement Accounts may be used by most individuals
who have taxable compensation. Simplified Employee Pensions and
Defined Contribution Plans (Profit Sharing or Money Purchase
Pension Plans) may be used by most employers, including
corporations, partnerships and small business owners (including
sole proprie-
70
tors), for the benefit of business owners and their employees. In
addition, the Funds offer a Section 403(b)(7) Plan for employees
of educational organizations and other qualifying tax-exempt
organizations. Investors should consult their tax adviser or
legal counsel before selecting a tax-deferred account.
Contributions under Traditional and Roth IRAs, SEPs, Defined
Contribution Plans and Section 403(b)(7) Plans are subject to
specific contribution limitations. Generally, such contributions
may be invested at the direction of the participant.
Distributions from tax-deferred retirement accounts may be
subject to ordinary income tax and may be subject to an
additional 10% tax if withdrawn prior to age 59 1/2 or used for a
nonqualifying purpose. Additionally, shareholders generally must
start withdrawing retirement plan assets no later than April 1 of
the year after they reach age 70 1/2. Several exceptions to these
general rules may apply and several methods exist to determine
the amount and timing of the minimum annual distribution (if
any). Shareholders should consult with their tax advisor or legal
counsel prior to receiving any distribution from any tax-deferred
account, in order to determine the income tax impact of any such
distribution.
Coverdell Education Savings Accounts (formerly Education IRAs)
allow individuals, subject to certain income limitations, to
contribute up to $2,000 annually on behalf of any child under the
age of 18. Contributions are also allowed on behalf of children
with special needs beyond age 18. Distributions are generally
subject to income tax if not used for qualified education
expenses.
To receive additional information about Traditional and Roth
IRAs, SEPs, Defined Contribution Plans, Section 403(b)(7) Plans
and Coverdell Education Savings Accounts along with the necessary
materials to establish an account, please visit janus.com, call a
Janus Representative or write to the Funds at P.O. Box 173375,
Denver, Colorado 80217-3375. No contribution to a Traditional or
Roth IRA, SEP, Defined Contribution Plan, Section 403(b)(7) Plan
or Coverdell Education Savings Account can be made until the
71
appropriate forms to establish any such plan have been completed.
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
It is a policy of the Funds to make distributions of
substantially all of its investment income and any net realized
capital gains. Any capital gains realized during each fiscal year
ended, as defined by the Code, are normally declared and payable
to shareholders in December. Each Fund declares and makes annual
distributions of income (if any). Each Fund intends to qualify as
a regulated investment company by satisfying certain requirements
prescribed by Subchapter M of the Code.
All income dividends and capital gains distributions, if any, on
a Fund's Shares are reinvested automatically in additional shares
of the same class of Shares of that Fund at the NAV determined on
the first business day following the record date.
Each Fund may purchase securities of certain foreign corporations
considered to be passive foreign investment companies by the IRS.
In order to avoid taxes and interest that must be paid by the
Funds, the Funds may make various elections permitted by the tax
laws. However, these elections could require that the Funds
recognize taxable income, which in turn must be distributed. Some
foreign securities purchased by the Funds may be subject to
foreign taxes which could reduce the yield on such securities. If
the amount of foreign taxes is significant in a particular year,
the Funds that qualify under Section 853 of the Code may elect to
pass through such taxes to shareholders. If such election is not
made by a Fund, any foreign taxes paid or accrued will represent
an expense to the Fund which will reduce its investment company
taxable income.
Income dividends or capital gains distributions made by Shares of
a Fund purchased through a qualified retirement plan will
generally be exempt from current taxation if left to accumulate
within the qualified plan. Generally, withdrawals from qualified
plans may be subject to ordinary income tax and, if made before
age 59 1/2, a 10% penalty tax. The tax status of your investment
72
depends on the features of your qualified plan. For further
information, please contact your plan sponsor.
PRINCIPAL SHAREHOLDERS
Investor Shares
[TO BE UPDATED BY AMENDMENT]
Officers and Trustees as a group own less than [1%] of the
outstanding Investor Shares of each Fund. As of [date no more
than 30 days prior to filing of the registration statement],
2003, the percentage ownership of each entity owning more than 5%
of the outstanding Investor Shares of each Fund is listed below:
[TO BE UPDATED BY AMENDMENT]
<Table>
<Caption>
Fund Shareholder and Address of Record Percentage Ownership
- -------------------------------------------------------------------------------------------
U.S. Value Fund Charles Schwab Reinvestment, [ ]
101 Montgomery Street,
San Francisco, CA 94104
Bank Vontobel AG and its [ ]
affiliates,
Bahnhofstrasse #3 CH-8022 Zurich,
Switzerland
International Equity Fund Charles Schwab Reinvestment, [ ]
101 Montgomery Street,
San Francisco, CA 94104
Bank Vontobel AG and its [ ]
affiliates,
Bahnhofstrasse #3 CH-8022 Zurich,
Switzerland
NFSC for the benefit of EAMCO, [ ]
P.O. Box 96211, Washington, D.C.
20090-6211
</Table>
This ownership is by nominee only and does not represent
beneficial ownership of such shares.
Class I Shares, Class A Shares and Class C Shares
[TO BE UPDATED BY AMENDMENT]
As of [date no more than 30 days prior to filing of the
registration statement], 2003, all of the outstanding Class I
Shares, Class A
73
Shares and Class C Shares of each Fund were owned by ,
which provided seed capital for the Funds. To the knowledge of
the Funds, no other shareholder owned more than 5% of the
outstanding Class I Shares, Class A Shares or Class C Shares of
either of the Funds as of , 2003.
MISCELLANEOUS INFORMATION
Each Fund is a series of the Trust, an open-end management
investment company registered under the 1940 Act and organized as
a Delaware statutory trust on May 2, 2003. As of the date of this
SAI, the Trust is offering two series of Shares, known as
"Funds," each of which consists of four classes of shares.
Additional series and/or classes may be created from time to
time.
The Funds were formed from the reorganization of Vontobel U.S.
Value Fund and Vontobel International Equity Fund (Class A Shares
and Class C Shares) of Vontobel Funds, Inc. into U.S. Value Fund
and International Equity Fund of Janus Adviser, respectively. As
a result of the reorganization, existing Vontobel Class A
shareholders who purchased their shares without a sales charge
received Investor Class shares, existing Vontobel Class A
shareholders who purchased their shares with a sales charge
received Class A Shares, and existing Vontobel Class C
shareholders received Class C Shares of the corresponding
Fund(s). Vontobel U.S. Value Fund and Vontobel International
Equity Fund each had a fiscal year end of December 31. As soon as
practicable following the reorganization, the Funds will change
their fiscal year end to the last day of February.
Janus Capital reserves the right to the name "Janus." In the
event that Janus Capital does not continue to provide investment
advice to the Funds, the Funds must cease to use the name "Janus"
as soon as reasonably practicable.
Shares of the Trust
The Trust is authorized to issue an unlimited number of shares of
beneficial interest with a par value of $0.001 per share for each
series of the Trust. Shares of each Fund are fully paid and
74
nonassessable when issued. Shares of a Fund participate equally
in dividends and other distributions by the shares of the same
class of that Fund, and in residual assets of that class of that
Fund in the event of liquidation. Shares of each Fund have no
preemptive, conversion or subscription rights.
The Funds discussed in this SAI each offer four classes of
Shares. Investor Shares of the Funds are available to the general
public and in connection with investments through certain
distributors, such as "mutual fund supermarkets" and through
retirement plans. Class I Shares, Class A Shares and Class C
Shares are offered only through certain retirement and pension
plans, bank trust departments, brokers, financial advisers and
other financial intermediaries.
Shareholder Meetings
The Trust does not intend to hold annual or regular shareholder
meetings. However, special meetings may be called for purposes
such as electing or removing Trustees, changing fundamental
policies, or for any other purpose requiring a shareholder vote
under the 1940 Act. Separate votes are taken by each Fund or
class only if a matter affects or requires the vote of only that
Fund or class or that Fund's or class' interest in the matter
differs from the interest of other Funds or classes. A
shareholder is entitled to one vote for each whole or fractional
dollar of net asset value (determined as of the applicable record
date) of each Share owned by the shareholder (the number of
Shares owned times net asset value per Share) on any matter on
which such shareholder is entitled to vote.
Under the Trust Instrument, special meetings of shareholders of
the Trust or of any Fund shall be called subject to certain
conditions, upon the written request of shareholders owning
Shares representing at least two-thirds of the votes entitled to
be cast at such meeting.
75
Voting Rights
The Trustees are responsible for major decisions relating to each
Fund's policies and objectives; the Trustees oversee the
operation of each Fund by its officers and review the investment
decisions of the officers.
[The present Trustees were elected at a meeting of shareholders
held on , 2003.] Under the Trust Instrument, each
Trustee will continue in office until the termination of the
Trust or his or her earlier death, retirement, resignation,
bankruptcy, incapacity or removal. Vacancies will be filled by a
majority of the remaining Trustees, subject to the 1940 Act.
Shareholders have the power to vote to elect or remove Trustees,
to amend the Trust Instrument and on any other matters on which a
shareholder vote is required by the 1940 Act, the Trust
Instrument, the Trust's Bylaws or the Trustees. Shares of all
Funds have noncumulative voting rights, which means that the
holders of more than 50% of the Shares of all Funds of the Trust
voting for the election of Trustees can elect 100% of the
Trustees if they choose to do so and, in such event, the holders
of the remaining Shares will not be able to elect any Trustees.
Independent Accountants
PricewaterhouseCoopers LLP, 1670 Broadway, Suite 1000, Denver,
Colorado 80202, independent accountants for the Funds, audit the
Funds' annual financial statements and prepare their tax returns.
Registration Statement
The Trust has filed with the SEC, Washington, D.C., a
Registration Statement under the Securities Act of 1933, as
amended, with respect to the securities to which this SAI
relates. If further information is desired with respect to the
Funds or such securities, reference is made to the Registration
Statement and the exhibits filed as a part thereof.
76
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Quotations of average annual total return for each Fund will be
expressed in terms of the average annual compounded rate of
return of a hypothetical investment in such Fund over periods of
1, 5, and 10 years (up to the life of the Fund) that would equate
the initial amount invested to the ending value. These rates of
return are quoted using three different measures: (1) average
annual total return before taxes; [(2) average annual total
return after taxes on distributions;] and (3) average annual
total return after taxes on distribution and redemption. The
average annual total return before taxes is calculated based on
the following formula: P(1 + T)(n) = ERV (where P = a
hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). The average annual total return after
taxes on distribution is calculated based on the following
formula: P(1 + T)(n) = ATV(D) (where P = a hypothetical initial
payment of $1,000, T = the average annual total return (after
taxes on distributions), n = the number of years and ATV(D) = the
ending value of a hypothetical $1,000 payment made at the
beginning of the period). Average annual total return after taxes
on distributions and redemption is calculated based on the
following formula: P(1 + T)(n) = ATV(DR) (where P = a
hypothetical initial payment of $1,000, T = the average annual
total return (after taxes on distributions and redemptions), n =
the number of years and ATV(DR) = the ending value of a
hypothetical $1,000 payment made at the beginning of the period).
All total return figures reflect the deduction of a proportional
share of Fund expenses on an annual basis, and assume that all
dividends and distributions, less taxes due on such
distributions, are reinvested when paid. The taxes due are
calculated using the highest individual marginal federal tax
rates and capital gains tax rates in effect on the reinvestment
date. State and local taxes are not considered. In addition, the
formulas do not take into account the effect of the alternative
minimum tax or phaseouts of certain tax credits, exemptions and
deductions for taxpayers whose adjusted gross income is above a
specified amount.
77
It is currently contemplated that the Funds will participate in a
tax-free reorganization of Vontobel U.S. Value Fund and Vontobel
International Equity Fund into U.S. Value Fund and International
Equity Fund, respectively. As a result of the reorganization,
existing Vontobel Class A shareholders who purchased their shares
without a sales charge will receive Investor Class shares,
existing Vontobel Class A shareholders who purchased their shares
with a sales charge will receive Class A Shares, and existing
Vontobel Class C shareholders will receive Class C Shares of the
corresponding Fund(s). The reorganization is subject to approval
by the shareholders of Vontobel U.S. Value Fund and Vontobel
International Equity Fund, and is expected to become effective on
or about September , 2003. The Funds will not commence
operations until the effective date of the reorganization.
Investor Shares
U.S. Value Fund commenced operations on September , 2003, after
the reorganization of Vontobel U.S. Value Fund (the "U.S. Value
Predecessor Fund") into the Fund. The performance shown below for
Investor Shares reflects the historical performance of Class A
Shares of the U.S. Value Predecessor Fund prior to the Fund's
commencement date. U.S. Value Fund's Investor Shares' estimated
operating expenses are lower than the operating expenses of Class
A Shares of U.S. Value Predecessor Fund.
International Equity Fund commenced operations on September ,
2003, after the reorganization of Vontobel International Equity
Fund (the "International Equity Predecessor Fund") into the Fund.
The performance shown below for Investor Shares reflects the
historical performance of Class A Shares of the International
Equity Predecessor Fund prior to the Fund's commencement date.
International Equity Fund's Investor Shares' estimated operating
expenses are lower than the operating expenses of Class A Shares
of International Equity Predecessor Fund.
Prior to June , 2002, Class A Shares of the Predecessor Funds
were sold without a front-end sales load. Accordingly, these
78
performance numbers do not [fully] reflect the impact of the
front-end sales load applicable to Class A Shares of the
Predecessor Funds. The average annual total return (before taxes)
of the Funds' Investor Shares (computed to include the returns of
the Predecessor Funds prior to the reorganization) for the period
or years indicated would be:
<Table>
<Caption>
Average Annual Total Return (Before Taxes)
---------------------------------------------------------
One Year Five Year Ten Year
Number Period Ended Period Ended Period Ended
Inception Date of of Months December 31, December 31, December 31,
Fund Predecessor Fund in Lifetime 2002 2002 2002 Life of Fund
- -----------------------------------------------------------------------------------------------------------------
U.S. VALUE FUND -
INVESTOR SHARES March 30, 1990 [53]
INTERNATIONAL EQUITY
FUND - INVESTOR
SHARES July 6, 1990 [ ]
</Table>
Average annual total return after taxes on distributions assumes
that (1) taxes are paid on distributions at the time of the
distribution; (2) shares were held for the entire measurement
period; and (3) no taxes have been paid on accumulated capital
appreciation. The average annual total return after taxes on
distributions of each Fund, computed as of [ ,] 2003, is
shown in the table below.
[TO BE UPDATED BY AMENDMENT]
<Table>
<Caption>
Average Annual Return
(After Taxes on Distributions)
Life of
Fund
Number (including
Inception Date of of Months One Five Ten Predecessor
Fund Name Predecessor Fund in Lifetime Year Years Years Fund)
- ---------------------------------------------------------------------------------------------------------------
U.S. VALUE FUND - INVESTOR
SHARES March 30, 1990
INTERNATIONAL EQUITY FUND -
INVESTOR SHARES July 6, 1990
</Table>
Average annual total return after taxes on distributions and
redemption assumes that (1) taxes are paid at the time of the
79
distribution; (2) shares have been sold at the end of the
measurement period; and (3) the long-term capital gains tax rate
is applied on accumulated capital appreciation for all periods.
If a capital loss would have occurred on liquidation, the loss is
recorded as a tax benefit, increasing the return after taxes on
distributions and redemption. The average annual total return
after taxes on distributions and redemption of each Funds,
computed as of [ ], 2003, is shown in the table below.
<Table>
<Caption>
Average Annual Total Return (After Taxes on
Distributions and Redemptions)
---------------------------------------------
One Year Five Year Ten Year
Number Period Ended Period Ended Period Ended
of Months December 31, December 31, December 31,
Fund Inception Date in Lifetime 2002 2002 2002
- -------------------------------------------------------------------------------------------------------
U.S. VALUE FUND - INVESTOR
SHARES March 30, 1990 [53]
INTERNATIONAL EQUITY
FUND - INVESTOR SHARES July 6, 1990 [ ]
</Table>
CLASS I SHARES
U.S. VALUE FUND
The performance shown below for Class I Shares reflects the
historical performance of Class A Shares of the U.S. Value
Predecessor Fund prior to the Fund's commencement date, restated
based on U.S. Value Fund's Class I Shares' higher estimated fees
and expenses (ignoring any fee and expense limitations).
INTERNATIONAL EQUITY FUND
The performance shown below for Class I Shares reflects the
historical performance of Class A Shares of the International
Equity Predecessor Fund prior to the Fund's commencement date.
International Equity Fund's Class I Shares' estimated operating
expenses are lower than the operating expenses of Class A Shares
of International Equity Predecessor Fund.
The average annual total return (before taxes) of the Funds'
Class I Shares (computed to include the returns of the
Predecessor
80
Funds prior to the reorganization) for the period or years
indicated would be:
[TO BE UPDATED BY AMENDMENT]
<Table>
<Caption>
Average Annual Total Return (Before Taxes)
Number Life of Fund
Inception Date of of Months One Five Ten (including
Fund Name the Predecessor Fund in Lifetime Year Years Years Predecessor Fund)
- ---------------------------------------------------------------------------------------------------------------
U.S. Value Fund - Class I
Shares March 30, 1990
International Equity
Fund - Class I Shares July 6, 1990
</Table>
CLASS A SHARES
U.S. VALUE FUND
The performance shown below for Class A Shares reflects the
historical performance of Class A Shares of the U.S. Value
Predecessor Fund prior to the Fund's commencement date. U.S.
Value Fund's Class A Shares' estimated operating expenses are
lower than the operating expenses of Class A Shares of U.S. Value
Predecessor Fund.
INTERNATIONAL EQUITY FUND
The performance shown below for Class A Shares reflects the
historical performance of Class A Shares of the International
Equity Predecessor Fund prior to the Fund's commencement date.
International Equity Fund's Class A Shares' estimated operating
expenses are lower than the operating expenses of Class A Shares
of International Equity Predecessor Fund.
The average annual return before taxes assumes that (1) the
maximum permitted initial sales load is deducted from the initial
$1,000 payment; (2) all distributions by a Fund are invested at
the price stated in the Prospectus on the reinvestment dates
during the period; and (3) shares were held for the entire
measurement periods and completely redeemed with the deferred
sales load deducted at the time, if applicable, in the amount and
under the terms disclosed in the Prospectus. The average annual
total return before taxes of the Funds' Class A Shares (computed
81
to include the returns of the Predecessor Funds prior to the
reorganization, if applicable, is shown in the table below.
[TO BE UPDATED BY AMENDMENT]
<Table>
<Caption>
Average Annual Total Return (Before Taxes)
Number Life of Fund
Inception Date of of Months One Five Ten (including
Fund Name Predecessor Fund in Lifetime Year Years Years Predecessor Fund)
- -------------------------------------------------------------------------------------------------------------
U.S. Value Fund - Class A
Shares March 30, 1990
International Equity Fund -
Class A Shares July 6, 1990
</Table>
CLASS C SHARES
U.S. VALUE FUND
The performance shown on the following page for Class C Shares
reflects the historical performance of Class A Shares of the U.S.
Value Predecessor Fund prior to the Fund's commencement date,
restated based on U.S. Value Fund's Class C Shares' higher
estimated fees and expenses (ignoring any fee and expense
limitations).
INTERNATIONAL EQUITY FUND
The performance shown for Class C Shares reflects the historical
performance of Class A Shares of the International Equity
Predecessor Fund prior to the Fund's commencement date, restated
based on International Equity Fund's Class C Shares' higher
estimated fees and expenses (ignoring any fee and expense
limitations).
82
The average annual return before taxes assumes that (1) the
maximum permitted initial sales load is deducted from the initial
$1,000 payment; (2) all distributions by a Fund are invested at
the price stated in the Prospectus on the reinvestment dates
during the period; and (3) shares were held for the entire
measurement periods and completely redeemed with the deferred
sales load deducted at the time, in the amount and under the
terms disclosed in the Prospectus. The average annual total
return before taxes of the Funds' Class C Shares (computed to
include the returns of the Predecessor Funds prior to the
reorganization) is shown in the table below.
[TO BE UPDATED BY AMENDMENT]
<Table>
<Caption>
Average Annual Total Return (Before Taxes)
Number Life of Fund
Inception of Months One Five Ten (including
Fund Name Date(1) in Lifetime Year Years Years Predecessor Fund)
- ----------------------------------------------------------------------------------------------------------
U.S. Value Fund - Class C
Shares March 30, 1990
International Equity Fund -
Class C Shares July 6, 1990
</Table>
From time to time in advertisements or sales material, the Funds
may discuss their performance ratings or other information as
published by recognized mutual fund statistical rating services,
including, but not limited to, Lipper Analytical Services, Inc.
("Lipper"), Ibbotson Associates, Micropal or Morningstar, Inc.
("Morningstar") or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Mutual Funds Magazine,
Kiplinger's or Smart Money. The Funds may also compare their
performance to that of other selected mutual funds (for example,
peer groups created by Lipper or Morningstar), mutual fund
averages or recognized stock market indicators, including, but
not limited to, the Standard & Poor's 500 Composite Stock Price
Index [add additional applicable indices]. In addition, the Funds
may compare their total return or yield to the yield on U.S.
Treasury obligations and to the percentage change in the Consumer
Price Index. Such performance ratings or comparisons
83
may be made with funds that may have different investment
restrictions, objectives, policies or techniques than the Funds
and such other funds or market indicators may be comprised of
securities that differ significantly from the Funds' investments.
84
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE TO THE ANNUAL REPORT OF VONTOBEL U.S. VALUE
FUND AND VONTOBEL INTERNATIONAL EQUITY FUND
[TO BE UPDATED BY AMENDMENT -- LIST OF FINANCIAL STATEMENTS TO BE
INCORPORATED BY REFERENCE]
The portions of such Annual Report that are not specifically
listed above are not incorporated by reference into this SAI and
are not part of the Registration Statement.
85
APPENDIX A
- --------------------------------------------------------------------------------
EXPLANATION OF RATING CATEGORIES
The following is a description of credit ratings issued by two of
the major credit ratings agencies. Credit ratings evaluate only
the safety of principal and interest payments, not the market
value risk of lower quality securities. Credit rating agencies
may fail to change credit ratings to reflect subsequent events on
a timely basis. Although [Vontobel] considers security ratings
when making investment decisions, it also performs its own
investment analysis and does not rely solely on the ratings
assigned by credit agencies.
86
STANDARD & POOR'S
RATINGS SERVICE
<Table>
BOND RATING EXPLANATION
----------------------------------------------------------------
Investment Grade
AAA...................... Highest rating; extremely strong
capacity to pay principal and
interest.
AA....................... High quality; very strong capacity to
pay principal and interest.
A........................ Strong capacity to pay principal and
interest; somewhat more susceptible to
the adverse effects of changing
circumstances and economic conditions.
BBB-..................... Adequate capacity to pay principal and
interest; normally exhibit adequate
protection parameters, but adverse
economic conditions or changing
circumstances more likely to lead to a
weakened capacity to pay principal and
interest than for higher rated bonds.
Non-Investment Grade
BB+, B, CCC, CC, C....... Predominantly speculative with respect
to the issuer's capacity to meet
required interest and principal
payments. BB -- lowest degree of
speculation; C -- the highest degree
of speculation. Quality and protective
characteristics outweighed by large
uncertainties or major risk exposure
to adverse conditions.
D........................ In default.
</Table>
87
MOODY'S INVESTORS
SERVICE, INC.
<Table>
BOND RATING EXPLANATION
----------------------------------------------------------------
Investment Grade
Aaa...................... Highest quality, smallest degree of
investment risk.
Aa....................... High quality; together with Aaa bonds,
they compose the high-grade bond
group.
A........................ Upper-medium grade obligations; many
favorable investment attributes.
Baa...................... Medium-grade obligations; neither
highly protected nor poorly secured.
Interest and principal appear adequate
for the present but certain protective
elements may be lacking or may be
unreliable over any great length of
time.
Non-Investment Grade
Ba....................... More uncertain, with speculative
elements. Protection of interest and
principal payments not well
safeguarded during good and bad times.
B........................ Lack characteristics of desirable
investment; potentially low assurance
of timely interest and principal
payments or maintenance of other
contract terms over time.
Caa...................... Poor standing, may be in default;
elements of danger with respect to
principal or interest payments.
Ca....................... Speculative in a high degree; could be
in default or have other marked
shortcomings.
C........................ Lowest-rated; extremely poor prospects
of ever attaining investment standing.
</Table>
88
Unrated securities will be treated as noninvestment grade
securities unless the portfolio manager determines that such
securities are the equivalent of investment grade securities.
Securities that have received ratings from more than one agency
are considered investment grade if at least one agency has rated
the security investment grade.
89
(JANUS LOGO)
www.janus.com
100 Fillmore Street
Denver, Colorado 80206-4928
1-800-525-0020
Vontobel Fund Distributors
a division of First Dominion Capital Corp.
member firm NASD 1500 Forest Avenue, Suite 223 Richmond, Virginia 23229
Telephone (800) 527-9500
Annual Report to Shareholders
December 31, 2002
Vontobel U.S. Value Fund
Vontobel International Equity Fund
Vontobel Eastern European Equity Fund
Series of Vontobel Funds, Inc.
(the "Company")
A "Series" Investment Company
Page 1
VONTOBEL U.S. VALUE FUND
ANNUAL REPORT DECEMBER 31, 2002
Dear Shareholders,
The Vontobel US Value Fund declined 2.2 percent in 2002, and that seems great
compared to the 22.1 percent decline in the S&P 500, but there's nothing great
about losing a small amount of money. A loss is a loss, and in our minds, there
is no such thing as a small loss. Our principal investment objective over any
reasonable period of time (three to five years) is to obtain a "satisfactory"
rate of return above the risk-free rate (the 10 year bond). We say
"satisfactory" and can not be more specific, because we never know how stocks
will be priced in the short-run and what kinds of opportunities "Mr. Market"
will afford us. Of course, in any short period of time, as in calendar year 2002
or 1999 or 1991, the value that we believe is inherent in our portfolio may not
be fully realized and we can indeed suffer a negative return, despite practicing
an investment approach that emphasizes preservation of capital and absolute
returns above the risk-free rate.
Although we cannot control in the short-term what "Mr. Market" will do to the
prices of our equities, we can continuously monitor our companies to make sure
that they are the superior, more reliable businesses that we supposed them to be
at the time of purchase and we do not have to sell until we think the fair value
of our portfolio is realized. So, despite the fact that when the clock struck
midnight on December 31, 2002, our portfolio had registered a 2.2 percent
decline for the calendar year 2002. The good news is that:
(1) we did not sell the entire portfolio to realize a 2.2 percent loss
(2) we believe that all of the businesses and companies in our portfolio
are doing reasonably well and will continue to grow in value in the
future and
(3) because generally the value of our companies' businesses grew last
year even while the prices of the stocks declined.
We believe that our portfolio today is significantly undervalued and in fact are
quite bullish about the prospects of making money with our current holdings on
the grounds that eventually "Mr. Market" might agree with our assessments and
mark our portfolio up accordingly. As a matter of fact, although it has become
quite popular today to speak of prospective annualized investment returns for
the US equity market for the next several years to be in the mid-single digit
range (6-9 percent), with our concentrated portfolio of about 25 stocks, the US
Value Fund almost never looks anything like the US equity market and we believe
if we are realistic in our appraisal of the fair values of our companies and if
we have done our job well and indeed chosen "superior" businesses that the
prospective rate of return on the US Value Fund today is very attractive and may
far exceed the consensus expectations for the US equity market as a whole.
Further to this point, your portfolio manager has put his conviction into action
by recently further increasing his personal holdings in the fund and
additionally, individual equities within the Fund. Make no mistake about it: we
are bullish about the return potential of the Fund.
Page 2
Although the popular press has sufficiently rehashed the dismal year that 2002
was, it is worth noting that every market sector in the S&P 500 declined. Only
131 of 500 stocks in the S&P increased. Stock picking mattered in 2002, unlike
the late 1990's when a rising speculative tide lifted all boats and a simple
index could beat most managers. As you know, in the last three years, the S&P
500 has declined 14.6 percent; thereby surpassing the pain inflicted by the last
major bear market in 1973-74. No question, times have been bad. Although we were
not immune to errors and disappointments in 2002, I take some relative comfort
in noting that during this horrible bear market of 2000, 2001 and 2002 when the
S&P 500 annualized at a negative 14.6 percent per year, the US Value Fund
compounded at a positive 10.9 percent rate per year.
As we enter 2003, several fund investors have expressed concern that given the
huge outperformance of our fund and value managers in general during the last
three years that perhaps now may be the time to switch to out-of-favor growth
stocks and growth funds. We would be the first to admit that last year's 20
percent out performance risks making us look smarter than we really are, and
would not be surprised at all if our degree of relative outperformance narrowed
in 2003 or even if we were to under-perform. Anything is possible in the
artificially brief 12 month calendar year and our focus is on the longer term
operating virtues of companies, not on the short-term pricing of stocks by "Mr.
Market".
We received several phone calls from nervous clients with much shorter
"investment" time horizons wondering what had gone wrong and demanded an
explanation. Regarding these nervous Nellies who are of the mindset to switch
from one fund to another to capture today's investment trends, or those who are
considering switching from what may be more "defensive" value funds that have
held up best in this bear market to possibly more "aggressive" tech and growth
funds to capture what they believe will surely be the inevitable eventual
resurgence in technology stocks and economic growth, we would make these
observations. First, we don't believe there is a meaningful difference between a
"growth" stock and a "value" stock and we believe the alleged difference between
"growth" investing and "value" investing is greatly exaggerated and
oversimplified in the marketplace. Every stock is worth the present value of
future cash flows that can be derived from the equity for the duration of its
life, and all rational investors want to buy something for less than what they
think it is fundamentally worth. In this respect, all true investors are value
investors. Maybe a more useful distinction can be made between investing based
on fundamentals and trend following based on momentum (buying what is currently
doing well). Second, our hats go off to any investor who is so smart that he or
she can consistently switch from "growth" to "value" to "growth", etc. to
capture what tomorrow's market cycle will bring. We don't know anybody who can
do this, and based on the evidence that so many people got caught with their
pants down at the peak of the last tech bubble in 1999 and failed to "switch
out" at the top, we doubt there really are many such adept players. Third, as
everyone has learned from Vodafone*, Vivendi*, Tyco* and others, growth for
growth sake is of no value to the shareholder. It must be profitable growth, and
profitable growth can sometimes be found in the most unlikely places. Take
Cincinnati Financial* (CINF), for example, a Midwestern property and casualty
insurer that we happen to own. Since, 1986, CINF has grown its book value by
17.6 percent per year -- pretty "growth like" for a conservative, well-run, old
economy business. As it happens, CINF is selling pretty close to book value in
the market today which suggests that if the past is prologue, one might expect
some nice capital appreciation from here, i.e. growth from a value stock. Last,
as noted above, we really do like the businesses in our current portfolio and
believe our portfolio is already significantly undervalued, regardless of
whether capital spending and the economy boom next year or not.
Investment styles as defined by the marketplace will always go in and out of
favor, but our intent is to remain firmly implanted with the same sensible
fundamental approach that has served us so well for over a decade. We wish all
of our readers a healthy, prosperous, enjoyable year! Good luck to everyone!
Edwin Walczak
Fund Manager
Page 3
COMPARISON OF $10,000 INVESTMENT IN
VONTOBEL U.S. VALUE FUND VS. S&P 500*
<Table>
<Caption>
DATE VUSVX WITH LOAD S & P 500
- -------- --------------- ---------
03/30/90 $ 9,425 $10,000
12/31/90 $ 8,493 $ 9,990
12/31/91 $11,675 $13,034
12/31/92 $13,560 $14,027
12/31/93 $14,375 $15,440
12/31/94 $14,461 $15,644
12/31/95 $20,300 $21,523
12/31/96 $24,666 $26,465
12/31/97 $33,151 $35,295
12/31/98 $38,026 $45,377
12/31/99 $32,675 $54,924
12/31/00 $44,169 $49,924
12/31/01 $45,531 $43,989
12/31/02 $44,530 $34,269
</Table>
Past performance is not predictive of future performance. Performance figures
include deduction of maximum applicable sales charges.
* The Standard & Poor's 500 Index (the "S&P 500") is an unmanaged index of 500
stocks of a representative sampling of leading U.S. companies based on market
size, liquidity and industry group representation. Returns include dividends and
distributions and are expressed in US$. The comparative index is not adjusted to
reflect expenses that the SEC requires to be reflected in the Fund's
performance.
Average Annual Total Returns for Periods ended December 31, 2002
<Table>
<Caption>
1 Year 5 Years 10 Years Since inception
------ ------- -------- ---------------
03/30/90
(7.82%) 4.83% 11.96% 12.42%
</Table>
Performance figures assume the reinvestment of all dividends and
distributions and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund
shares.
Page 4
Vontobel U.S. Value Fund
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2002
<Table>
<Caption>
Number
of
Shares Security Description Market Value
- ------- -------------------- ------------
Common Stock: 100.46%
Banking: 10.72%
57,600 Corus Bankshares Inc. $ 2,514,816
47,100 Golden West Financial Services 3,382,251
85,200 State Street Corp 3,322,800
61,000 Wells Fargo & Company 2,859,070
-----------
12,078,937
Diversified Financial Services: 16.47%
49,500 American Express 1,749,825
129,374 Federal National Mortgage Association 8,322,629
143,600 Federal Home Loan Mortgage Association 8,479,580
-----------
18,552,034
Food-Retail: 2.54%
122,500 Safeway Inc. 2,861,600
-----------
Health Care Facilities: 2.85%
71,400 Universal Health Svcs Inc Cl B 3,220,140
-----------
Insurance-Diversified: 6.77%
131,900 American International Group 7,630,415
-----------
Life & Health Insurance: 2.67%
82,200 Torchmark Corp. 3,002,766
-----------
Metal Fabrication/Hardware: 1.87%
134,000 Watts Industries "A" 2,109,160
-----------
Media: 6.47%
48,200 Gannett Co., Inc. 3,460,760
60,600 Knight-Ridder, Inc. 3,832,950
-----------
7,293,710
</Table>
Page 5
<Table>
<Caption>
Number
of
Shares Security Description Market Value
- ------- -------------------- ------------
Medical: 2.25%
141,300 Health Mgmt. Assoc. Inc. New Cl A $ 2,529,270
-----------
Multiline Insurance: 22.22%
209 Berkshire Hathaway, Inc.* "A" 15,204,750
47,800 Markel Corp.* 9,822,900
-----------
25,027,650
Property/Casualty Insurance: 14.49%
98,800 The Chubb Corp. 5,157,360
164,500 Cincinnati Financial Corp. 6,176,975
65,900 IPC Holdings, Ltd 2,078,486
103,825 Old Republic International Corp. 2,907,100
-----------
16,319,921
Retail: 7.37%
53,500 Liz Claiborne Inc. 1,586,275
54,000 Polo Ralph Lauren Corp Cl A 1,175,040
102,100 Tiffany & Co 2,441,211
158,700 TJX Companies Inc. 3,097,824
-----------
8,300,350
Specialty Insurance: 3.77%
113,000 Mercury General Corp. 4,246,540
-----------
Total Investments:
(Cost: $107,451,453)** 100.46% 113,172,493
Liabilities, net of other assets (0.46%) (515,402)
------- ------------
Net Assets 100.00% $112,657,091
======= ============
</Table>
* Non-income producing
**Cost for Federal income tax purposes is $107,451,453 and net unrealized
appreciation consists of:
<Table>
Gross unrealized appreciation $9,291,660
Gross unrealized depreciation (3,570,620)
----------
Net unrealized appreciation $5,721,040
</Table>
See Notes to Financial Statements
Page 6
VONTOBEL INTERNATIONAL EQUITY FUND
ANNUAL REPORT DECEMBER 31, 2002
Dear Shareholders,
As we wrap up the year 2002, we are also hopefully wrapping up what many are
characterizing as the most severe bear market since the Great Depression. In
order to best sum up the year from a general perspective, it is perhaps best to
recap the many landmines that have littered the investment landscape over the
past year in order to put the market performance into perspective. In sum, 2002
was a year of: Weak global economic growth, corporate scandals, bankruptcies,
profit warnings, dividend cuts, asbestos litigation, tremendous volatility, the
forced selling of equities, deflation, an oil crisis in Venezuela, and the
pending conflict in the Middle East. Clearly, the waters have been rocky for
investors and no matter how high the quality of the portfolio, the boat is bound
to sway from time to time due to the oncoming tide. The good news though is,
ultimately, that most of these issues have now been addressed to some degree and
that we are also currently experiencing one of the loosest periods of monetary
policy in US history. Corporate managers have aggressively attacked their cost
bases and debt loads. Elliot Spitzer has taken up the battle against inequity in
the financial markets. Sir Allen Greenspan has been busy pumping liquidity into
the financial system, and investors have been slowly correcting the valuation
bubbles of the bull market excess.
Please don't let the preceding paragraph lead you astray however, because as
truly disciplined investors our decisions are not driven by a macro-economic
view of the world in which we are operating. For us, 2002 was a year in which we
were able to comb the carnage of the fallen corporate angels and find a number
of companies that are truly great businesses selling for well below their
intrinsic worth. Looking forward, as we stand and stare into the abyss that is
2003, we can only make one prediction: we will strictly adhere to our
disciplined investment style through all market conditions. Essentially, the
same tools that we utilized in 2002 will also bear the fruit of absolute returns
that we hope to harvest in 2003.
Not much has changed in the portfolio during the fourth quarter, as one should
have expected. The International Fund was up 5.1 percent compared to the Morgan
Stanley Capital International's Europe, Australasia and Far East (MSCI EAFE)
Index which was up 6.5 percent for the same period. Thus, we gave back some of
the ground that we gained over the year, which is but natural as the index is
full of names which are down very significantly and were due for a dead cat
bounce! For the full year we were down 7.9 percent hile the average fund was
down 16.6 percent. The index was down 15.9 percent. Thus on a relative basis we
had the best year in the last decade! That landed us in the top 8 percent of all
International Funds for the year. This is a small consolation to us however, as
we were still down for the year, and flat since early February 2002.
Essentially, what contributed to the relative out-performance in 2002 was our
large overweight in consumer staples. It is important to reiterate that this
overweight was not a macroeconomic decision, it was purely the byproduct of the
sector containing a disproportionate number of undervalued great businesses that
we seek to own. Names like BATS, Cadbury, Diageo, Heineken, Nestle, Swedish
Match, and Reckitt Benckiser all sharply outperformed the market. Looking at it
another way, our out-performance was also a byproduct of the low quality
companies that we refused to own. This is a perfect example of an old adage that
we frequently use at Vontobel which is; "It's not what you don't own that will
kill you, it's what you own." This mantra points to most stocks in the
informational technology sector where we own no companies because we find it
nearly impossible to identify their long-term competitive advantages and to
gauge the sustainability of their franchises. The IT sector alone comprised
roughly 8 percent of the EAFE index, and was down nearly 40 percent for the
year. An almost equally difficult area that we have combed to find names has
been the telecommunications sector, which represents roughly 8 percent of the
index and was down nearly 24 percent for the year. In telecommunication services
we maintained a severe underweight. Again, not because of a macroeconomic view,
but rather because we just couldn't get a good enough handle on those businesses
to be comfortable enough to invest in them.
So much for pounding our chests! What is the ground reality now? On a regional
basis we still have difficulty finding names in continental Europe. The missing
element is as much stock valuation as it is the quality hurdle which we are
always concerned with. Amongst the numerous companies that we have looked at
over the last 3-6 months are Essilor, Fortis, Geest, Danone, and Ekornes. All of
them have a "track record" of solid historical performance but we really
question the sustainability thereof. In addition, the growth rates that the
stocks are discounting in today's market quotations are simply dubious to us.
Other names like Henkel, Wella and Beiresdorf in Germany, Hermes and Air Liquide
in France, meet our quality hurdle. However, they are at this time a little too
pricey for our taste. The net result is that we are struggling to find buyable
businesses in Germany. Similarly, we own just one position respectively in
France and in Italy. To reiterate, this is not a reflection of any top-down
Page 7
concerns or anything like that. We remain agnostic as to the macro-economic
concerns in Germany or France. It is simply a quality issue that we struggle
with. Spain, Switzerland, and the Netherlands constitute the bulk of our
European exposure outside of the UK and Ireland.
All the chronicled problems in Europe do not perturb us for one minute. From our
vantage point we continue to find great value in a slew of names which
ultimately afford us a nice sized investable universe to cherry pick from. It is
fascinating that the high quality names we own are selling at both extremely low
absolute and relative price to earnings (P/E) multiples. This phenomenon is even
more surprising when one considers at what point of the economic cycle we find
ourselves. As an example, Lindt in Switzerland is trading at 16x this year's
expected earnings. Lindt is one of the new additions from the year's final
quarter because the stock came into our buying range. Earnings are growing at
double digits due to a 5-6 percent increase in sales fueled by store openings in
the US and inherent growth in the premium chocolate market. The business is
extremely well-positioned to deliver double-digit earnings growth almost
irrespective of the economic scenario. Lindt keeps ramping up their retail
outlets in the US along with improving margins due to better asset utilization
and pricing power. This business has been around for nearly 150 years. During
the last fifteen years it has grown at 13 percent annually at the operating
level, with a double-digit return on equity (ROE) in each and every year. The
P/E multiple has fallen from nearly 23x in 1988 to 16x now. If they were to
deliver 10 percent growth for the next five years, we believe the business is
worth nearly CHF 1,100 per share compared to the current price of CHF 780.
Coming out of the last recession in 1991-92 the stock traded at around 20-22x
earnings and at a significant premium to the European and Swiss markets
respectively. Although we do not value the businesses we are interested in from
a relative perspective but on an absolute basis, this anomaly reflects the
general level of pessimism investors have about overall market prospects.
Some of the more cyclical businesses we have looked at lately includes Nokia. In
general, we found that most are discounting rather optimistic growth rates going
forward. Nokia, for example, is discounting nearly 15 percent growth when one
normalizes operating margins to 15 percent. Their average margins have been 12
percent over the last 10 years. Needless to say that the wireless industry has
much worse prospects today than it did 10 years ago! In addition, we have come
across eight white goods manufacturing firms in China which have shifted to
producing handsets for the domestic market and are selling them under their own
brand names. When a company which had been manufacturing dishwashers and washing
machines moves to start manufacturing mobile handset units, it definitely is a
maturing industry in our eyes! As usual, we believe investors are still looking
in the rear view mirror. It is for this reason that we see no cause to revisit
names like Alcatel, Ericsson, Siemens, STM Micro, and ASML. It is certain that
stocks like these will inevitably bounce whenever investors get excited about
macro economic prospects. We know that in these circumstances we are likely to
trail in any ensuing rally, because our strict discipline precludes us from
buying any of these names. Such is life!
One business with more cyclicality than generally wets our investment appetites
is Signet (UK). The company is generating double-digit operating margins and a
nearly 20 percent ROE. It is one of the largest specialty jewelry retailers in
the world and a dominant player in a highly fragmented market. With two basic
store types each with strong organic growth prospects, the company should be
able to grow the bigger freestanding format called Jared at the more hyper pace
of an immature format. Jared's has nearly double the average ticket size of
around USD 500 and roughly quadrupled the selling space of the more mature Kays
format (mall stores), and they are opening 12-15 new stores per year. This
format competes much more effectively against the small family owned jewelers
present in local towns. As a group, Signet has much lower operating expenses
than competitors like Zales, thus generating nearly 500 bp higher margins while
turning over their inventory at a much faster rate. Simultaneously, they provide
the consumer with a higher quality store format and
Page 8
product offering! The jewelry business is surprisingly far less cyclical than
other discretionary spending segments, and has been growing at a 6 percent rate
annually since 1980 without ever experiencing a contraction. This steadiness is
helped along by the fact that over half of sales are for wedding related
occasions. Signet is selling at 9x this year's earnings and should be able to
comfortably grow in the high single-digits over the next five years.
During October we visited a whole slew of companies in Asia over a period of
about three weeks. Most visits were with companies that are already in our
investable universe, competitors of our existing holdings or their clients both
as vendors or buyers. Subsequent to our visits we remain comfortable with our
positions in great businesses like Singapore Air Terminal (Singapore) and Dah
Sing (Hong Kong). This portion of the portfolio continues to be extremely
undervalued at under 10x forward earnings while growing at close to a
double-digit rate. More specifically, Singapore Air Terminal sells at 7x,
Kowloon Motor at 7x, and Hong Kong Electric at 9x. In India, ITC sells at 10x
while Dr Reddys sells at 12x. All of these businesses have and should continue
to generate over 15 percent return on equity on an unleveraged basis.
We generally continue to remain rather optimistic about our positions in Asia,
outside of Japan. Our largest single country exposure in this group remains in
South Korea, which despite recent saber rattling by North Korea, should continue
to do well. Businesses there are essentially "given away". The four names we own
trade at under 6x this years' expected earnings and under 8x trailing earnings.
All have sustained double-digit earnings per share (EPS) growth for the last
decade on a compounded basis. As far as we know, ice cream and candy businesses
do not tend to suffer in an economic slowdown!
Japan remains a problem child. We own stakes in four businesses and we are
looking at two new names. It remains to be seen whether we will be able to get
to those. Overall, we are pessimistic about the prospects in the land of the
rising sun. Our exposure is limited to 7.5 percent of portfolio assets for now,
a substantial underweight relative to the EAFE Index which still maintains a 20+
percent weighting in the country.
High ROE with low or no leverage is what we seek. The problem is that there are
not many businesses which can maintain high ROEs as they grow larger and even
fewer companies that are selling at prices that are enticing. Thus, we go
wherever we find opportunities on our terms, whether it is in Germany or Korea!
As for 2003, the multiples should not contract further than the 11x P/E of our
portfolio and thus we are optimistic for the coming year's performance. We
believe that the earnings picture will be reasonable and, as an added bonus, the
yield of the portfolio remains abnormally high at around 3 percent. Payout
ratios have continued to trend upward and the resulting high yields are simply a
function of the free cash generative capacity of the businesses we own. For
them, free cash generation remains robust while reinvestment opportunities are
limited. Thus, we expect them to continue to pay out significant dividends
accompanied by share buybacks. That, by the way, is also a theme that will have
an impact on the capital spending picture in Europe and the US as companies
continue to restrain capital expenditure in order to return money to
shareholders.
We believe, barring a significant economic contraction or disruption, the
portfolio will grow earnings at 6-8 percent. That seems low from a historic
standpoint but growth is very dependable and in a low inflationary environment,
significantly higher than what the EAFE Index can deliver.
Rajiv Jain
Fund Manager
Page 9
COMPARISON OF $10,000 INVESTMENT IN
VONTOBEL INTERNATIONAL EQUITY FUND VS.
MSCI EAFE* INDEX FROM 7/6/90**
<Table>
<Caption>
DATE VUSVX WITH LOAD S & P 500
- -------- --------------- ---------
03/30/90 $ 9,425 $10,000
12/31/90 $ 8,208 $ 8,725
12/31/91 $ 9,748 $ 9,815
12/31/92 $ 9,410 $ 8,653
12/31/93 $13,400 $11,503
12/31/94 $12,688 $12,431
12/31/95 $14,071 $13,867
12/31/96 $16,459 $14,750
12/31/97 $18,014 $15,054
12/31/98 $21,034 $18,116
12/31/99 $30,815 $23,058
12/31/00 $25,072 $19,791
12/31/01 $17,763 $15,092
12/31/02 $16,356 $11,666
</Table>
Past performance is not predictive of future performance. Performance figures
include deduction of maximum applicable sales charges.
* Morgan Stanley Capital International Europe, Australasia, Far East Index
("MSCI EAFE") is an unmanaged index of more than 1,100 common stock securities
issued by foreign companies. Returns include dividends and are expressed in US$.
Average Annual Total Returns for Periods ended December 31, 2002
<Table>
<Caption>
1 Year 5 Years 10 Years Since inception
------ ------- -------- ---------------
07/06/90
(13.21%) (3.07%) 5.06% 4.02%
</Table>
Performance figures assume the reinvestment of all dividends and
distributions and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund
shares.
** On July 6, 1990, Vontobel Asset Management Inc. became the Investment Advisor
to the Fund and the Fund's investment objective was changed. Previous periods
during which the Fund was advised by other investment advisors are not shown in
the graph.
Page 10
Vontobel International Equity Fund
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2002
<Table>
<Caption>
Number
of Shares Security Description Market Value
- --------- -------------------- ------------
Common Stock: 100.38%
Australia: 4.13%
74,600 Australia & New Zealand Bank Group $ 728,373
78,400 Tabcorp Holdings Limited 469,874
-----------
1,198,247
Brazil: 1.11%
64,200 Souza Cruz Ord Registered* 323,176
-----------
Denmark: 1.95%
19,600 Novo-Nordisk AS Class B* 565,796
-----------
France: 1.13%
2,300 Total SA CL B 328,243
-----------
Great Britain: 32.02%
105,800 British American Tobacco PLC 1,056,685
93,400 Bunzl PLC 571,279
150,200 Cadbury Schweppes PLC* 935,619
76,200 Diageo PLC New* 827,898
41,900 HSBC Holdings PLC* 462,991
79,300 Johnston Press PLC 470,358
199,025 Morrison (WM.) Supermarkets 691,957
95,138 Northern Rock PLC 1,010,685
17,200 Reckitt Benckiser PLC 333,606
121,919 Rentokil Initial PLC* 431,730
39,900 Royal Bank of Scotland Group PLC* 955,639
411,200 Signet Group PLC* 450,070
151,800 Tesco Ord PLC 474,014
89,400 Trinity Mirror PLC 623,079
-----------
9,295,610
Hong Kong: 3.87%
68,200 Dah Sing Financial Services 345,436
98,000 Hong Kong Electric Holdings 371,338
</Table>
Page 11
<Table>
<Caption>
Number
of Shares Security Description Market Value
- --------- -------------------- ------------
Hong Kong (continued):
92,300 Kowloon Motor Bus Holdings $ 407,143
-----------
1,123,917
India: 2.83%
21,200 Doctor Reddys Lab ADR* 409,796
29,500 ITC Limited GDR 413,000
-----------
822,796
Ireland: 3.69%
40,900 Bank of Ireland 418,155
48,900 Kerry Group PLC A 653,776
-----------
1,071,931
Italy: 1.34%
24,400 Eni SPA* 387,625
-----------
Japan: 7.79%
15,200 Honda Motor Co., Ltd. 561,920
16,900 Takeda Chemical Industries 705,886
177,000 Tokyo Gas Co., Ltd. 554,476
75,000 Sampo Japan Insurance 437,684
-----------
2,259,966
Korea: 5.44%
13,930 Hite Brewery Co., Ltd PRD 305,367
810 Lotte Chilsung Beverage and Co. 382,446
950 Lotte Confectionary 382,067
5,860 Amore Pacific Corporation 508,898
-----------
1,578,778
Mexico: 2.03%
18,400 Telefonos de Mexico ADR 588,432
-----------
Netherlands: 6.27%
43,800 ABN AMRO Holdings NV 715,569
28,600 Aegon NV* 367,677
18,882 Heineken Holdings NV* 736,547
-----------
1,819,793
Portugal: 2.22%
116,133 Brisa Auto Estrada* 642,983
-----------
Singapore: 0.79%
253,000 Singapore Airport Terminal 230,444
-----------
</Table>
Page 12
<Table>
<Caption>
Number
of Shares Security Description Market Value
- --------- -------------------- ------------
Spain: 7.61%
100,600 Banco Bilbao Vizcaya Argentina* $ 962,062
15,933 Banco Popular Espanol 651,085
31,500 Gas Natural SDG SA* 596,868
-----------
2,210,015
Sweden: 3.88%
15,700 Hennes & Mauritz AB Class B* 303,346
104,400 Swedish Match AB Fuerer 822,473
-----------
1,125,819
Switzerland: 12.28%
32,200 Compagnie Financiere Richmont 600,608
738 Lindt & Spruengli AG 426,836
4,820 Nestle SA REG SHS 1,021,009
19,900 Novartis AG Registered 725,821
12,032 Swiss Reinsurance 788,969
-----------
3,563,243
Total Investments:
(Cost: $28,207,766) ** 100.38% 29,136,814
Liabilities, net of other assets (0.38%) (110,628)
------ -----------
Net Assets 100.00% $29,026,186
====== ===========
</Table>
* Non-income producing
** Cost for Federal income tax purposes is $28,207,766 and net unrealized
appreciation consists of:
<Table>
<Caption>
Gross unrealized appreciation $2,164,320
Gross unrealized depreciation (1,235,272)
----------
Net unrealized appreciation $ 929,048
</Table>
ADR--Security represented is held by the custodian bank in the form of American
Depositary Receipts.
See Notes to Financial Statements
Page 13
VONTOBEL INTERNATIONAL EQUITY FUND
INDUSTRY PERCENTAGE BASED ON NET ASSETS
December 31, 2002
<Table>
Banking 21.53%
Food Products 11.78%
Tobacco 9.01%
Pharmaceuticals 8.29%
Beverages 7.76%
Insurance 5.49%
Gas Utilities 3.97%
Media 3.77%
Specialty Retail 2.60%
Oil & Gas 2.47%
Multi-Line Retail 2.38%
Commercial Services & Supplies 2.28%
Transportation Infrastructure 2.21%
Textile & Apparel 2.07%
Diversified Telecommunication Services 2.03%
Paper & Forest Products 1.97%
Automobiles 1.94%
Healthcare Equipment & Supplies 1.75%
Food & Drug Retailing 1.63%
Hotels, Restaurants & Leisure 1.62%
Road & Rail 1.40%
Electric Utilities 1.28%
Household Products 1.15%
-------
100.38%
Liabilities, net of other assets (0.38%)
-------
Net assets 100.00%
=======
</Table>
See Notes to Financial Statements
Page 14
VONTOBEL EASTERN EUROPEAN EQUITY FUND
ANNUAL REPORT DECEMBER 31, 2002
Dear Shareholders,
In 2002 the Vontobel Eastern European Equity Fund (VEEEX) gained 20.5 percent in
USD. With this performance the fund ranked second out of 248 funds in the
Micropal Peer Group of Regional Emerging Market funds. The fund also finished
about 2.5 percent above the Nomura Research Institute's Central and Eastern
European Equity (NRI Composite-11) Index, our benchmark for Eastern European
funds. This compares favorably to heavy losses on many of the world's stock
markets in 2002.
The year 2002 started quite bad for the fund, as we had a large underweight
position in Russia. Until May the Russian market was the best performing market
in the Emerging European region. However, since May 2002 the Russian market has
suffered heavy losses that reduced our positions in Russia further when the
market was close to its top. Russia has lost some of its attraction because
investors fear a lower oil price after resolution of the crisis in Iraq. Russian
companies are also facing rising costs due to appreciation of the ruble. In 2003
there will be parliamentary elections and in 2004 presidential elections in
Russia. In the period before these elections, we expect economic reforms to slow
and political uncertainties to increase. Therefore, we remain rather cautious
with Russia.
Our biggest overweight has been the group of European Union candidate countries
and within this group, Hungary. In the fall of 2002, the EU finished
negotiations with 10 countries, which allows them to enter the EU in 2004. Most
countries will hold referendums on EU entry during the coming months. Opinion
polls suggest that these referendums should in most cases only be mere
formalities.
These countries have been benefiting and will continue to benefit from the
process of EU convergence. This means that high foreign direct investment is
flowing into the region, which helps productivity, exports and economic growth.
Strong inflows into the bond markets are driving down interest rates and
increase the value of their currencies. Low interest rates boost consumption and
investment and government deficits carry a lower interest burden. The process of
EU convergence is continuing and will drive corporate profits and stock prices
higher in coming years.
We had a big overweight position in Hungary as the country is one of the most
economically successful EU candidates. It was fast with privatization and has
quickly transformed its planned economy into a functioning market economy.
Private corporations are exceptionally well managed. Profit margins and growth
are much healthier than in most other countries. The Hungarian bourse rose 35
percent in 2002.
The only negative exception in the group of EU candidate countries has been
Poland. Poland has suffered a sharp economic slowdown. In 2001 interest rates
had reached 20 percent and the Polish zloty gained strongly against its
neighboring currencies. Moreover, Poland is burdened with structural problems,
including large agricultural and heavy industry sectors. This led to a slowdown
of the economy that lasted through 2002. Now, as interest rates are down to 7
percent and the zloty has lost some of its strength, we expect a slow recovery.
Like in other countries in the region, the government seems committed to cut the
budget deficit and speed up privatization. The Polish bourse was flat in USD in
2002 and we had a 10 percent underweight position there. At this point, we feel
that most Polish stocks are close to their fundamental fair value.
Page 15
The Czech market, which rose 40 percent in 2002, was one of the best performing
worlwide. Like Hungary, it benefited from EU convergence trends. Additionally,
some companies have been privatized and have been successfully restructured by
their new owners. Especially Komercni banka and Ceska sporitelna (Erste Bank)
have been excellent investments. We had a neutral country position but strong
overweight in the successful banks.
Our biggest positions within sectors have been in the banks, which rose 45
percent in 2002. The banking sector is the main beneficiary of EU convergence.
Falling interest rates boost lending - especially to private households. We have
experienced a huge mortgage lending boom in Hungary and the Czech Republic in
2002. The level of private loans to GDP is still miles away from developed
market norms. Therefore, growth should continue for some years. The banks are
also benefiting from growing fee income. Areas like investment funds, real
estate, insurance, credit cards are all growing fast. On the other hand, the
credit risk is declining and some banks could reduce their level of bad loan
provisions. On the negative side, interest spreads are declining as well, which
is counterbalancing improving loan quality. The top banks have been OTP in
Hungary and Komercni banka and Ceska sporitelna in the Czech Republic. They have
been top positions in our fund. We remain cautious on Polish banks, as stock
prices are relatively high.
Our second most overweight sector was oil downstream, which rose 28 percent. EU
convergence is mainly boosting local consumption. Refineries and retail gas
stations are beneficiaries of growing consumption. Growing car fleets and
highway kilometers are also boosting gasoline consumption. We like the sector
due to its privatization and consolidation opportunities that still exist. In
the next one or two years we will see privatization transactions with Hungarian
MOL, Czech Unipetrol and likely also with Polish PKN.
We have been underweight in the oil upstream sector, which increased 38 percent.
The biggest increases have taken place in the beginning of the year, where we
were already convinced that the stocks are heavily overvalued. Later in the year
the sector fell back sharply due to uncertainties about the longer term level of
the price of crude oil.
We were overweight in construction, which increased 20 percent in 2002. In
Eastern Europe huge infrastructure projects will be realized in the coming
years. Major highways and roads will be constructed by firms like Budimex from
Poland. The construction sector is a difficult sector with low margins. However,
current valuations have reached such low levels that investments should pay off,
especially in light of the good growth prospects.
Utilities were overweight during the year. This was primarily due to one
position: Demasz of Hungary, which rose 43 percent. The company is delivering
stable, high and growing profits and trades at a dividend yield of over 10
percent. The Russian utilities are very high risk investments due to the
uncertainties of the restructuring process by the Russian government. We had no
position there at the end of the year.
The pharmaceutical sector, which rose 62 percent in 2002, has been overweight
during most of the year. The companies are well managed producers of generic
drugs. Demand for generics is growing as health care systems need to lower
costs. The companies show low levels of debt and high profitability. At the end
of the year, we reduced positions in the sector. We fear problems in the export
area due to the strength of Central European currencies.
Generally we have been underweight in export oriented sectors. Most currencies
have been very strong in Central and Eastern Europe. The Hungarian forint and
the Czech koruna gained 20 percent in 2002. Currency strength impacts exporting
firms negatively.
Another substantial underweight has been the telecommunications sector. This
sector is suffering for several reasons. The markets have been liberalized
and prices are falling in a toughening competitive environment. Growth rates in
mobile markets have slowed down. Strategic shareholders have huge debt issues
and are creating share overhang problems for their Central and Eastern European
subsidiaries. We benefited from our 9 percent underweight as the sector rose
only 4 percent.
2002 was a good year for investors in Central and Eastern Europe. Looking into
the future, we are optimistic that the positive trends will continue. We are
convinced that EU convergence trends will continue. This should lead to positive
economic and corporate results, which in turn should drive share prices higher.
Apart from the EU entry countries, we do not see many opportunities. Russia
holds big hopes for the long term investor, but medium term we remain skeptical.
One opportunity that could arise this year lies in Turkey and Israel. We expect
these markets to recover as soon as a solution to the Iraq crisis is in sight
and we intend to build small positions in these countries.
Guenter Faschang
Fund Manager
Page 16
COMPARISON OF $10,000 INVESTMENT IN
VONTOBEL EASTERN EUROPEAN EQUITY FUND VS.
NRI COMPOSITE-11*
<Table>
<Caption>
DATE VUSVX WITH LOAD S & P 500
- -------- --------------- ---------
02/15/96 $ 9,425 $10,000
12/31/96 $14,034 $13,476
12/31/97 $14,949 $13,571
12/31/98 $ 7,979 $10,607
12/31/99 $ 9,136 $12,358
12/31/00 $ 7,538 $11,061
12/31/01 $ 6,979 $10,278
12/31/02 $ 8,410 $12,730
</Table>
Past performance is not predictive of future performance. Performance figures
include deduction of maximum applicable sales charges.
* Nomura Research Institute's ("NRI") Composite-11 Index is comprised of
equities traded on listed markets in Poland, the Czech Republic, Hungary,
Slovakia, Croatia, Romania, Slovenia, Estonia, Latvia, Lithuania and Russia.
Returns do not include dividends and are expressed in US$.
Average Annual Total Returns for Periods ended December 31, 2002
<Table>
<Caption>
1 Year 5 Years Since inception 02/15/96
------ ------- ------------------------
13.58% (11.92%) (2.19%)
</Table>
Performance figures assume the reinvestment of all dividends and
distributions and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund
shares.
Page 17
VONTOBEL EASTERN EUROPEAN EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2002
<Table>
<Caption>
Number of Market
Shares Security Description Value
- --------- --------------------- -----------
Common Stocks: 98.21%
Austria: 8.03%
7,780 BAU Holdings AG ORD $ 448,696
8,800 Erste Bank Der Oester Spar* 591,956
2,315 OMV AG 227,166
20,600 S&T System Intergration and Technology* 138,247
6,900 VA Technologie AG Bearer* 112,148
-----------
1,518,213
Croatia: 1.94%
25,800 Pliva D D GDR 366,360
-----------
Czech Republic: 14.86%
222,700 Ceske Energticke Zavody AS CEZ 674,613
45,400 Ceske Radiokomunikace AS 294,508
18,670 Komercni Banka 1,296,076
12,900 Komercni Banka AS Sponsored ADR* 296,700
221,000 Unipetrol* 249,214
-----------
2,811,111
Estonia: 6.76%
17,000 As Eesti Telekom Reg Sponsored GDR 317,900
57,250 Hansabank Ltd 959,317
-----------
1,277,217
Hungary: 29.25%
13,400 Delmagyarorszagi Aramsz Sponsored GDR 131,320
12,976 Demasz Rt 651,827
9,320 Egis Gyogysergyar 575,897
1,340 Gedeon Richter Ltd GDR Reg S 87,770
4,920 Richter Gedeon Vegyeszeti* 324,792
49,927 Magyar Olay Es Gazipari RT 1,164,113
8,000 MOLMagyar Olay GDR Reg S 187,200
12,050 Matav RT ADR 214,490
105,650 Matav Rt Regd Shares 382,773
70,600 OTP Bank 693,603
46,850 OTP Bank GDR Reg S 915,918
37,047 Pannonplast Muanyagipari 199,275
-----------
5,528,978
Israel: 1.87%
120,000 Bank Hapoalim BM 171,580
14,000 Check Point Software Tech* 181,580
-----------
353,160
</Table>
Page 18
<Table>
<Caption>
Number of Market
Shares Security Description Value
- --------- -------------------- -------------
Poland: 17.67%
17,400 Bank Polska Kasa Opieki $ 429,433
14,750 Bank Polska Kasa Opieki SA 361,375
4,451 Bank Przemyslowo Handlowy 315,604
18,673 Bank Zachodni Wbk 342,834
254,795 Big Bank Gdanski 219,594
35,656 Budimex SA* 277,500
28,000 KGHM Polska Miedz SA 98,720
20,500 KGHM Polska Miedz GDR 139,400
2,766 Mostostal Warzawa SA* 6,790
165,000 Mostostal Zabrze-Holding SA 53,003
12,000 Polski Koncern Nafto GDR 110,400
17,700 Polski Koncern Naftowy 81,820
83,700 Telekomunikacja Polska SA 278,709
99,500 Telekomunikacja Polska SA GDR* 333,325
21,926 Zakalady Metali Lekkich 290,897
-----------
3,339,404
Russia: 14.50%
12,650 Lukoil Oil Co Sponsored ADR 765,325
9,500 Mobile Telesystems Sponsored ADR 352,830
9,000 RAO Gazprom Sponsored ADR Reg S 103,500
36,300 Surgutneftegaz Sponsored ADR 562,650
6,850 Yukos Corp Sponsored ADR 957,288
-----------
2,741,593
Slovakia: 3.33%
17,481 Slovnaft AS 441,254
147,000 Slovakofarma AS GDR 187,425
-----------
628,679
Total Investments
(Cost:$16,859,219) ** 98.21% 18,564,715
Other assets,net 1.79% 337,442
------- -----------
Net Assets 100.00% $18,902,157
</Table>
* Non-income producing
** Cost for Federal income tax purposes is $16,859,219 and net unrealized
appreciation consists of:
<Table>
<Caption>
Gross unrealized appreciation $3,703,110
Gross unrealized depreciation (1,997,614)
----------
Net unrealized appreciation $1,705,496
</Table>
ADR--Security represented is held by the custodian bank in the form of American
Depositary Receipts.
GDR--Security represented is held by the custodian bank in the form of Global
Depositary Receipts.
GDS--Security represented is held by the custodian bank in the form of Global
Depositary Shares.
See Notes to Financial Statements
Page 19
VONTOBEL EASTERN EUROPEAN EQUITY FUND
INDUSTRY PERCENTAGE BASED ON NET ASSETS
December 31, 2002
<Table>
Banking 34.88%
Oil & Gas 23.00%
Telecommunications 9.95%
Medical Drugs 9.50%
Construction 4.16%
Utilities 3.57%
Electricity Distributor 3.45%
Telecom Services 1.56%
Manufacturing 1.54%
Petrochemicals 1.32%
Metals 1.26%
Construction Materials 1.05%
IT and Consulting Services 0.96%
Computer Software 0.73%
Utilities -Electric 0.69%
Industrials/Engineering 0.59%
-------
98.21%
Other assets, net 1.79%
-------
Net Assets 100.00%
=======
</Table>
See Notes to Financial Statements
Page 20
VONTOBEL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 2002
<Table>
<Caption>
International Eastern
U.S. Value Equity European Equity
Fund Fund Fund
------------- ------------- ---------------
Assets:
Investments at cost $ 107,451,453 $ 28,207,766 $ 16,859,219
============= ============= =============
Investments at value
(Notes 1 & 3) $ 113,172,493 $ 29,136,814 $ 18,564,715
Cash -- 175,407 349,550
Receivables:
Capital stock sold 237,866 20,217 25,298
Dividends 111,085 89,871 21,770
Investments sold 313,450 -- --
Other assets 36,844 25,265 24,583
------------- ------------- -------------
Total Assets 113,871,738 29,447,574 18,985,916
------------- ------------- -------------
Liabilities:
Bank overdraft 361,516 -- --
Payables:
Capital stock redeemed 728,815 58,777 25,380
Forward currency contracts
- closed -- 287,441 --
Investment management fees 95,554 24,927 19,725
Accrued expenses 28,762 50,243 38,654
------------- ------------- -------------
Total Liabilities 1,214,647 421,389 83,759
------------- ------------- -------------
Net Assets $ 112,657,091 $ 29,026,186 $ 18,902,157
============= ============= =============
Class A Net Assets $ 112,302,365 $ 29,026,186 $ 18,902,157
============= ============= =============
Shares Outstanding, Class A
($.01 par value) 6,024,493 2,448,114 2,203,184
Net Asset Value (NAV) and
Redemption Price Per Share -
Class A (Note 2) $ 18.64 $ 11.86 $ 8.58
============= ============= =============
Maximum Offering Price Per
Share - Class A
(NAV x 100/94.25) $ 19.78 $ 12.58 $ 9.10
============= ============= =============
Class C Net Assets $ 354,726 $ -- $ --
============= ============= =============
Shares Outstanding, Class C
($.01 par value) 19,068 -- --
Net Asset Value (NAV) and
Redemption Price Per Share -
Class C (Note 2) $ 18.60 $ -- $ --
============= ============= =============
Maximum Offering Price Per
Share - Class C
(NAV x 100/99.00) $ 18.79 $ -- $ --
Components of net assets are:
Paid in capital $ 106,967,062 $ 44,900,847 $ 68,238,637
Net unrealized appreciation
on investments and foreign
currency transactions 5,721,040 656,018 1,706,752
Accumulated net realized loss
on investments (31,011) (16,530,679) (51,043,232)
Net Assets $ 112,657,091 $ 29,026,186 $ 18,902,157
============= ============= =============
</Table>
See Notes to Financial Statements
Page 21
VONTOBEL FUNDS
STATEMENTS OF OPERATIONS
Year ended December 31, 2002
<Table>
<Caption>
Eastern
U.S. Value Equity European Equity
Fund Fund Fund
----------- ----------- ---------------
Investment Income:
Dividend $ 958,198 $ 1,043,036 $ 341,273
Foreign tax withheld -- (104,295) (65,652)
Interest 15,122 5,300 --
----------- ----------- -----------
Total Investment Income 973,320 944,041 275,621
----------- ----------- -----------
Expenses:
Investment management fees
(Note 2) 876,616 361,230 214,305
12b-1 fees (Note 2) 667 -- --
Recordkeeping and
administrative services
(Note 2) 133,209 72,246 34,289
Shareholder servicing
and reports (Note 2) 121,885 56,853 46,809
Transfer agent fees (Note 2) 143,827 61,332 58,832
Custodian and accounting
fees 87,756 173,924 117,694
Filing and registration
fees (Note 2) 33,135 23,848 19,413
Legal and audit fees 59,760 65,971 49,677
Other 85,562 64,575 13,164
----------- ----------- -----------
Total expenses 1,542,417 879,979 554,183
Custody credits (11,934) -- --
----------- ----------- -----------
Net expenses 1,530,483 879,979 554,183
----------- ----------- -----------
Net Investment Income (Loss) (557,163) 64,062 (278,562)
----------- ----------- -----------
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments 5,389,306 (803,762) (1,843,483)
Net realized loss on foreign
currency conversions and
forward currency contracts -- (228,361) (55,845)
Net change in unrealized
appreciation/depreciation
on investments and foreign
currencies (8,112,854) (2,105,940) 5,210,244
----------- ----------- -----------
Net Realized and Unrealized
Gain (Loss) on Investments (2,723,548) (3,138,063) 3,310,916
----------- ----------- -----------
Net Increase (Decrease) in Net
Assets Resulting From
Operations $(3,280,711) $(3,074,001) $ 3,032,354
=========== =========== ===========
</Table>
See Notes to Financial Statements
Page 22
VONTOBEL U.S. VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
Year Ended Year Ended
December 31, 2002 December 31, 2001
----------------- -----------------
OPERATIONS
Net investment loss $ (557,163) $ (516,333)
Net realized gain on investments 5,389,306 6,317,785
Change in unrealized gain
on investments (8,112,854) (4,652,531)
------------- -------------
Net increase (decrease)in net
assets resulting from operations (3,280,711) 1,148,921
DISTRIBUTION TO SHAREHOLDERS FROM
(Note 4)
Capital gains ($.80 and $.--
per share, respectively) -
Class A (4,966,060) --
Capital gains ($.80 and $.--
per share, respectively) -
Class C (13,772) --
Net investment income ($.--
and, $.02 per share, respectively)-
Class A -- (144,492)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net
assets resulting from capital
share transactions* - Class A 34,395,321 (52,085,237)
Net increase in net assets
resulting from capital share
transactions* - Class C 365,259 --
------------- -------------
Net increase (decrease) in net
assets 26,500,037 (51,080,808)
Net assets at beginning of year 86,157,054 137,237,862
------------- -------------
NET ASSETS at end of year $ 112,657,091 $ 86,157,054
============= =============
</Table>
*A summary of capital share transactions follows:
<Table>
<Caption>
Year Ended Year Ended
December 31, 2002 December 31, 2001
------------------------------- -------------------------------
Class A Shares Shares Value Shares Value
------------ ------------ ------------ ------------
Shares sold 4,454,625 $ 89,364,343 723,921 $ 14,670,583
Shares reinvested from
distributions 248,162 4,700,197 -- --
Shares redeemed (3,016,420) (59,669,219) (3,501,910) (66,755,820)
------------ ------------ ------------ ------------
Net increase (decrease) 1,686,367 $ 34,395,321 (2,777,989) $(52,085,237)
============ ============ ============ ============
(52,085,237)
</Table>
<Table>
<Caption>
Period Ended
December 31, 2002**
----------------------
Class C Shares Shares Value
-------- --------
Shares sold 18,340 $351,487
Shares reinvested from
distributions 728 13,772
Shares redeemed -- --
-------- --------
Net increase 19,068 $365,259
======== ========
</Table>
** Commencement of operations of Class C shares was October 9, 2002 See Notes to
Financial Statements
Page 23
VONTOBEL INTERNATIONAL EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
Year Ended Year Ended
December 31, 2002 December 31, 2001
----------------- -----------------
OPERATIONS
Net investment income (loss) $ 64,062 $ (321,284)
Net realized loss on
investments and foreign
currency transactions (1,032,123) (14,383,099)
Change in unrealized
appreciation of investments
and foreign currencies (2,105,940) (19,098,800)
------------- -------------
Net decrease in net assets
resulting from operations (3,074,001) (33,803,183)
DISTRIBUTIONS TO SHAREHOLDERS
FROM (Note 4)
Net investment income ($-- and
$0.12 per share, respectively) -- (430,460)
Net realized gain from investment
transactions ($-- and $0.35
per share, respectively) -- (1,296,677)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets
resulting from capital share
transactions* (12,256,185) (53,346,359)
------------- -------------
Net decrease in net assets (15,330,186) (88,876,679)
Net assets at beginning of year 44,356,372 133,233,051
------------- -------------
NET ASSETS at end of year $ 29,026,186 $ 44,356,372
============= =============
</Table>
*A summary of capital share transactions follows:
<Table>
<Caption>
Year Ended Year Ended
December 31, 2002 December 31, 2001
----------------------------- -----------------------------
Shares Value Shares Value
------------ ------------ ------------ ------------
Shares sold 914,578 $ 11,344,343 2,696,927 $ 38,009,894
Shares reinvested from
distributions -- -- 152,544 1,585,926
Shares redeemed (1,910,316) (23,600,528) (6,470,365) (92,942,179)
------------ ------------ ------------ ------------
Net decrease (995,738) $(12,256,185) (3,620,894) $(53,346,359)
============ ============ ============ ============
</Table>
See Notes to Financial Statements
Page 24
VONTOBEL EASTERN EUROPEAN EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
Year ended Year ended
December 31,2002 December 31,2001
---------------- ----------------
OPERATIONS
Net investment loss $ (278,562) $ (150,252)
Net realized loss on
investments and foreign
currency transactions (1,899,328) (4,470,362)
Change in unrealized gain
on invest-ments and
foreign currencies 5,210,244 2,988,557
------------ ------------
Net increase (decrease) in net
assets resulting from
operations 3,032,354 (1,632,057)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net
assets resulting from capital
share transactions* 799,703 (2,530,185)
------------ ------------
Net increase (decrease) in net
assets 3,832,057 (4,162,242)
Net assets at beginning of year 15,070,100 19,232,342
------------ ------------
NET ASSETS at end of year $ 18,902,157 $ 15,070,100
============ ============
15,070,100
</Table>
*A summary of capital share transactions follows:
<Table>
<Caption>
Year Ended Year Ended
December 31, 2002 December 31, 2001
--------------------------- ---------------------------
Shares Value Shares Value
----------- ----------- ----------- -----------
Shares sold 634,659 $ 5,050,081 451,702 $ 3,167,700
Shares redeemed (546,716) (4,250,378) (835,993) (5,697,885)
----------- ----------- ----------- -----------
Net increase (decrease) 87,943 $ 799,703 (384,291) $(2,530,185)
=========== =========== =========== ===========
</Table>
See Notes to Financial Statements
Page 25
VONTOBEL U.S. VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<Table>
<Caption>
Class C
Years ended December 31, Period
Ended
2002 2001 2000 1999 1998 12/31/02*
----------- ----------- ----------- ----------- ----------- -----------
Per Share Operating
Performance
Net asset value, beginning
of period $ 19.86 $ 19.29 $ 14.27 $ 16.73 $ 16.51 $ 17.49
----------- ----------- ----------- ----------- ----------- -----------
Income from investment
operations
Net investment income (loss) (0.09) (0.12) 0.02 0.07 0.22 (0.06)
Net realized and unrealized
gain (loss)on investments (0.33) 0.71 5.00 (2.42) 2.06 1.97
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations (0.42) 0.59 5.02 (2.35) 2.28 1.91
----------- ----------- ----------- ----------- ----------- -----------
Less distributions
Distributions from net
investment income -- (0.02) -- (0.11) (0.16) --
Distributions from realized
gain on investments (0.80) -- -- -- (1.90) (0.80)
----------- ----------- ----------- ----------- ----------- -----------
Total distributions (0.80) (0.02) -- (0.11) (2.06) (0.80)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 18.64 $ 19.86 $ 19.29 $ 14.27 $ 16.73 $ 18.60
=========== =========== =========== =========== =========== ===========
Total Return (2.20%) 3.06% 35.18% (14.07%) 14.70% 10.82%
Ratios/Supplemental Data
Net assets,end of period
(000's) $ 112,302 $ 86,157 $ 137,238 $ 71,480 $ 200,463 $ 355
Ratio to average net
assets - (A)
Expenses - (B) 1.74% 1.75% 1.75% 1.87% 1.46% 2.74%**
Expenses - net (C) 1.72% 1.75% 1.75% 1.87% 1.45% 2.72%**
Net investment income
(loss) (0.63%) (0.43%) 0.23% 0.40% 0.93% (1.63%)**
Portfolio turnover rate 75.89% 66.44% 103.76% 66.62% 122.71% 75.89%
</Table>
* - Commencement of operations for Class C shares was October 9, 2002.
** - Annualized
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios for Class A shares by .02% in 1999, 0.01% in 1998.
(B) Expense ratio for Class A shares has been increased to include additional
custodian fees in 2002 and 1998 which were offset by custodian fee credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits the Fund
received. In addition, the expense ratio for Class A has increased by .29% in
2001 as a result of a change in accounting principle related to the recording of
redemption fees. Prior year numbers have not been restated to reflect this
change.
See Notes to Financial Statements
Page 26
VONTOBEL INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
Years ended December 31,
-----------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Per Share Operating Performance
Net asset value, beginning of year $ 12.88 $ 18.86 $ 28.01 $ 20.18 $ 18.15
----------- ----------- ----------- ----------- -----------
Income from investment
operations-
Net investment income (loss) 0.03 (0.10) (0.03)(1) 0.06 0.01
Net realized and unrealized
gain (loss) on investments (1.05) (5.41) (5.30) 9.07 2.98
----------- ----------- ----------- ----------- -----------
Total from investment operations (1.02) (5.51) (5.33) 9.13 2.99
----------- ----------- ----------- ----------- -----------
Less distributions-
Distributions from net investment
income -- (0.12) (0.08) (0.05) --
Distributions from realized gains -- (0.35) (3.74) (1.25) (0.96)
----------- ----------- ----------- ----------- -----------
Total distributions -- (0.47) (3.82) (1.30) (0.96)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year $ 11.86 $ 12.88 $ 18.86 $ 28.01 $ 20.18
=========== =========== =========== =========== ===========
Total Return (7.92%) (29.22%) (18.70%) 46.52% 16.77%
Ratios/Supplemental Data
Net assets, end of year (000's) $ 29,026 $ 44,356 $ 133,233 $ 192,537 $ 161,933
Ratio to average net assets-
Expenses (A) 2.44% 1.89% 1.39% 1.28% 1.40%
Expenses-net (B) 2.44% 1.88% 1.38% 1.27% 1.36%
Net investment income (loss) 0.18% (0.38%) (0.15) 0.03% 0.06%
Portfolio turnover rate 97.73% 92.39% 69.12% 37.91% 41.51%
</Table>
(A) Expense ratio has been increased to include additional custodian fees which
were offset by custodian fee credits.
(B) Expense ratio-net reflects the effect of the custodian fee credits the fund
received. In addition, the expense ratio in 2001 has increased by .13% as a
result of a change in accounting principle related to the recording of
redemption fees. Prior year numbers have not been restated to reflect this
change.
(1) Based on average shares outstanding
See Notes to Financial Statements
Page 27
VONTOBEL EASTERN EUROPEAN EQUITY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
Years ended December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Per Share Operating Performance
Net asset value, beginning of year $ 7.12 $ 7.69 $ 9.32 $ 8.14 $ 15.25
---------- ---------- ---------- ---------- ----------
Income from investment operations-
Net investment loss (0.13) (0.07) (0.21)(1) (0.20) (0.31)
Net realized and unrealized
gain (loss) on investments 1.59 (0.50) (1.42) 1.38 (6.80)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.46 (0.57) (1.63) 1.18 (7.11)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 8.58 $ 7.12 $ 7.69 $ 9.32 8.14
========== ========== ========== ========== ==========
Total Return 20.51% (7.41%) (17.49) 14.50% (46.62%)
Ratios/Supplemental Data
Net assets, end of year (000's) $ 18,902 $ 15,070 $ 19,232 $ 33,644 $ 36,154
Ratio to average net assets-
Expenses (A) 3.23% 3.46% 2.81% 3.37% 2.57%
Expenses-net (B) 3.23% 3.38% 2.59% 3.26% 2.41%
Net investment loss (1.62%) (0.95%) (1.76%) (2.35%) (1.67%)
Portfolio turnover rate 85.90% 71.18% 85.97% 103.80% 135.35%
</Table>
(A) Expense ratio has been increased to include additional custodian fees which
were offset by custodian fee credits. (B) Expense ratio-net reflects the effect
of the custodian fee credits the fund received. In addition, the expense ratio
in 2001 has increased by .25% as a result of a change in accounting principle
related to the recording of redemption fees. Prior year numbers have not been
restated to reflect this change.
(1) Based on average shares outstanding
See Notes to Financial Statements
Page 28
VONTOBEL FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Vontobel Funds, Inc. ("VFI") is registered under The Investment Company Act of
1940, as amended, as an open-end management investment company. Three series of
shares (Funds) included in this report invest primarily in equity securities.
VFI has allocated to each Fund 50,000,000 of its 500,000,000 shares of $.01 par
value common stock.
The U.S. Value Fund was established in March, 1990. The investment objective of
this Fund is to achieve long-term capital returns of the broad market by
investing in a continuously managed non-diversified portfolio of U.S. equity
securities.
The International Equity Fund was established in December, 1984. The objective
of this Fund is to achieve capital appreciation by investing in a carefully
selected and continuously managed diversified portfolio consisting primarily of
equity securities of issuers located in Europe and the Pacific Basin.
The Eastern European Equity Fund was established in February, 1996. The
objective of this Fund is to achieve capital appreciation by investing in a
carefully selected and continuously managed diversified portfolio consisting
primarily of equity securities of issuers located in Eastern Europe.
The following is a summary of significant accounting policies consistently
followed by the Funds. The policies are in conformity with accounting principles
generally accepted in the United States of America.
Security Valuation
Investments traded on a principal exchange (U.S. or foreign) and on the NASDAQ
National Market System are valued at the last quoted sales 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 last available bid price. 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 Funds Board of
Directors. 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 Funds'officers in a manner specifically authorized by
the Board of Directors of the Funds. 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.
Security Transactions and Dividends
Security transactions are accounted for on the trade date. The cost of
securities sold is determined generally on a specific identification basis.
Dividends are recorded on the ex-dividend date.
Currency Translation
The market values of foreign securities, currency holdings, other assets and
liabilities initially expressed in foreign currencies are recorded in the
financial statements after translation to U.S. dollars based on the exchange
rates at the end of the period. The cost of such holdings is determined using
Page 29
historical exchange rates. Income and expenses are translated at approximate
rates prevailing when accrued or incurred. The Funds do not isolate that portion
of gains and losses on investments which is due to changes in foreign exchange
rates from that which is due to changes in market prices of the investments.
Such fluctuations are included with the net realized and unrealized gains and
losses from investments. Foreign securities and currency transactions may
involve certain considerations and risks not typically associated with those of
domestic origin.
Forward Currency Contracts
Forward sales of currencies are undertaken to hedge certain assets denominated
in currencies that Vontobel Asset Management, Inc., the Funds' investment
advisor, expects to decline in value in relation to other currencies. A forward
currency contract is an agreement between two parties to buy or sell a currency
at a set price on a future date. Forward contracts are marked to market daily
and the change in market value is recorded by the fund as an unrealized gain or
loss. When a contract is closed, the Funds record a realized gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed. The Funds could be at risk if the
counter parties are unable to meet the terms of the contracts or if the value of
the currency changes unfavorably.
Federal Income Taxes
The Funds intend to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all taxable
income to their shareholders. Therefore, no federal income tax provision is
required. Following are the Funds' capital loss carryforwards available to
offset future capital gains and post-October capital loss deferrals which will
be recognized in the following tax year:
<Table>
<Caption>
Post-
October
capital
Loss losses
Carryforward: Expires: deferred:
------------- -------- -----------
U.S.Value Fund $ -- -- $ 31,011
International Equity Fund $16,374,118 2009 to $ 156,561
2010
Eastern European Equity Fund $51,043,232 2006 to $ --
2010
</Table>
Accounting Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Class Net Asset Values and Expenses
All income, expenses not attributable to a particular class, and realized and
unrealized gains, are allocated to each class proportionately on a daily basis
for purposes of determining the net asset value of each class. Certain
shareholder servicing and distribution fees are allocated to the particular
class to which they are attributable.
The Funds currently offer Class A shares which include a maximum front-end sales
charge of 5.75%and a maximum contingent deferred sales charge of 2% on the
proceeds of Class A shares redeemed within 360 days. Class A shares may be
purchased without a font-end sales charge through certain third-party fund
"supermarkets." The U.S. Value Fund also offers Class C shares which include a
Page 30
maximum front-end sales charge of 1% and a maximum contingent deferred sales
charge of 1% on the proceeds of Class C shares redeemed within 360 days.
2. INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
Pursuant to Investment Advisory Agreements with each of the Funds, the Advisor,
Vontobel Asset Management, Inc. provides investment services to the U.S. Value
Fund and the International Equity Fund for an annual fee of 1.00% on the first
$100 million of average daily net assets and .75% on average daily net assets
over $100 million. The Advisor provides investment services to the Eastern
European Equity Fund for an annual fee of 1.25% on the first $500 million of
average daily net assets and 1.00% on average daily net assets over $500
million.
First Dominion Capital Corp. ("FDCC") acts as the Funds' principal underwriter
in the continuous public offering of the Funds' shares. In addition to
underwriting fees and commissions received relating to the distribution of the
Funds' shares, FDCC receives a maximum contingent deferred sales charge ("CDSC")
of 2% for certain Fund share redemptions occurring within 360 days of purchase.
Shares redeemed subject to a CDSC will receive a lower redemption value per
share.
The U.S. Value Fund has adopted a Distribution Plan (the "Plan") for Class C
Shares in accordance with Rule 12b-1 under the 1940 Act, providing for the
payment of distribution and service fees to the distributors of the Fund. The
Plan provides that the Fund will pay a fee to the Distributor at an annual rate
of 1.00% of average daily net assets. Of this amount, 0.75% represents
distribution 12b-1 fees and 0.25% represents shareholder servicing fees.
Commonwealth Shareholder Services, Inc. ("CSS"), the administrative agent for
the Funds, provides shareholder, recordkeeping, administrative and blue-sky
filing services. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.15% of average daily net assets from the U.S. Value Fund and 0.20% of
average daily net assets from the International Equity and Eastern European
Equity Funds.
Fund Services, Inc. ("FSI") provides transfer and dividend disbursing agent
services to the Funds.
Certain officers and/or directors of the Funds are also officers and/or
directors of Vontobel Asset Management, Inc., FDCC, CSS, and FSI.
For the year ended December 31, 2002, affiliated parties received the following
for administrative, underwriting, and transfer agent services rendered:
<Table>
<Caption>
FDCC: FDCC:
CSS: (commissions (CDSC) FSI:
& fees)
-------- ------------ -------- --------
U.S. Value Fund $152,077 $ 15,245 $161,019 $ 69,846
International Equity Fund $ 80,201 $ 58 $ 30,970 $ 37,262
Eastern European Equity $ 41,405 $ 1,753 $ 37,360 $ 45,376
Fund
</Table>
3. INVESTMENTS
Purchases and sales of securities other than short-term notes were as follows:
<Table>
<Caption>
Purchases: Sales:
----------- -----------
U.S. Value Fund $96,455,937 $66,158,313
International Equity Fund $34,874,274 $47,883,790
Eastern European Equity Fund $14,715,101 $14,441,687
</Table>
4. DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF CAPITAL
Distributions from net investment income and realized gains, if any, are
recorded on the ex-dividend date. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the United States of
America. These distribution differences are primarily due to differing
treatments for foreign currency transactions, net operating losses, equalization
and post-October capital and currency losses.
Page 31
The tax character of distributions paid during the years ended December 31, 2002
and December 31, 2001 was as follows:
<Table>
<Caption>
Years ended December 31,
2002 2001
-------------------- -----------------------
Long Term Long Term
Ordinary Capital Ordinary Capital
Income Gain Income Gain
------- ---------- ---------- ----------
U.S. Value Fund $ -- $4,979,832 $ 144,492 $ --
International Equity Fund $ -- $ -- $ 430,460 $1,296,677
Eastern European Equity $ -- $ -- $ -- $ --
Fund
</Table>
As of December 31, 2002, the components of distributable earnings on a tax basis
were as follows:
<Table>
<Caption>
Post-Oct.
Capital loss Unrealized Cap. losses
Carryforward: appreciation: deferred: Total:
------------- ------------- ------------ ------------
U.S. Value Fund $ -- $ 5,721,040 $ (30,111) $ 5,690,029
International Equity Fund $(16,374,118) $ 656,018 $ (156,561) $(15,874,661)
Eastern European Equity Fund $(51,043,232) $ 1,706,752 $ -- $(49,336,480)
</Table>
Reclassifications: Accounting principles generally accepted in the United States
of America require that certain components of net assets be reclassified between
financial and tax reporting. These reclassifications have no effect on net
assets or net asset value per share. For the year ended December 31, 2002, the
U.S. Value Fund increased undistributed net investment income by $557,163;
increased accumulated net realized gains (losses) by $33,016 and decreased paid
in capital by $590,179.
The International Equity Fund decreased undistributed net investment income by
$64,062; increased accumulated net realized gains (losses) by $228,361 and
decreased paid in capital by $164,299.
The Eastern European Equity Fund increased undistributed net investment income
by $278,562, increased accumulated net realized gains (losses) by $55,845 and
decreased paid in capital by $334,407.
These reclasses were made as a result of permanent book/tax differences relating
primarily to net operating losses and foreign currency transactions.
Page 32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statements of assets and liabilities of
Vontobel U.S. Value Fund, Vontobel International Equity Fund and Vontobel
Eastern European Equity Fund , each a series of Vontobel Funds, Inc, including
the schedules of portfolio investments as of December 31, 2002, and the related
statements of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the years or periods in the five year period then ended.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2002 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Vontobel U.S. Value Fund; the Vontobel International Equity Fund and the
Vontobel Eastern European Equity Fund, as of December 31, 2002, the results of
their operations for the year then ended, the changes in net assets for each of
the two years in the period then ended, and the financial highlights for each of
the years or periods in the five year period then ended, in conformity with
accounting principles generally accepted in the United States of America.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 14, 2003
Page 33
Vontobel Funds, Inc.
(the "Company")
SUPPLEMENTAL INFORMATION
(Unaudited)
Information pertaining to the Directors' and Officers' of the Company is set
forth below. The statement of additional information (the "SAI") includes
additional information about the Directors and is available without charge upon
request by calling (800) 527-9500.
<Table>
<Caption>
- --------------------------------------------------------------------------------
Other
Directorships
by Directors
Number of Principal and Number
Position(s) Held Funds in Occupation(s) of Funds in
Name, Address and With Company and Company During The the Complex
Age(1) Tenure Overseen Past 5 Years Overseen
- --------------------------------------------------------------------------------
Interested Directors:
- --------------------------------------------------------------------------------
John Pasco,III(2) Chairman, Director 3 Mr. Pasco is The World
(56) and Treasurer Treasurer and Funds, Inc. -
since October, Director of 7 Funds; The
1983 Commonwealth World
Shareholder Insurance
Services, Trust - 1
Inc., the Fund
Company's
Administrator,
since 1985;
President and
Director of
Vontobel Fund
Distributors,
a division of
First Dominion
Capital Corp.,
the Company's
Underwriter;
Director and
Shareholder
of Fund
Services Inc.,
the Company's
Transfer and
Disbursing
Agent, since
1987; and a
Shareholder of
Commonwealth
Fund
Accounting,
Inc., which
provides
bookkeeping
services. Mr.
Pasco is also
a certified
public
accountant.
- --------------------------------------------------------------------------------
</Table>
Page 34
<Table>
<Caption>
- --------------------------------------------------------------------------------
Other
Directorships
by Directors
Number of Principal and Number
Position(s) Held Funds in Occupation(s) of Funds in
Name, Address and With Company and Company During The the Complex
Age(1) Tenure Overseen Past 5 Years Overseen
- --------------------------------------------------------------------------------
Interested Directors (continued):
- --------------------------------------------------------------------------------
Joseph Mastoloni Director since 3 Mr. Mastoloni The World
(3) February, 2001 has served as Insurance
450 Park Avenue Compliance Trust - 1
New York, Officer of Fund
NY 10022 (38) Vontobel USA
Inc., a
registered
investment
adviser, since
May, 1994 and
was appointed
as Vice
President in
July 1999.
- --------------------------------------------------------------------------------
Non-Interested Directors:
- --------------------------------------------------------------------------------
Samuel Boyd, Director since 3 Mr. Boyd has The World
Jr. October, 1983 served as the Funds, Inc. -
Manager of the 7 Funds; The
(61) Customer World
Services Insurance
Operations and Trust - 1
Accounting Fund
Division of
the Potomac
Electric
Power Company
since 1978.
Mr. Boyd
is also a
certified
public
accountant.
- --------------------------------------------------------------------------------
William E. Poist Director since 3 Mr. Poist has The World
October, 1983 served as a Funds, Inc. -
(65) financial and 7 Funds; The
tax consultant World
through his Insurance
firm Trust - 1
Management Fund
Consulting for
Professionals
since 1968.
Mr. Poist is
also a
certified
public
accountant.
- --------------------------------------------------------------------------------
Paul M. Dickinson Director since 3 Mr. Dickinson The World
July, 1987 has served as Funds, Inc. -
(54) President of 7 Funds; The
Alfred J. World
Dickinson, Insurance
Inc., Realtors Trust - 1
since April Fund
1971.
- --------------------------------------------------------------------------------
</Table>
Page 35
<Table>
<Caption>
- -------------------------------------------------------------------------------------
Other
Directorships
by Directors
Number of Principal and Number
Position(s) Held Funds in Occupation(s) of Funds in
Name, Address and With Company and Company During The the Complex
Age(1) Tenure Overseen Past 5 Years Overseen
- -------------------------------------------------------------------------------------
Officers:
- -------------------------------------------------------------------------------------
F. Byron Parker, Secretary N/A Mr. Parker served N/A
Jr. as Secretary of
(59) Commonwealth
Shareholder
Services, Inc.,
the Company's
Administrator,
since 1986; and
as Secretary of
The World
Funds, Inc., a
registered
investment
company, since
May 1997. He is
also a Partner
in the law firm
Mustian &
Parker.
- -------------------------------------------------------------------------------------
Edwin D. Vice President of N/A Mr. Walczak N/A
Walczak the Company and has served as
450 Park President of the Senior Vice
Avenue Vontobel U. S. President and
New York, NY Value Fund Portfolio
10022 Manager of
(48) Vontobel USA
Inc., a
registered
investment
adviser, since
July 1988.
- -------------------------------------------------------------------------------------
Rajiv Jain Vice President of N/A Mr. Jain N/A
450 Park Avenue the Company and joined
New York, NY President of the Vontobel Asset
10022 Vontobel Management,
(34) International Inc., a
Equity Fund since registered
April, 2002 investment
advisor, in
November, 1994
as an equity
analyst. He was
appointed Vice
President in
January, 1998,
First Vice
President in
January, 2000,
Managing
Director in
January, 2002
and Portfolio
Manager in
February, 2002.
- -------------------------------------------------------------------------------------
</Table>
Page 36
<Table>
<Caption>
- --------------------------------------------------------------------------------
Other
Directorships
by Directors
Number of Principal and Number
Position(s) Held Funds in Occupation(s) of Funds in
Name, Address and With Company and Company During The the Complex
Age(1) Tenure Overseen Past 5 Years Overseen
- --------------------------------------------------------------------------------
Officers
(continued):
- --------------------------------------------------------------------------------
Gunter Faschang Vice President of N/A Mr. Faschang N/A
450 Park Avenue the Company and began his
New York, NY President of the career in
10022 Vontobel Eastern September 1995
(29) European Equity as a
Fund registered
trader on the
floor of the
Frankfurt
Stock Exchange
with Sputz AG
and
Exco-Bierbaum.
In March 1997
he joined
Investmentbank
Austria,
Vienna, as a
Central
European
equity
strategist. In
January 1998
Mr. Faschang
moved to Erste
Bank, Vienna,
as a Central
European
equity
strategist and
sector analyst
for Russian
oil stocks,
with
responsibility
for organizing
the Erste
group's
Central
European
research
effort. In
March 2000 he
was appointed
manager of
Erste-Sparinvest's
Danubia Fund.
In July 2001
Mr. Faschang
joined
Vontobel Asset
Management AG
as head of
Eastern
European
equity
management and
research, and
was at the
same time
appointed a
Vice President
of Vontobel
USA Inc., a
registered
investment
adviser.
- --------------------------------------------------------------------------------
</Table>
Page 37
(1) Unless otherwise indicated, each Director or Officer may be contacted by
writing the Director or Officer, c/o Vontobel Funds, Inc., 1500 Forest Avenue,
Suite 223, Richmond, Virginia 23229
(2) Mr. Pasco is considered to be an "interested person" of the Company, as that
term is defined in the Investment Company Act of 1940, as amended (the "1940
Act"). Mr. Pasco is an interested person because: (1) he is an officer of the
Company; (2) he owns First Dominion Capital Corp., the principal underwriter of
the Company; and (3) he owns or controls the Company's various service
providers.
(3) Mr. Mastoloni is considered to be an "interested person" of the Company, as
that term is defined in the 1940 Act. Mr. Mastoloni is an interested person
because: (1) he is an Officer of Vontobel USA, Inc. the investment adviser to
the Funds.
Each Director holds office for an indefinite term and until the earlier of: the
Company's next annual 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 of Directors and serves for a
period of one year, or until his successor is duly elected and qualified.
Mr. Pasco, the Chairman of the Board of the Company, is the President and
Director of Vontobel Fund Distributors, a division of First Dominion Capital
Corp., the Company's underwriter. Mr. Mastoloni, a Director of the Company, is
an officer of Vontobel USA, Inc., the Company's investment adviser. Messrs.
Walczak, Pierallini and Faschang, Officers of the Company, are officers of
Vontobel USA, Inc., the Company's investment adviser.
Page 38
VONTOBEL FUNDS, INC.
1500 FOREST AVENUE, SUITE 223
RICHMOND, VA 23229
(800) 527-9500
STATEMENT OF ADDITIONAL INFORMATION
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
EASTERN EUROPEAN EQUITY FUND
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current prospectus of the Vontobel U.S. Value
Fund, the Vontobel International Equity Fund and the Vontobel Eastern European
Equity Fund dated May 1, 2003. You may obtain the prospectus, free of charge, by
writing to Vontobel Funds, Inc., 1500 Forest Avenue, Suite 223, Richmond,
Virginia 23229 or by calling (800) 527-9500.
The Funds' audited financial statements and notes thereto for the year ended
December 31, 2002 and the unqualified report of Tait, Weller & Baker, the Funds'
independent auditors, on such financial statements are included in the Funds'
Annual Report to Shareholders for the year ended December 31, 2002 (the "Annual
Report") and are incorporated by reference into this SAI. No other parts of the
Annual Report are incorporated herein. A copy of the Annual Report accompanies
this SAI and an investor may obtain a copy of the Annual Report, free of charge,
by writing to the Funds or calling (800) 527-9500.
The date of this SAI is May 1, 2003
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
General Information...............................................1
Investment Objectives.............................................1
Strategies and Risks..............................................1
Investment Programs...............................................2
Investment Restrictions..........................................13
Management of the Company........................................15
Policies Concerning Personal Investment Activities...............22
Principal Securities Holders.....................................22
Investment Adviser and Advisory Agreement .......................23
Management-Related Services......................................24
Portfolio Transactions...........................................27
Capital Stock and Dividends......................................28
Distribution ....................................................29
Additional Information about Purchases and Sales.................30
Tax Status ......................................................33
Investment Performance...........................................35
Financial Information............................................39
</Table>
GENERAL INFORMATION
Vontobel Funds, Inc. (the "Company") was organized as a Maryland corporation on
October 28, 1983. 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 Vontobel U.S.
Value Fund (the "Value Fund"), the Vontobel International Equity Fund (the
"International Equity Fund") and the Vontobel Eastern European Equity Fund (the
"Eastern European Equity Fund") (individually, a "Fund"; and, collectively, the
Funds"). Each Fund is a separate investment portfolio or series of the Company.
The International Equity and Eastern European Equity Funds are "diversified"
series," as that term is defined in the 1940 Act. The Value Fund is a
"non-diversified" series.
As of the date of this SAI, each Fund is authorized to offer three classes of
shares, two of which are offered by this SAI: Class A Shares imposing a
front-end sales charge up to a maximum of 5.75%; and Class C Shares charging a
deferred sales charge of 2% if shares are redeemed within two years after
purchase and a 12b-1 fee. 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.
The Company was originally named The Commonwealth Group, Inc. On December 30,
1988, the Company changed its name to Tyndall-Newport Fund, Inc. On July 10,
1990, the Company again changed its name to Tyndall World Funds, Inc. On April
26, 1991, the Company changed its name from Tyndall World Funds, Inc. to World
Funds, Inc. On February 28, 1997, the Company changed its name from World Funds,
Inc. to Vontobel Funds, Inc.
ADDITIONAL INFORMATION ABOUT THE FUNDS' INVESTMENTS
The following information supplements the discussion of each Fund's investment
objective and policies. A 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 such Fund. As used in this SAI, "majority of
outstanding voting shares" means the lesser of: (1) 67% of the voting shares of
the Fund represented at a meeting of shareholders at which the holders of 50% or
more of the shares of the Fund are represented; or (2) more than 50% of the
outstanding voting shares of the Fund. The investment programs, restrictions and
the operating policies of each Fund that are not fundamental policies can be
changed by the Board of Directors of the Company without shareholder approval.
Page 1
INVESTMENT OBJECTIVES
The Value Fund's investment objective is to achieve long-term capital
appreciation. The investment objective of the International Equity Fund and the
Eastern European Equity Fund is to achieve capital appreciation.
All investments entail some market and other risks. For instance, there is no
assurance that a Fund will achieve its investment objective. You should not rely
on an investment in a Fund as a complete investment program.
STRATEGIES AND RISKS
The following discussion of investment techniques and instruments supplements,
and should be read in conjunction with, the investment information in the Funds'
prospectus. In seeking to meet its investment objective, each Fund may invest in
any type of security whose characteristics are consistent with its investment
program described below.
INVESTMENT PROGRAMS
Convertible Securities -- Each of the Funds may invest in convertible
securities. Traditional convertible securities include corporate bonds, notes
and preferred stocks that may be converted into or exchanged for common stock,
and other securities that also provide an opportunity for equity participation.
These securities are convertible either at a stated price or a stated rate (that
is, for a specific number of shares of common stock or other security). As with
other fixed income securities, the price of a convertible security generally
varies inversely with interest rates. While providing a fixed income stream, a
convertible security also affords the investor an opportunity, through its
conversion feature, to participate in the capital appreciation of the common
stock into which it is convertible. As the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis and so 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, a Fund may have to pay
more for a convertible security than the value of the underlying common stock.
Warrants -- Each of the Funds 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.
Illiquid Securities -- Each Fund may invest 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 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 -- Under normal circumstances, the Value Fund will have at least
65% of its net assets invested in equity securities. The Value Fund may also
acquire debt securities and cash equivalents, such as overnight repurchase
agreements and short-term U.S. Government securities. In addition, for temporary
defensive purposes, the International Equity and Eastern European Equity funds
may hold cash or debt obligations denominated in U.S. dollars or foreign
Page 2
currencies. Debt securities include obligations of governments,
instrumentalities and corporations. The debt securities in which the Funds may
invest will be rated at the time of purchase Baa or higher by Moody's Investors
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
investment adviser believes are of comparable quality. Debt securities rated Baa
by Moody's or BBB by S&P are generally considered to be investment grade
securities although they have speculative characteristics and changes in
economic conditions or circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case for higher
rated debt obligations.
Strategic Transactions -- Each of the Funds 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), to
manage the effective maturity or duration of fixed-income securities, or to
enhance potential gain (strategies described in more detail below). 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, each 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 a 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.
Options -- Each of the Funds 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. A 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 a 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 a 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, a 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. A Fund's purchase of a call option on a security,
financial future, index, currency or other instrument might be intended to
Page 3
protect the Fund against an increase in the price of the underlying instrument.
When writing a covered call option, a 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 a 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, a 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 a 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 a 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 (close of 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 a 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 (close of the NYSE),
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.
A 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 a 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 a Fund desires
to sell a particular security from its portfolio on which it has written a call
option, or purchased a put option, it will seek to effect a closing transaction
prior to, or concurrently with, the sale of the security. There is, of course,
no assurance that a 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. A Fund will pay brokerage
commissions in connection with the writing or purchase of options to close out
Page 4
previously written options. Such brokerage commissions are normally higher than
those applicable to purchases and sales of portfolio securities.
Options written by a 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, a 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.
A 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 Funds are each
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.
A 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.
Page 5
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. A Fund
will only sell OTC options (other than OTC currency options) that are subject to
a buy-back provision permitting the Fund to require the Counterparty to sell the
option back to the Fund at a formula price within seven days. Although not
required to do so, the Funds generally expect 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 a 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 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. A 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 a Fund and portfolio securities
"covering" the amount of a Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to a Fund's limitation on investing no more than 15%
of its assets in illiquid securities.
If a 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 Funds 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 International Equity Fund and the Eastern European Equity Fund (the
"International Funds") may purchase and sell call options on currencies. All
calls sold by the International Funds must be "covered" (i.e., a 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 a Fund will receive the option premium to help protect it against
loss, a call sold by a Fund exposes a 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 a Fund to hold a security or
instrument which it might otherwise have sold.
The Funds 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 a Fund holds the above securities in its portfolio),
and futures contracts. A Fund may not purchase or sell futures contracts on
Page 6
individual corporate debt securities. The International Funds may purchase and
sell put options on currencies. A 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 a 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 Funds may also
purchase and sell call and put options on securities indices and other financial
indices. By doing so, the Funds can achieve many of the same objectives that
they 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. 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 International Funds may enter into financial futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate or currency market changes and for risk management
purposes. The use of futures for hedging is intended to protect the
International Funds 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, a 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, a 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
International Funds to provide for the deposit of initial margin and the
segregation of suitable assets to meet their 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
International Funds, 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.
Page 7
The International Funds' 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
International Funds 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 a 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 a Fund. If the International Funds exercise 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 International Funds 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 such 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 International Funds may engage in currency
transactions with counterparties in order to hedge the value of portfolio
holdings denominated in particular currencies against fluctuations in relative
value. Currency transactions include forward currency contracts, exchange-listed
currency futures, exchange-listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
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 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 International Funds may enter into currency transactions
with counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO, or (except for OTC
currency options) are determined to be of equivalent credit quality by the
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 a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Furthermore, there is the risk that the
perceived linkage between various currencies may not be present or may not be
present during the particular time the International Funds are engaging in proxy
hedging (see "Proxy Hedging," below). If the International Funds enter into a
currency hedging transaction, they will comply with the asset segregation
requirements described below. Cross currency hedges may not be considered
"directly related" to the International Funds' principal business of investing
in stock or securities (or options and futures thereon), resulting in gains
Page 8
therefrom not qualifying under the "less than 30% of gross income" test of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
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
International Funds if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges the International Funds
have 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 International Funds' dealings 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 a 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 a Fund's portfolio securities or the receipt of income therefrom. The
International Funds 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 International Funds
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 International Funds may use position hedging when the
investment adviser believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar. The International
Funds may enter into a forward foreign currency contract to sell, for a fixed
amount of dollars, the amount of foreign currency approximating the value of
some or all of its portfolio securities denominated in such foreign currency.
The precise matching of the forward foreign currency contract amount and the
value of the portfolio securities involved may not have a perfect correlation
since the future value of the securities hedged will change as a consequence of
market movements between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
difficult, and the successful execution of this short-term hedging strategy is
uncertain.
The International Funds 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
Page 9
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 International Funds may also cross-hedge currencies by
entering into transactions to purchase or sell one or more currencies that are
expected to decline in value relative to other currencies to which the
International Funds have or expect 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 International
Funds may also engage in proxy hedging. Proxy hedging is often used when the
currency to which a Fund's portfolio is exposed is difficult to hedge or to
hedge against the U.S. dollar. Proxy hedging entails entering into a forward
contract to sell a currency whose changes in value are generally considered to
be linked to a currency or currencies in which some or all of 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
International Funds' securities denominated in linked currencies. For example,
if the investment adviser considers that the Swedish krona is linked to the
euro, the International 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 Funds 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 a 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 -- Each of the International Funds 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 International Funds
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 a 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 a Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by a Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
securities sufficient to purchase and deliver the securities if the call is
Page 10
exercised. A call option sold by a Fund on an index will require the Fund to own
portfolio securities which correlate with the index or segregate liquid high
grade assets equal to the excess of the index value over the exercise price
industry or other on a current basis. A put option written by a Fund requires
the Fund to segregate liquid, high grade assets equal to the exercise price. A
currency contract which obligates the International Funds to buy or sell
currency will generally require the International Funds to hold an amount of
that currency or liquid securities denominated in that currency equal to the
International Funds' obligations or to segregate liquid high grade assets equal
to the amount of the International Funds' obligation.
OTC options entered into by a 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 a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange-listed options sold by a Fund other than those
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, a 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, a 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. Each of the International Funds 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 International Funds 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 International Funds held a futures or forward contract, it could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. Other Strategic
Transactions may also be offered in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction, no segregation is
required, but if it terminates prior to such time, liquid assets equal to any
remaining obligation would need to be segregated.
The International Funds' activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Code for qualification as a
regulated investment company.
Depositary Receipts -- American Depositary Receipts ("ADRs") are receipts
typically issued in the U.S. by a bank or trust company evidencing ownership of
an underlying foreign security. Each of the International Funds may invest in
Page 11
ADRs which are structured by a U.S. bank without the sponsorship of the
underlying foreign issuer. In addition to the risks of foreign investment
applicable to the underlying securities, such unsponsored ADRs may also be
subject to the risks that the foreign issuer may not be obligated to cooperate
with the U.S. bank, may not provide additional financial and other information
to the bank or the investor, or that such information in the U.S. market may not
be current.
Like ADRs, European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), and Registered Depositary Certificates ("RDCs") represent receipts for
a foreign security. However, they are issued outside of the U.S. The
International Funds may also invest in EDRs, GDRs and RDCs.
EDRs, GDRs and RDCs involve risks comparable to ADRs, as well as the fact that
they are issued outside of the U.S. Furthermore, RDCs involve risks associated
with securities transactions in Russia.
Temporary Defensive Positions -- When the investment adviser believes that
investments should be deployed in a temporary defensive posture because of
economic or market conditions, each of the Funds may invest up to 100% of its
assets in U.S. Government securities (such as bills, notes, or bonds of the U.S.
Government and its agencies) or other forms of indebtedness such as bonds,
certificates of deposits or repurchase agreements. For temporary defensive
purposes, the International Funds may hold cash or debt obligations denominated
in U.S. dollars or foreign currencies. These debt obligations include U.S. and
foreign government securities and investment grade corporate debt securities, or
bank deposits of major international institutions. When a Fund is in a temporary
defensive position, it is not pursuing its stated investment policies. The
investment adviser decides when it is appropriate to be in a defensive position.
It is impossible to predict how long such alternative strategies will be
utilized.
U.S. Government Securities -- The Funds may invest in U.S. Government
Securities. The term "U.S. Government Securities" refers to a variety of
securities which are issued or guaranteed by the U.S. Treasury, by various
agencies of the U.S. Government, and by various instrumentalities which have
been established or sponsored by the U.S. Government. U.S. Treasury securities
are backed by the full faith and credit of the United States. Securities issued
or guaranteed by U.S. Government agencies or U.S. Government sponsored
instrumentalities may or may not be backed by the full faith and credit of the
United States. In the case of securities not backed by the full faith and credit
of the United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
and may not be able to assert a claim directly against the United States in the
event the agency or instrumentality does not meet its commitment. An
instrumentality of the U.S. Government is a government agency organized under
Federal charter with government supervision.
Repurchase Agreements -- As a means of earning income for periods as short as
overnight, the Funds may enter into repurchase agreements that are
collateralized by U.S. Government Securities. The Funds may enter into
repurchase commitments for investment purposes for periods of 30 days or more.
Such commitments involve investment risks similar to those of the debt
securities in which the Funds invest. Under a repurchase agreement, a Fund
acquires a security, subject to the seller's agreement to repurchase that
security at a specified time and price. A purchase of securities under a
repurchase agreement is considered to be a loan by a Fund. The investment
adviser monitors the value of the collateral to ensure that its value always
equals or exceeds the repurchase price and also monitors the financial condition
of the seller of the repurchase agreement. If the seller becomes insolvent, a
Fund's right to dispose of the securities held as collateral may be impaired and
the Fund may incur extra costs. Repurchase agreements for periods in excess of
seven days may be deemed to be illiquid.
Page 12
If the buyer under a repurchase agreement becomes insolvent, a Fund's right to
re-acquire its securities may be impaired. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the buyer of the securities
before repurchase of the securities under a reverse repurchase agreement, it may
encounter delay and incur costs before being able to apply the cash held to
purchase replacement securities. Also, the value of such securities may increase
before it is able to purchase them.
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 a Fund's portfolio whenever necessary, in the Adviser's opinion,
to meet the Fund's objective. The Adviser anticipates that the average annual
portfolio turnover rate of each of the Funds will be less than 100%. As a result
of negative investment performance, there were increased transactions (due to
Fund redemptions) in the Value Fund for the fiscal year ended December 31, 2000,
which caused the Fund's portfolio turnover to exceed 100%.
Other Investments -- The Board of Directors may, in the future, authorize one or
more of the Funds to invest in securities other than those listed in this SAI
and in the prospectus, provided such investments would be consistent with the
Fund's investment objective and that such investment would not violate the
Fund's fundamental investment policies or restrictions.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies and Restrictions -- The Funds have adopted the
following fundamental investment restrictions. The fundamental investment
restrictions cannot be changed without approval by the vote of a "majority of
the outstanding voting securities" of each Fund.
As a matter of fundamental policy, a Fund will not:
1) Except for the Value Fund, as to 75% of its assets, purchase the
securities of any issuer (other than obligations issued or guaranteed as
to principal and interest by the Government of the United States or any
agency or instrumentality thereof) if, as a result of such purchase, more
than 5% of its total assets would be invested in the securities of such
issuer.
2) Except for the Value Fund, 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.
3) Act as an underwriter of securities of other issuers, except that the
International Funds may invest up to 10% of the value of its total assets
(at 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
International Funds may utilize not more than 1.00% of its assets for
deposits or commissions required to enter into and forward foreign
currency contracts for hedging purposes.
Page 13
5) As to the International Funds, 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. As to
the Value Fund, borrow money, except as a temporary measure for
extraordinary or emergency purposes, or except in connection with reverse
repurchase agreements, provided that the Fund maintains asset coverage of
300% in connection with the issuance of senior securities.
Notwithstanding the foregoing, to avoid the untimely disposition of
assets to meet redemptions, the Value Fund may borrow up to 33 1/3% of
the value of the Value Fund's assets to meet redemptions, provided that
the Fund may not make other investments while such borrowings are
outstanding.
6) Make loans, except that a Fund may (1) lend portfolio securities; and (2)
enter into repurchase agreements secured by U.S. Government securities.
7) Invest more than 25% of a Fund's total assets in securities of one or
more issuers having their principal business activities in the same
industry. For the purpose of this restriction, telephone companies are
considered to be in a separate industry from gas and electric public
utilities, and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to
financing the activities of their parents.
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 a 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
a 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 investment policies and restrictions:
(a) Restrictions with respect to repurchase agreements shall be construed to
be for repurchase agreements entered into for the investment of available
cash consistent with a Fund's repurchase agreement procedures, not
repurchase commitments entered into for general investment purposes.
(b) Except with respect to their fundamental limitations with respect to
borrowings, the Funds adhere to the percentage restrictions on investment
or utilization of assets set forth above at the time an investment is
made. A later change in percentage resulting from changes in the value or
Page 14
the total cost of a Fund's assets will not be considered a violation of
the restriction.
Non-Fundamental Policies and Restriction -- In addition to the fundamental
policies and investment restrictions described above, and the various general
investment policies described in the Prospectus and elsewhere in the SAI, the
Funds will be subject to the following investment restrictions. Theses
restrictions are considered non-fundamental and may be changed by the Board of
Directors without shareholder approval.
As a matter of non-fundamental policy, a Fund may not:
1) Invest more than 15% of its net assets in illiquid securities.
MANAGEMENT OF THE COMPANY
Directors and Officers -- The Company is governed by a Board of Directors, which
is responsible for protecting the interests of shareholders. The Directors are
experienced businesspersons who meet throughout the year to oversee the
Company's activities, review contractual arrangements with companies that
provide services to the Funds, and review performance. The names, addresses and
ages of the Directors and officers of the Company, together with information as
to their principal occupations during the past five years, are listed below. The
Directors who are considered "interested persons" as defined in Section 2(a)(19)
of the 1940 Act, as well as those persons affiliated with the investment adviser
and principal underwriter, and officers of the Company, are noted with an
asterisk (*).
Page 15
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
Other
Directorships
by
Directors
Number and
of Number
Position(s) Funds Principal of Funds
Held With in Occupation(s) in the
Name, Address Company and Company During the Past Complex
and Age Tenure Overseen 5 Years Overseen
- -----------------------------------------------------------------------------------------------
Interested Directors:
- -----------------------------------------------------------------------------------------------
John Pasco, III Chairman, 3 Mr. Pasco is The
(1) Director Treasurer and World
1500 Forest and Treasurer Director of Funds,
Avenue, Suite 223 since Commonwealth Inc.-
Richmond, VA October, Shareholder 7 Funds;
23229 1983 Services, Inc., The
(57) the Company's World
Administrator, Insurance
since 1985; Trust -
President and 1 Fund
Director of
Vontobel Fund
Distributors, a
division of
First Dominion
Capital Corp.,
the Company's
Underwriter;
Director and
Shareholder of
Fund Services
Inc., the
Company's
Transfer and
Disbursing
Agent, since
1987; a
shareholder of
Commonwealth
Fund Accounting,
Inc., which
provides
bookkeeping
services;
President and
Treasurer of
Commonwealth
Capital
Management, LLC,
a registered
investment
adviser, since
December, 2002;
and Chairman and
Trustee of World
Insurance Trust,
a registered
investment
company, since
May, 2002. Mr.
Pasco is also a
certified public
accountant.
- -----------------------------------------------------------------------------------------------
Joseph Mastoloni Director 3 Mr. Mastoloni The
(2) since has served as World
450 Park Avenue February, Compliance Insurance
New York, NY 2001 Officer of Trust -
10022 Vontobel Asset 1 Fund
(39) Management,
Inc., a
registered
investment
adviser, since
May, 1994 and
was appointed as
Vice President
in July 1999;
and a Trustee
for World
Insurance Trust,
a registered
investment
adviser, since
May, 2002.
</Table>
Page 16
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
Other
Directorships
by
Directors
Number and
of Number
Position(s) Funds Principal of Funds
Held With in Occupation(s) in the
Name, Address Company and Company During the Past Complex
and Age Tenure Overseen 5 Years Overseen
- -----------------------------------------------------------------------------------------------
Non-Interested Directors:
- -----------------------------------------------------------------------------------------------
Samuel Boyd, Jr. Director 3 Mr. Boyd is The
10808 Hob Nail since Manager of the World
Court October, Customer Funds,
Potomac, MD 20854 1983 Services Inc.-
Operations and 7 Funds;
(62) Accounting The
Division of the World
Potomac Electric Insurance
Power Company Trust -
since August, 1 Fund;
1978; a Trustee Satuit
of World Capital
Insurance Management
Trust, a Trust -
registered 1 Fund
investment
company, since
May, 2002; and a
Trustee of
Satuit Capital
Management
Trust, a
registered
investment
company, since
October, 2002.
Mr. Boyd is also
a certified
public
accountant.
- -----------------------------------------------------------------------------------------------
William E. Poist Director 3 Mr. Poist has The
5272 River Road since served as a World
Bethesda, MD October, financial and Funds,
20816 1983 tax consultant Inc.-
through his firm 7 Funds;
(66) Management The
Consulting for World
Professionals Insurance
since 1968; a Trust -
Trustee of World 1 Fund
Insurance Trust,
a registered
investment
company, since
May, 2002. Mr.
Poist is also a
certified public
accountant.
- -----------------------------------------------------------------------------------------------
Paul M. Dickinson Director 3 Mr. Dickinson The
8704 since July, has served as World
Berwickshire Dr. 1987 President of Funds,
Richmond, VA Alfred J. Inc.-
23229 Dickinson, Inc., 7 Funds;
Realtors since The
(55) April 1971; and World
a Trustee of Insurance
World Insurance Trust -
Trust, a 1 Fund
registered
investment
company, since
May, 2002.
</Table>
Page 17
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
Other
Directorships
by
Directors
Number and
of Number
Position(s) Funds Principal of Funds
Held With in Occupation(s) in the
Name, Address Company and Company During the Past Complex
and Age Tenure Overseen 5 Years Overseen
- -----------------------------------------------------------------------------------------------
Officers:
- -----------------------------------------------------------------------------------------------
F. Byron Parker, Secretary N/A Mr. Parker has N/A
Jr. since served as
1500 Forest October, Secretary of
Avenue, Suite 222 1983 Commonwealth
Richmond, VA Shareholder
23229 Services, Inc.,
the Company's
(60) Administrator,
since 1986; Secretary
of The World Funds,
Inc., a registered
investment company,
since May 1997; and
Secretary of World
Insurance Trust, a
registered investment
company, since
May, 2002. He is also
a Partner in the
law firm Parker
and McMakin.
- -----------------------------------------------------------------------------------------------
Edwin D. Vice N/A Mr. Walczak has N/A
Walczak President of served as Senior
450 Park the Company Vice President
Avenue and President and Portfolio
New York, NY of the Manager of
10022 Vontobel U. Vontobel Asset
(49) S. Value Fund Management,
since March, Inc., a
1990 registered
investment
adviser, since
July 1988.
- -----------------------------------------------------------------------------------------------
Rajiv Jain Vice N/A Mr. Jain joined N/A
450 Park Avenue President of Vontobel Asset
New York, NY the Company Management,
10022 and President Inc., a
(35) of the registered
Vontobel investment
International adviser, in
Equity Fund November, 1994
since April, as an equity
2002 analyst. He was
appointed Vice
President in January,
1998, First Vice
President in January,
2000, Managing
Director in January,
2002 and Portfolio
Manager in February,
2002.
</Table>
Page 18
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
Other
Directorships
by
Directors
Number and
of Number
Position(s) Funds Principal of Funds
Held With in Occupation(s) in the
Name, Address Company and Company During the Past Complex
and Age Tenure Overseen 5 Years Overseen
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Guenter Faschang Vice President N/A Mr. Faschang N/A
450 Park Avenue of the Company began his career
New York, NY and President in September
10022 of the 1995 as a
(30) Vontobel registered trader
Eastern on the floor of
European the Frankfurt
Equity Fund Stock Exchange
with Sputz AG and
Exco-Bierbaum. In
March 1997 he
joined Investmentbank
Austria, Vienna,
as a Central European
equity strategist.
In January 1998 Mr.
Faschang moved to
Erste Bank, Vienna,
as a Central European
equity strategist
and sector analyst
for Russian oil
stocks, with
responsibility for
organizing the
Erste group's Central
European research
effort. In March 2000
he was appointed
manager of
Erste-Sparinvest's
Danubia Fund. In
July 2001, Mr.
Faschang joined
Vontobel
Asset Management
AG as head of Eastern
European equity
management and
research, and was
at the same time
appointed a Vice
President of Vontobel
Asset Management,
Inc., a registered
investment adviser.
</Table>
- ----------
(1) Mr. Pasco is considered to be an "interested person" of the Company, as that
term is defined in the 1940 Act. Mr. Pasco is an interested person because:
(1) he is an officer of the Company; (2) he owns First Dominion Capital
Corp., the principal underwriter of the Company; and (3) he owns or controls
the Company's various service providers.
(2) Mr. Mastoloni is considered to be an "interested person" of the Company, as
that term is defined in the 1940 Act. Mr. Mastoloni is an interested person
because: (1) he is an officer of Vontobel Asset Management, Inc. the
investment adviser to the Funds.
Page 19
Each director holds office for an indefinite term and until the earlier of: the
Company's next annual 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 of Directors and serves for a
period of one year, or until his successor is duly elected and qualified.
Mr. Pasco, the Chairman of the Board of the Company, is the President and
director of Vontobel Fund Distributors, a division of First Dominion Capital
Corp., the Company's underwriter. Mr. Mastoloni, a director of the Company, is
an officer of Vontobel Asset Management, Inc., the Company's investment adviser.
Messrs. Walczak, Jain and Faschang, officers of the Company, are officers of
Vontobel Asset Management, Inc., the Company's investment adviser.
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 of Directors the
selection of independent auditors, and perform such other duties as may be
assigned to the Audit Committee by the Board of Directors. During its most
recent fiscal year ended December 31, 2002, the Audit Committee met three times.
The Company has a standing Nominating Committee of the Board composed of Messrs.
Boyd, Poist and Dickinson. The Nominating Committee is responsible for the
selection and nomination of candidates to serve as directors of the Company.
Although the 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 the Company's
most recent fiscal year ended December 31, 2002, the Nominating Committee did
not meet.
As of December 31, 2002, the directors beneficially owned the following dollar
range of equity securities in each Fund as indicated below:
<Table>
<Caption>
- --------------------------------------------------------------------
Aggregate Dollar
Range of Equity
Securities in All
Funds of the Company
Name of Dollar Range of Equity Overseen by the
Director Securities in the Fund Director
- --------------------------------------------------------------------
John Pasco, None None
III
- --------------------------------------------------------------------
Joseph None None
Mastoloni
- --------------------------------------------------------------------
Samuel Boyd, $1-$10,000 - Value Fund $10,001-$50,000
Jr. $1-$10,000 - International
Equity Fund
$1-$10,000 - Eastern European
Equity Fund
</Table>
Page 20
<Table>
<Caption>
- --------------------------------------------------------------------
Aggregate Dollar
Range of Equity
Securities in All
Funds of the Company
Name of Dollar Range of Equity Overseen by the
Director Securities in the Fund Director
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Paul $10,001-$50,000 - Value Fund $10,001-$50,000
Dickinson $1-$10,000 - International
Equity Fund
$1-$10,000 - Eastern
European
Equity Fund
- --------------------------------------------------------------------
William Poist $1-$10,000 - Value Fund $10,001-$50,000
$1-$10,000 - International
Equity Fund
$10,001-$50,000 - Eastern
European
Equity Fund
- --------------------------------------------------------------------
</Table>
Compensation of Directors -- The Company does not compensate the directors and
officers who are officers or employees of any investment adviser to a Fund of
the Company. The directors who are not "interested persons" of the Company, as
that term is defined in the 1940 Act, receive an annual retainer of $1,000 and a
fee of $200 for each meeting of the directors which they attend in person or by
telephone. Mr. Parker, Secretary of the Company, received legal fees from the
Company for certain legal services provided to the Company. Directors and
officers are reimbursed for travel and other out-of-pocket expenses. The Company
does not offer any retirement benefits for directors.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
Pension or Total
Retirement Compensation
Aggregate Benefits Estimated from Fund
Compensation Accrued As Annual and Fund
From the Part of Benefits Complex
Name of Person, Company Fund Upon Paid to
Position (1) Expenses Retirement Directors(2)
- ------------------------------------------------------------------------------------------
John Pasco, III, N/A N/A N/A N/A
Chairman
- ------------------------------------------------------------------------------------------
Joseph Mastoloni, N/A N/A N/A N/A
Director
- ------------------------------------------------------------------------------------------
Samuel Boyd, Jr., $5,400 N/A N/A $5,400
Director
- ------------------------------------------------------------------------------------------
Paul M. Dickinson, $5,400 N/A N/A $5,400
Director
- ------------------------------------------------------------------------------------------
William E. Poist, $5,400 N/A N/A $5,400
Director
- ------------------------------------------------------------------------------------------
</Table>
(1) This amount represents the aggregate amount of compensation paid to the
directors for service on the Board of Directors for the Funds' fiscal year
ended December 31, 2002.
(2) This amount represents the aggregate amount of compensation paid to the
directors by all funds offered by the Company for the fiscal year or period
ended December 31, 2002. The Company consisted of a total of three funds as
of December 31, 2002.
Page 21
Approval of the Advisory Agreement -- The Board of Directors of the Company most
recently re-approved the terms and conditions of the Investment Advisory
Agreements between the Company, on behalf of each Fund, and Vontobel Asset
Management, Inc. (the "Adviser") at a meeting on November 20, 2002. At the
meeting, the directors reviewed the materials provided to the directors in
advance of the meeting. These materials included a description of each
agreement, information concerning the fees charged for investment advisory
services, information on each Fund's expense ratio, performance data for each
Fund and their comparable competitors and indices, and information concerning
the personnel rendering investment advisory services to the applicable Fund.
Each director was also provided with a memorandum discussing the Board's
responsibilities in connection with the renewal of these agreement and materials
which analyzed each Fund's fees, expenses and performance in comparison to other
comparable funds and indices.
The Board discussed the various information provided to them and reviewed the
terms and conditions of each agreement. The Board also reviewed the nature,
scope and quality of the investment advisory services provided to each Fund. The
Board noted that Mr. Mastoloni, a director of the Company, could benefit from
the renewal of these agreements due to his affiliation with the Adviser. The
Board also discussed the profitability of the Adviser.
Based upon the information provided to them, the Board of Directors concluded
that the Adviser had to capabilities, resources and personnel necessary to
manage the investments of each Fund. The Board of Directors then decided to
continue each agreement for a period of one year commencing January 1, 2003, and
concluded that each of the agreements contained terms, including the provisions
for fees, that were fair and reasonable to the applicable Fund.
Sales Loads -- No front-end or 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.
POLICIES CONCERNING PERSONAL INVESTMENT ACTIVITIES
The Fund, investment adviser and principal underwriter have each adopted Codes
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's 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.
PRINCIPAL SECURITIES HOLDERS
As of April 30, 2003, the following persons owned of record or beneficially 5%
or more of the outstanding voting shares of the following classes of the Funds:
Value Fund -- Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco,
CA 94104, 1,452,453.489 outstanding shares (or 38.269%), National Investor
Services Corp., for the exclusive benefit of customers, 55 Water Street, 32nd
Floor, New York, New York 10041, 241,242.400 outstanding shares (or 6.356%) and
Bank Vontobel AG and its affiliates, Bahnhofstrasse #3 CH-8022 Zurich,
Switzerland, 341,505.711 outstanding shares (or 8.998%)
Page 22
International Equity Fund -- Charles Schwab Reinvestment, 101 Montgomery Street,
San Francisco, CA 94104, 901,594.679 outstanding shares (or 39.699%) and Bank
Vontobel AG and its affiliates, Bahnhofstrasse #3 CH-8022 Zurich, Switzerland,
196,732.684 outstanding shares (or 8.663%).
Eastern European Equity Fund -- Charles Schwab Reinvestment, 101 Montgomery
Street, San Francisco, CA 94104, 493,795.951 outstanding shares (or 18.351%);
Bank Vontobel AG and its affiliates, Bahnhofstrasse #3 CH-8022 Zurich,
Switzerland, owned of record 167,798.697 outstanding shares (or 6.236%); and
National Investors Services, Corp., for the exclusive benefit of customers, 55
Water Street, 32nd Floor, New York, New York 10041, 404,530.150 outstanding
shares (or 15.034%).
Management Ownership -- As of March 31, 2003, the directors and officers, as a
group, owned less than 1% of the outstanding shares of the Company, its series
or classes.
INVESTMENT ADVISER AND ADVISORY AGREEMENT
Vontobel Asset Management, Inc., located at 450 Park Avenue, New York, New York
10022, is the investment adviser for each Fund. The Adviser is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, (the
"Advisers Act"). The Adviser is a wholly owned subsidiary of Vontobel Holding
AG, a Swiss bank holding company which is traded on the Swiss Stock Exchange.
The Adviser serves as investment adviser to the Funds pursuant to separate
Investment Advisory Agreements with the Company for each Fund (each an "Advisory
Agreement"). The Advisory Agreement for each Fund may be renewed annually
provided such renewal is approved annually by: 1) the Company's Board of
Directors; or 2) by a majority vote of the outstanding voting securities of the
Company and a majority of the directors who are not "interested persons" of the
Company. The Advisory Agreements will automatically terminate in the event of
their "assignment," as that term is defined in the 1940 Act, and may be
terminated without penalty at any time upon 60 days' written notice to the other
party by: (i) the majority vote of all the directors or by vote of a majority of
the outstanding voting securities of the Fund; or (ii) the Adviser.
Under the Advisory Agreement, the Adviser provides each Fund with investment
management services, subject to the supervision of the Board of Directors, and
with office space, and pays the ordinary and necessary office and clerical
expenses relating to investment research, statistical analysis, supervision of
the Funds' portfolio and certain other costs. The Adviser also bears the cost of
fees, salaries and other remuneration of Company's directors, officers or
employees who are officers, directors, or employees of the Adviser. Each Fund is
responsible for its other costs and expenses, such as, but not limited to,
brokerage fees and commissions in connection with the purchase and sale of
securities, legal, auditing, bookkeeping and recordkeeping services, custodian
and transfer agency fees and fees and other costs of registration of each Fund's
shares for sale under various state and federal securities laws.
- -As compensation for its service as investment adviser for each of the Funds,
the Adviser receives a fee. That fee is payable monthly at an annualized rate
that is equal to a percentage of each Fund's average daily net assets. The
percentages are set forth below.
Under each Advisory Agreements for the Value Fund and the International Equity
Fund, the monthly compensation paid to the Adviser is accrued daily at an annual
rate of 1.00% on the first $100 million of average daily net assets and 0.75% on
average daily net assets in excess of $100 million. Under the Advisory Agreement
for the Eastern European Equity Fund, the monthly compensation paid to the
Adviser is accrued daily at an annual rate of 1.25% on the average daily net
assets. The following table shows the total amount of advisory fees that each
Fund paid the Adviser for the last three fiscal years.
Page 23
<Table>
<Caption>
- ------------------------------------------------------------------------------
Fund 2000 Fees 2001 Fees 2002 Fees
- ------------------------------------------------------------------------------
Value Fund $ 616,564 $1,167,082 $876,616
- ------------------------------------------------------------------------------
International Equity 1,473,957 830,594 361,230
Fund
- ------------------------------------------------------------------------------
Eastern European Equity 365,861 196,572 214,305
Fund
- ------------------------------------------------------------------------------
</Table>
MANAGEMENT-RELATED SERVICES
Administration -- Pursuant to the Administrative Services Agreement with the
Company (the "Services Agreement"), Commonwealth Shareholder Services, Inc.
("CSS"), located at 1500 Forest Avenue, Suite 223, Richmond, Virginia 23229,
serves as the administrator of the Funds. CSS supervises all aspects of the
operation of the Funds, except those performed by the Adviser. John Pasco III,
Chairman of the Board of the Company, is the sole owner of CSS. CSS provides
certain administrative services and facilities for the Funds, including
preparing and maintaining certain books, records, and monitoring compliance with
state and federal regulatory requirements.
As administrator, CSS receives asset-based fees, computed daily and paid monthly
at annual rates of 0.20% of the average daily net assets of each Fund on the
first $500 million and 0.15% on assets in excess of $500 million (which includes
regulatory matters, backup of the pricing of shares of each Fund, administrative
duties in connection with execution of portfolio trades, and certain services in
connection with Fund accounting). CSS also receives an hourly fee, plus certain
out-of-pocket expenses, for shareholder servicing and state securities law
matters. The table below shows the total amount of administrative fees that each
Fund paid CSS for the last three fiscal years.
<Table>
<Caption>
- --------------------------------------------------------------------------
Years Ended December 31,
- --------------------------------------------------------------------------
Fund 2000 Fees 2001 Fees 2002 Fees
- --------------------------------------------------------------------------
Value Fund $140,916 $258,139 $152,077
- --------------------------------------------------------------------------
International Equity Fund 344,506 187,172 80,201
- --------------------------------------------------------------------------
Eastern European Equity Fund 77,795 36,796 41,405
- --------------------------------------------------------------------------
</Table>
Custodian and Accounting Services -- Pursuant to the Custodian Agreement and
Accounting Agency Agreement with the Company, Brown Brothers Harriman & Co.
("BBH"), located at 40 Water Street, Boston Massachusetts, 02109, acts as the
custodian of the Funds' securities and cash and as the Funds' accounting
services agent. With the consent of the Company, BBH has designated The
Depository Trust Company of New York, as its agent to secure a portion of the
assets of the International Equity and Eastern European Equity Funds. BBH is
authorized to appoint other entities to act as sub-custodians to provide for the
Page 24
custody of foreign securities which may be acquired and held by the
International Equity and Eastern European Equity Funds outside the U.S. Such
appointments are subject to appropriate review by the Company's Board of
Directors. As the accounting services agent of the Funds, BBH maintains and
keeps current the books, accounts, records, journals or other records of
original entry relating to each Fund's business.
Transfer Agent -- Pursuant to a Transfer Agent Agreement with the Company, Fund
Services, Inc. ("FSI" or the "Transfer Agent") acts as the Company's transfer
and disbursing agent. FSI is located at 1500 Forest Avenue, Suite 111, Richmond,
Virginia 23229. John Pasco, III, Chairman of the Board of the Company and an
officer and shareholder of CSS (the Administrator of the Funds), owns one-third
of the stock of FSI; therefore, FSI may be deemed to be an affiliate of the
Company and CSS.
FSI provides certain shareholder and other services to the Company, including
furnishing account and transaction information and maintaining shareholder
account records. FSI is responsible for processing orders and payments for share
purchases. FSI mails proxy materials (and receives and tabulates proxies),
shareholder reports, confirmation forms for purchases and redemptions and
prospectuses to shareholders. FSI 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, FSI receives per account fees and transaction charges plus
out-of-pocket expenses against a minimum fee.
Distributor -- Vontobel Fund Distributors, a division of First Dominion Capital
Corp. (the "Distributor"), located at 1500 Forest Avenue, Suite 223, Richmond,
Virginia 23229, serves as the principal underwriter and national distributor of
the Funds' shares pursuant to a Distribution Agreement (the "Distribution
Agreement"). John Pasco, III, Chairman of the Board of the Company, owns 100% of
the Distributor, and is its President, Treasurer and a director. The Distributor
is registered as a broker-dealer and is a member of the National Association of
Securities Dealers, Inc. The offering of the Funds' shares is continuous. The
Distributor is entitled to the front-end sales charge on the sales of Class A
Shares as described in the prospectus and this SAI. The Distributor is also
entitled to the payment of deferred sales charges upon the redemption of Fund
shares as described in the prospectus and this SAI. In addition, the Distributor
may receive Distribution 12b-1 and Service Fees from the Funds, as described in
the prospectus and this SAI.
During the fiscal year ended December 31, 2002, the Distributor received the
following compensation as a result of the sale of Fund shares:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------
Net Compensation
Underwriting on
Discounts Redemption Other
and and Brokerage Compensation
Fund Commission Repurchases Commission (1)
- -------------------------------------------------------------------------------------------
Value Fund $15,245 $161,019 None None
- -------------------------------------------------------------------------------------------
International Equity $ 58 30,970 None None
Fund
- -------------------------------------------------------------------------------------------
Eastern European
Equity Fund $ 1,753 37,360 None None
- -------------------------------------------------------------------------------------------
</Table>
Page 25
Independent Accountants -- The Company's independent auditors, Tait, Weller &
Baker, audit the Company's annual financial statements, assist in the
preparation of certain reports to the SEC, and prepares the Company's tax
returns. Tait, Weller & Baker is located at 8 Penn Center Plaza, Suite 800,
Philadelphia, Pennsylvania 19103.
Plan of Distribution -- The Funds have a Distribution 12b-1 and Service Plan
(the "12b-1 Plan") for each of its Class C Shares under which it may finance
certain activities primarily intended to sell such classes of shares, provided
the categories of expenses are approved in advance by the Board of Directors of
the Company and the expenses paid under each 12b-1 Plan were incurred within the
preceding 12 months and accrued while such 12b-1 Plan is in effect. The 12b-1
Plans provide that each Fund will pay a fee to the Distributor at an annual rate
of 1.00% of the average daily net assets attributable to a Fund's outstanding
Class C Shares. During the fiscal year ended December 31, 2002, the Distributor
received $667 in distribution and service fees from the Class C Shares of the
Value Fund. This amount was used for sales and marketing purposes in connection
with the sale of Class C Shares of the Value Fund.
Under each Fund's Class C Share 12b-1 Plans, 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 such Fund's outstanding Class C Shares, and
(ii) to an institution (a "Service Organization") for shareholder support
services may not exceed the annual rates of 0.25% of the average daily net
assets attributable to such 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.
Payments for distribution expenses under each 12b-1 Plan are subject to Rule
12b-1. 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". Shareholder servicing fees are paid to Service Organizations for
providing one or more of the following services to such customers: (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 with respect to Class C
Shares or the information necessary for sub-accounting; (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
applicable 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.
Rule 12b-1 provides, among other things, that an investment company may bear
such expenses only pursuant to a plan adopted in accordance with the Rule. In
accordance with Rule 12b-1, the 12b-1 Plans provide that a report of the amounts
expended under the 12b-1 Plans, and the purposes for which such expenditures
were incurred, will be made to the Board of Directors for its review at least
quarterly. The 12b-1 Plans provide that they may not be amended to increase
materially the costs which Class C Shares of such Fund may bear for distribution
pursuant to the 12b-1 Plans without shareholder approval, and that any other
type of material amendment must be approved by a majority of the Board of
Directors, and by a majority of the directors who are neither "interested
persons" (as defined in the 1940 Act) of the Company nor have any direct or
indirect financial interest in the operation of the 12b-1 Plans or in any
Page 26
related agreements (the "12b-1 Directors"), by vote cast in person at a meeting
called for the purpose of considering such amendments.
The Company's Board of Directors have concluded that there is a reasonable
likelihood that the 12b-1 Plans will benefit each Fund and holders of Class C
Shares. The 12b-1 Plans are subject to annual re-approval by a majority of the
12b-1 Directors and are terminable at any time with respect to each Fund by a
vote of a majority of the 12b-1 Directors or by vote of the holders of a
majority of the Class C Shares of such Fund. Any agreement entered into pursuant
to the 12b-1 Plans with a Service Organization is terminable with respect to
such Fund without penalty, at any time, by vote of a majority of the 12b-1
Directors, by vote of the holders of a majority of Class C Shares of such Fund,
by the Distributor or by the Service Organization. An agreement will also
terminate automatically in the event of its assignment.
As long as the 12b-1 Plans are in effect, the nomination of the directors who
are not interested persons of the Company (as defined in the 1940 Act) must be
committed to the discretion of the 12b-1 Directors.
PORTFOLIO TRANSACTIONS
It is the policy of the Adviser, in placing orders for the purchase and sale of
each 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 applicable 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 a
Fund may obtain better prices or executions on a commission basis or by dealing
with other than a primary market maker.
The Adviser, when placing transactions, may allocate a portion of a 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 analyses 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 a
Fund, may be used by the Adviser for the benefit of other clients, and the Funds
may benefit from such transactions effected for the benefit of other clients.
While there is no formula, agreement or undertaking to do so, and when it can be
done consistent with the policy of obtaining best price and execution, a Fund
may consider sales of its shares as a factor in the selection of brokers to
execute portfolio transactions. The Adviser may be authorized, when placing
portfolio transactions for a 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.
Page 27
The Board of 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 Board reviews all transactions which have been placed pursuant to those
policies and procedures at its Board meetings.
When two or more Funds that are 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 Fund. In some cases this
procedure could have a detrimental effect on the price or volume of the security
as far as a Fund is concerned. In other cases, however, the ability of such Fund
to participate in volume transactions will be beneficial for the Fund. The Board
of Directors of the Company 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 Funds paid brokerage commissions as follows:
<Table>
<Caption>
Years Ended December 31,
- -----------------------------------------------------------------------------
Fund 2000 2001 2002
- -----------------------------------------------------------------------------
Value Fund $314,380 $279,183 $255,623
- -----------------------------------------------------------------------------
International Equity Fund 461,911 607,902 455,933
- -----------------------------------------------------------------------------
Eastern European Equity Fund 49,412 26,129 66,349
- -----------------------------------------------------------------------------
</Table>
CAPITAL STOCK AND DIVIDENDS
The Company is authorized to issue 500,000,000 shares of common stock, with a
par value of $0.01 per share. The Company has presently allocated 50,000,000
shares to each Fund, and has further reclassified those shares as follows:
Twenty Million (20,000,000) shares for Class A Shares of each series; Fifteen
Million (15,000,000) shares for Class B Shares of each series; and Fifteen
Million (15,000,000) shares for Class C Shares of each series. This SAI
supplements the prospectus for Class A and Class C shares. Class B Shares are
offered by a separate prospectus and statement of additional information.
Shares have no preemptive rights and only such conversion or exchange rights as
the Board of Directors may grant in their discretion. When issued for payment as
described in the prospectuses, shares will be fully paid and non-assessable.
Shares of the Funds do not have cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors if they choose to do so. In such event, the holders
of the remaining shares will not be able to elect any person to the Board of
Directors. Shares will be maintained in open accounts on the books of the
Transfer Agent. Each class of shares in the Funds (i.e., Class A, Class B, and
Class C Shares) bear pro-rata the same expenses and are entitled equally to each
Fund's dividends and distributions except as follows. Each class will bear the
Page 28
expenses of any distribution and/or service plans applicable to such class. For
example, as described below, holders of Class C Shares will bear the expenses of
the Distribution 12b-1 and Service Plan applicable to it. 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.
If they deem it advisable and in the best interests of shareholders, the
directors may create additional series of shares, each of which represents
interests in a separate portfolio of investments and is subject to separate
liabilities, and may create multiple classes of shares of such series, which may
differ from each other as to expenses and dividends. If additional series or
classes of shares are created, shares of each series or class are entitled to
vote as a series or class only to the extent required by the 1940 Act or as
permitted by the directors. Upon the Company's liquidation, all shareholders of
a series would share pro-rata in the net assets of such series available for
distribution to shareholders of the series, but, as shareholders of such series,
would not be entitled to share in the distribution of assets belonging to any
other series.
A shareholder will automatically receive all income dividends and capital gain
distributions in additional full and fractional shares of the applicable 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,
including the payment of dividend and capital gain distributions and
transactions made as a result of the Automatic Investment Plan.
Shareholders may rely on these statements in lieu of stock certificates.
Rule 18f-3 Plan -- The Board of Directors have 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 Funds represent an equal pro rata interest in the Funds and generally have
identical voting, dividend, liquidation, and other 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 Funds may be exchanged for shares of the same class
of another Fund; and (iii) each Fund's Class B Shares will convert automatically
into Class A Shares of such Fund after a period of eight years, based on the
relative net asset value of such shares at the time of conversion. At present,
each Fund offers Class A Shares charging a maximum front-end sales charge of
5.75%, Class B Shares imposing a back-end sales charge upon the sale of shares
within six years of purchase and Class C Shares charging a deferred sales charge
if shares are redeemed within two years.
DISTRIBUTION
The Distributor may from time to time offer incentive compensation to dealers
(which sell shares of the Funds that are subject to sales charges) allowing such
dealers to retain an additional portion of the sales load. A dealer who receives
all of the sales load may be considered an underwriter of the Funds' shares.
In connection with promotion of the sales of the Funds, the Distributor may,
from time to time, offer (to all broker dealers who have a sales agreement with
the Distributor) the opportunity to participate in sales incentive programs
(which may include non-cash concessions). These non-cash concessions are in
Page 29
addition to the sales load described in the prospectus. The Distributor may
also, from time to time, pay expenses and fees required in order to participate
in dealer sponsored seminars and conferences, reimburse dealers for expenses
incurred in connection with pre-approved seminars, conferences and advertising,
and may, from time to time, pay or allow additional promotional incentives to
dealers as part of pre-approved sales contests.
Computation of Offering Price - Class A Shares
A hypothetical illustration of the computation of the offering price per share
of each Fund, using the value of each Fund's net assets attributable to Class A
Shares and the number of outstanding Class A Shares of such Fund at the close of
business on December 31, 2002 and the Class A Shares' maximum front-end sales
charge of 5.75%, is as follows:
<Table>
<Caption>
- -----------------------------------------------------------------------------
Internation Eastern
Equity European
Value Fund Fund Equity Fund
Class A Class A Class A
Shares Shares Shares
- -----------------------------------------------------------------------------
Net Assets $112,302,365 $18,902,157 $29,026,186
- -----------------------------------------------------------------------------
Outstanding Shares 6,024,493 2,448,114 2,203,184
- -----------------------------------------------------------------------------
Net Asset Value Per Share $ 18.64 $ 11.86 $ 8.58
- -----------------------------------------------------------------------------
Sales Charge (5.75% of the
offering price) $ 1.14 $ 0.72 $ 0.52
- -----------------------------------------------------------------------------
Offering Price to Public $ 19.78 $ 12.58 $ 9.10
- -----------------------------------------------------------------------------
</Table>
ADDITIONAL INFORMATION ABOUT PURCHASES AND SALES
Purchasing Shares -- You may purchase Fund shares directly from the Distributor.
You may also buy shares through accounts with brokers and other 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
procedures. Your institution may charge a fee for its services, in addition to
the fees charged by the applicable Fund. You will also generally have to address
your correspondence or questions regarding such Fund to your authorized
institution. The offering price per share is equal to the NAV next determined
after the Funds or authorized institution receives your purchase order, plus any
applicable sales charge.
Your authorized institution is responsible for transmitting all subscription and
redemption requests, investment information, documentation and money to the
applicable Fund on time. Certain authorized institutions have agreements with
the Funds 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 payment to the applicable 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.
Each Fund reserves the right to reject any purchase order and to suspend the
offering of shares of such Fund. Under certain circumstances the Company or the
Page 30
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
Funds may also change or waive policies concerning minimum investment amounts at
any time.
Exchanging Shares -- Shareholders may exchange their shares for the same class
of shares of any other Fund of the Company, provided the shares of such 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. 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 a 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 each 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 such 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.
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 the 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 10 employees at the plan's inception, or such an employer on behalf of
employees of a trust or plan for such employees, their spouses and their
children under the age of 21 or a trust or plan for such employees, which
provides for purchases through periodic payroll deductions or otherwise. There
must be at least 5 initial participants with accounts investing or invested in
shares of 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
Page 31
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.
Selling Shares -- You may sell your shares by giving instructions to the
Transfer Agent by mail or by telephone. The Funds 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 Board of Directors may suspend the right of redemption or postpone the date
of payment during any period when (a) trading on the New York Stock Exchange is
restricted as determined by the SEC or such exchange is closed for other than
weekends and holidays, (b) the SEC has by order permitted such suspension, or
(c) an emergency, as defined by rules of the SEC, exists during which time the
sale of Fund shares or valuation of securities held by such Fund are not
reasonably practicable.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the prospectus, each Fund offers the following
shareholder services:
Regular Account -- The regular account allows for voluntary investments to be
made at any time. Available to individuals, custodians, corporations, trusts,
estates, corporate retirement plans and others, investors are free to make
additions and withdrawals to or from their account as often as they wish. Simply
use the account application provided with the prospectus to open your account.
Be sure to specify which class of shares you wish to invest in.
Telephone Transactions -- A shareholder may redeem shares or transfer into
another fund if this service is requested at the time the shareholder completes
the initial account application. If it is not elected at that time, it may be
elected at a later date by making a request in writing to the Transfer Agent and
having the signature on the request guaranteed. Each Fund employs reasonable
procedures designed to confirm the authenticity of instructions communicated by
telephone and, if it does not, it may be liable for any losses due to
unauthorized or fraudulent transactions. As a result of this policy, a
shareholder authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which a Fund believes to be
genuine. When requesting a telephone redemption or transfer, the shareholder
will be asked to respond to certain questions designed to confirm the
shareholder's identity as a shareholder of record. Cooperation with these
procedures helps to protect the account and the Fund involved from unauthorized
transactions.
Automatic Investment Plans -- Any shareholder may utilize this feature, which
provides for automatic monthly investments into your account. Upon your request,
the Transfer Agent will withdraw a fixed amount each month from a checking or
savings account for investment into a Fund. This does not require a commitment
for a fixed period of time. A shareholder may change the monthly investment,
skip a month or discontinue the Automatic Investment Plan as desired by
notifying the Transfer Agent at (800) 628-4077.
Individual Retirement Account ("IRA") -- All wage earners under 70-1/2, even
those who participate in a company sponsored or government retirement plan, may
establish their own IRA. You can contribute 100% of your earnings up to $3,000.
Individuals who are, or become, at least 50 years old during the taxable year
may contribute an additional $500 per year. A spouse who does not earn
compensation can contribute up to $3,000 per year to his or her own IRA. The
deductibility of such contributions will be determined under the same rules as
Page 32
for contributions made by individuals with earned income. A special IRA program
is available for corporate employees under which the employers may establish IRA
accounts for their employees in lieu of establishing corporate retirement plans.
Known as SEP-IRA's (Simplified Employee Pension-IRA), they free the corporate
employer of many of the recordkeeping requirements or establishing and
maintaining a corporate retirement plan trust.
If a shareholder has received a distribution from another qualified retirement
plan, all or part of that distribution may be rolled over into your Fund IRA. A
rollover contribution is not subject to the limits on annual IRA contributions.
By acting within applicable time limits of the distribution you can continue to
defer federal income taxes on your rollover contribution and on any income that
is earned on that contribution.
Roth IRA -- A Roth IRA permits certain taxpayers to make a non-deductible
investment of up to $3,000 per year. Individuals who are, or become, at least 50
years old during the taxable year may contribute an additional $500 per year.
Provided an investor does not withdraw money from his or her Roth IRA for a 5
year period, beginning with the first tax year for which contribution was made,
deductions from the investor's Roth IRA would be tax free after the investor
reaches the age of 59-1/2. Tax free withdrawals may also be made before reaching
the age of 59-1/2 under certain circumstances. Please consult your financial
and/or tax professional as to your eligibility to invest in a Roth IRA. An
investor may not make a contribution to both a Roth IRA and a regular IRA in any
given year. An annual limit of $3,000 applies to contributions to regular and
Roth IRAs. For example, if a taxpayer contributes $3,000 to a regular IRA for a
year, he or she may not make any contribution to a Roth IRA for that year.
How to Establish Retirements Accounts -- Please call the Company to obtain
information regarding the establishment of individual retirement plan accounts.
Each plan's custodian charges nominal fees in connection with plan establishment
and maintenance. These fees are detailed in the plan documents. A shareholder
may wish to consult with an attorney or other tax adviser for specific advice
concerning tax status and plans.
TAX STATUS
Distributions and Taxes
Distributions of net investment income -- The Funds receive income generally in
the form of dividend income on their investments. This income, less expenses
incurred in the operation of a Fund, constitutes a Fund's net investment income
from which dividends may be paid to you. Any distributions by a Fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or reinvest them in additional shares.
Distribution of capital gains -- The Funds may derive capital gains and losses
in connection with sales or other dispositions of their 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 a Fund. Any net capital gains realized by a Fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminated excise or income taxes on the Fund.
Effect of foreign investments on distributions -- Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
Fund. Similarly, foreign exchange losses realized by a Fund on the sale of debt
securities are generally treated as ordinary losses by a Fund. These gains when
distributed will be taxable to you as ordinary dividends, and any losses will
reduce a Fund's ordinary income otherwise available for distribution to you.
This treatment could increase or reduce a Fund's ordinary income distributions
Page 33
to you, and may cause some or all of a Fund's previously distributed income to
be classified as return of capital.
A Fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a Fund's total assets at the end of the
fiscal year are invested in securities of foreign corporations, a 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 a 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. A 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 Funds 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, a 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 taxes as a regulated investment company -- Each 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 regulated
investment companies, the Funds generally pay no federal income tax on the
income and gains they distribute to you. The Board of Directors of the Company
reserve the right not to maintain the qualifications of a Fund as a regulated
investment company if it determines such course of action to be beneficial to
shareholders. In such case, a 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.
Excise tax distribution requirements -- To avoid federal excise taxes, the
Internal Revenue Code requires a 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 twelve month period ending October 31 and 100% of any
undistributed amounts from the prior year. Each 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 -- Redemption 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 Fund 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 a 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.
Page 34
U.S. Government Obligations -- Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
Dividends-received deduction for corporations -- Because the Value Fund's income
may include corporate dividends, if the shareholder is a corporation, a
percentage of the dividends paid by the Value Fund may qualify for the
dividends-received deduction. You will be permitted in some circumstances to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available only with respect to dividends designated by the
Value Fund as eligible for such treatment. All dividends (including the deducted
portion) must be included in your alternative minimum taxable income
calculations.
Because the income of the International Funds are derived primarily from
investments in foreign rather than domestic U.S securities, no portion of its
distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the International
Funds for the most recent calendar year qualified for such deduction, and it is
anticipated that none of the current year's dividends will so qualify.
Investment in complex securities -- The Funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a Fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a Fund and/or defer a Fund's ability to recognize losses, and, in limited
cases, subject a Fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by a Fund.
Capital Loss Carryforwards -- As of December 31, 2002, the Funds had the
following capital loss carryforwards available to offset future capital gains
through the indicated expiration dates as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------
Fund 2006 2007 2008 2009 2010
- --------------------------------------------------------------------------------------------------
International Equity -- -- -- $14,139,027 $2,235,091
Fund
- --------------------------------------------------------------------------------------------------
Eastern European Equity $20,327,913 $18,895,462 4,400,101 3,798,604 3,621,152
Fund
- --------------------------------------------------------------------------------------------------
</Table>
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of the Funds to that of
other mutual funds and to relevant indices in advertisements or in reports to
shareholders, performance will be stated in terms of total return or yield. Both
"total return" and "yield" figures are based on the historical performance of a
Fund, show the performance of a hypothetical investment and are not intended to
indicate future performance.
Yield Information -- From time to time, the Funds may advertise a yield figure.
A portfolio's yield is a way of showing the rate of income the portfolio earns
Page 35
on its investments as a percentage of the portfolio's share price. Under the
rules of the SEC, yield must be calculated according to the following formula:
6
Yield = 2[(a-b +1) -1]
---
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
A Fund's yield, as used in advertising, is computed by dividing the Fund's
interest and dividend income for a given 30-day period, net of expenses, by the
average number of shares entitled to receive distributions during the period
dividing this figure by a Fund's NAV at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purposes of yield quotations in
accordance with standardized methods applicable to all stock and bond mutual
funds. Dividends from equity investments are treated as if they were accrued on
a daily basis solely for the purposes of yield calculations. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses generally are excluded
from the calculation. Income calculated for the purpose of calculating a Fund's
yield differs from income as determined for other accounting purposes. Because
of the different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for a Fund may differ from the rate of
distributions the fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Total Return Performance -- Total return quotations used by the Funds are based
on standardized methods of computing performance mandated by the SEC. The
average annual total return (before taxes) of a Fund is calculated according to
the following formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1,5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods(or fractional portion
thereof).
The average annual total return (before taxes) will be calculated under the
foregoing formula and the time periods used in advertising will be based on
rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover
prescribed periods. When the period since inception is less than one year, the
total return quoted will be the aggregate return for the period. In calculating
the ending redeemable value, all dividends and distributions by a Fund are
assumed to have been reinvested at NAV as described in the prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula above,
is computed by finding the average annual compounded rates of return over the
Page 36
prescribed periods (or fractional portions thereof) that would equate the
initial amount invested to the ending redeemable value.
Based on the foregoing, each Fund's average annual total return (before taxes)
for Class A Shares for the period or years indicated would be:
<Table>
<Caption>
- --------------------------------------------------------------------------------
Periods ended December 31, 2002
- --------------------------------------------------------------------------------
Since
Fund One Year Five-Years Ten-Years Inception
- --------------------------------------------------------------------------------
Value Fund(1) 4.83% 11.96% 12.42% (7.82%)
- --------------------------------------------------------------------------------
International Equity (13.21%) 5.06% 4.02% (3.07%)
Fund(2)
- --------------------------------------------------------------------------------
Eastern European 13.58% (11.92%) N/A (2.19%)
Equity Fund(3)
- --------------------------------------------------------------------------------
</Table>
(1) Commencement of operations was March 30, 1990.
(2) Commencement of operations was July 6, 1990.
(3) Commencement of operations was February 15, 1996.
The "average annual total returns (after taxes on distributions)" and "average
annual total returns (after taxes on distributions and redemptions)" for the
Class A Shares of each Fund are included in the prospectus. The Class C Shares
of each Fund do not yet have a full calendar year of operations. After-tax
returns for Class C Shares would be different.
"Average annual total return (after taxes on distributions)" for a specified
period is derived by calculating the actual dollar amount of the investment
return on a $1,000 investment made at the maximum public offering price
applicable at the beginning of the period, and then calculating the annual
compounded rate of return (after federal income taxes on distributions but not
redemptions) which would produce that amount, assuming a redemption at the end
of the period. This calculation assumes a complete redemption of the investment
but further assumes that the redemption has no federal income tax consequences.
This calculation also assumes that all dividends and distributions, less the
federal income taxes due on such distributions, are reinvested at net asset
value on the reinvestment dates during the period. In calculating the impact of
federal income taxes due on distributions, the federal income tax rates used
correspond to the tax character of each component of the distributions (e.g.,
ordinary income rate for ordinary income distributions, short-term capital gain
rate for short-term capital gains distributions and long-term capital gain rate
for long-term capital gains distributions). The highest individual marginal
federal income tax rate in effect on the reinvestment date is applied to each
component of the distributions on the reinvestment date. Note that these tax
rates may vary over the measurement period. The effect of applicable tax
credits, such as the foreign tax credit, is also taken into account in
accordance with federal tax law. The calculation disregards (i) the affect of
phase-outs of certain exemptions, deductions and credits at various income
levels, (ii) the impact of the federal alternative minimum tax and (iii) the
potential tax liabilities other than federal tax liabilities (e.g., state and
local taxes).
"Average annual total return (after taxes on distributions and redemptions)" for
a specified period is derived by calculating the actual dollar amount of the
Page 37
investment return on a $1,000 investment made at the maximum public offering
price applicable at the beginning of the period, and then calculating the annual
compounded rate of return (after federal income taxes on distributions and
redemptions) which would produce that amount, assuming a redemption at the end
of the period. This calculation assumes a complete redemption of the investment.
This calculation also assumes that all dividends and distributions, less the
federal income taxes due on such distributions, are reinvested at net asset
value on the reinvestment dates during the period. In calculating the federal
income taxes due on distributions, the federal income tax rates used correspond
to the tax character of each component of the distributions (e.g., ordinary
income rate for ordinary income distributions, short-term capital gain rate for
short-term capital gains distributions and long-term capital gain rate for
long-term capital gains distributions). The highest individual marginal federal
income tax rate in effect on the reinvestment date is applied to each component
of the distributions on the reinvestment date. Note that these tax rates may
vary over the measurement period. The effect of applicable tax credits, such as
the foreign tax credit, is taken into account in accordance with federal tax
law. The calculation disregards the (i) effect of phase-outs of certain
exemptions, deductions and credits at various income levels, (ii) the impact of
the federal alternative minimum tax and (iii) the potential tax liabilities
other than federal tax liabilities (e.g. state and local taxes). In calculating
the federal income taxes due on redemptions, capital gains taxes resulting from
a redemption are subtracted from the redemption proceeds and the tax benefits
from capital losses resulting from the redemption are added to the redemption
proceeds. The highest federal individual capital gains tax rate in effect on the
redemption date is used in such calculation. The federal income tax rates used
correspond to the tax character of any gains or loses (e.g., short-term or
long-term).
The Funds may also from time to time include in such advertising an aggregate
total return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately each Fund's performance with other measures of investment return. The
Funds may quote an aggregate total return figure in comparing each Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, Russell Indices, the
Value Line Composite Index, the Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency Index,
Merrill Lynch Intermediate Agency Index, Morgan Stanley Capital International
Europe, Australasia, Far East Index or the Morgan Stanley Capital International
World Index. For such purposes, each Fund calculates its aggregate total return
for the specific periods of time by assuming the investment of $1,000 in shares
of the applicable Fund and assuming the reinvestment of each dividend or other
distribution at NAV on the reinvestment date. Percentage increases are
determined by subtracting the initial value of the investment from the ending
value and by dividing the remainder by the beginning value. To calculate its
average annual total return, the aggregate return is then annualized according
to the SEC's formula for total return quotes outlined above.
The Funds may also advertise the performance rankings assigned by the various
publications and statistical services, including but not limited to, Capital
Resource Advisors, Lipper Mutual Performance Analysis, Intersec Research Survey
of non-U.S. Equity Fund Returns, Frank Russell International Universe, and any
other data which may be reported from time to time by Dow Jones & Company,
Morningstar, Inc., Chase Investment Performance, Wilson Associates, Stanger, CDA
Investment Technologies, Inc., the Consumer Price Index ("CPI"), The Bank Rate
Monitor National Index, or IBC/Donaghue's Average U.S. Government and Agency, or
as appears in various publications, including but not limited to, The Wall
Street Journal, Forbes, Barron's, Fortune, Money Magazine, The New York Times,
Financial World, Financial Services Week, USA Today and other national or
regional publications.
Page 38
FINANCIAL INFORMATION
You can receive free copies of reports, request other information and discuss
your questions about the Funds by contacting the Company directly at:
VONTOBEL FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, Virginia 23229
Telephone: (800) 527-9500
e-mail: mail@shareholderservices.com
A prospectus and additional information may also be obtained from our website at
www.vontobelfunds.com.
The Annual Report for the fiscal year ended December 31, 2002 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 Funds included in the Annual Report have been audited by the
Funds' independent auditors, Tait, Weller and Baker, 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.
Page 39
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Article VI of Janus Adviser's Amended and Restated Trust Instrument
provides for indemnification of certain persons acting on behalf of the funds.
In general, Trustees and officers will be indemnified against liability and
against all expenses of litigation incurred by them in connection with any
claim, action, suit or proceeding (or settlement of the same) in which they
become involved by virtue of their fund office, unless their conduct is
determined to constitute willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties. A determination that a person covered by the
indemnification provisions is entitled to indemnification may be made by the
court or other body before which the proceeding is brought, or by either a vote
of a majority of a quorum of Trustees who are neither "interested persons" of
the Trust nor parties to the proceeding or by an independent legal counsel in a
written opinion. The funds also may advance money for these expenses, provided
that the Trustee or officer undertakes to repay the funds if his conduct is
later determined to preclude indemnification, and that either he provide
security for the undertaking, the Trust be insured against losses resulting from
lawful advances or a majority of a quorum of disinterested Trustees, or
independent counsel in a written opinion, determines that he ultimately will be
found to be entitled to indemnification. The Trust also maintains a liability
insurance policy covering its Trustees and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Trust Instrument or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, then the Registrant will,
unless in the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
<Table>
<Caption>
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- -------------
Exhibit 1(a) Trust Instrument dated May 1, 2003, is incorporated by
reference to Exhibit 1(a) to the Registration Statement on
Form N-1A, filed on June 16, 2003 (File No. 811-21371).
Exhibit 1(b) Amended and Restated Trust Instrument dated May 9, 2003, is
incorporated by reference to Exhibit 1(b) to the
Registration Statement on Form N-1A, filed on June 16, 2003
(File No. 811-21371).
Exhibit 2 Bylaws are incorporated by reference to Exhibit 2(a) to the
Registration Statement on Form N-1A, filed on June 16, 2003
(File No. 811-21371).
Exhibit 3 Not applicable.
Exhibit 4 Form of Agreement and Plan of Reorganization dated ,
2003 is filed herewith as Appendix A to the Prospectus/Proxy
statement included as Part A of this Registration Statement.
Exhibit 5 Not applicable.
Exhibit 6(a) Form of Investment Advisory Agreement for Janus Adviser --
U.S. Value Fund dated , 2003 is filed herewith as
Exhibit 6(a).
Exhibit 6(b) Form of Investment Advisory Agreement for Janus Adviser --
International Equity Fund dated , 2003 is filed
herewith as Exhibit 6(b).
</Table>
C-1
<Table>
<Caption>
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- -------------
Exhibit 6(c) Form of Investment Subadvisory Agreement for Janus Adviser
-- U.S. Value Fund dated , 2003 is filed herewith as
Exhibit 6(c).
Exhibit 6(d) Form of Investment Subadvisory Agreement for Janus Adviser
-- International Equity Fund dated , 2003 is filed
herewith as Exhibit 6(d).
Exhibit 7 Distribution Agreement between Janus Adviser and Janus
Distributors LLC, , 2003.*
Exhibit 8 Not applicable.
Exhibit 9 Custodian Contract between Janus Adviser and [ ], dated
as of , 2003.*
Exhibit 10 Not applicable.
Exhibit 11 Form of Opinion of Goodwin Procter LLP with respect to
shares of Janus Adviser -- U.S. Value Fund and Janus Adviser
-- International Equity Fund is filed herewith as Exhibit
11.
Exhibit 12 Form of Opinion of Goodwin Procter LLP with respect to tax
matters.*
Exhibit 13 [Expense Reimbursement Agreement with Vontobel Asset
Management, Inc.]*
Exhibit 14(a) Consent of Tait, Weller & Baker, independent accountants, is
filed herewith as Exhibit 14(a).
Exhibit 14(b) Consent of PricewaterhouseCoopers LLP, independent auditors,
is filed herewith as Exhibit 14(b).
Exhibit 15 Not applicable.
Exhibit 16 Powers of Attorney are filed herewith as Exhibit 16.
Exhibit 17 Not applicable.
</Table>
- ---------------
* To be filed by amendment
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-2
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of Denver and State of
Colorado, on the 14th day of July, 2003.
JANUS ADVISER
By: /s/ LOREN M. STARR
------------------------------------
Loren M. Starr
President and Chief Executive
Officer
Janus Adviser is organized under an Amended and Restated Certificate of
Trust, dated May 9, 2003, a copy of which is on file with the Secretary of State
of the State of Delaware, and the Amended and Restated Trust Instrument, dated
May 9, 2003. The obligations of the Registrant hereunder are not binding upon
any of the Trustees, shareholders, nominees, officers, agents or employees of
the Registrant personally, but bind only the trust property of the Registrant,
as provided in the Amended and Restated Trust Instrument of the Registrant. The
execution of this Registration Statement has been authorized by the Trustees of
the Registrant and this Registration Statement has been signed by an authorized
officer of the Registrant, acting as such, and neither such authorization by
such Trustees nor such execution by such officer shall be deemed to have been
made by any of them personally, but shall bind only the trust property of the
Registrant as provided in its Amended and Restated Trust Instrument.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOREN M. STARR President and Chief Executive July 14, 2003
------------------------------------------------ Officer
Loren M. Starr (Principal Executive Officer)
/s/ ANITA E. FALICIA Vice President, Chief Financial July 14, 2003
------------------------------------------------ Officer and Treasurer (Principal
Anita E. Falicia Financial Officer and Principal
Accounting Officer)
/s/ THOMAS H. BAILEY* Trustee July 14, 2003
------------------------------------------------
Thomas H. Bailey
/s/ THOMAS I. FLORENCE* Trustee July 14, 2003
------------------------------------------------
Thomas I. Florence
/s/ ARTHUR F. LERNER* Trustee July 14, 2003
------------------------------------------------
Arthur F. Lerner
/s/ DENNIS B. MULLEN* Trustee July 14, 2003
------------------------------------------------
Dennis B. Mullen
/s/ JAMES T. ROTHE* Trustee July 14, 2003
------------------------------------------------
James T. Rothe
/s/ HEINRICH SCHLEGEL* Trustee July 14, 2003
------------------------------------------------
Heinrich Schlegel
</Table>
C-3
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MAUREEN T. UPTON* Trustee July 14, 2003
------------------------------------------------
Maureen T. Upton
/s/ MARK B. WHISTON* Trustee July 14, 2003
------------------------------------------------
Mark B. Whiston
*By: /s/ THOMAS A. EARLY
-----------------------------------------
Thomas A. Early
Attorney-in-Fact
</Table>
C-4
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- -------------
Exhibit 4 Form of Agreement and Plan of Reorganization (filed as
Appendix A to Part A of this Registration Statement).
Exhibit 6(a) Form of Investment Advisory Agreement for Janus
Adviser -- U.S. Value Fund.
Exhibit 6(b) Form of Investment Advisory Agreement for Janus
Adviser -- International Equity Fund.
Exhibit 6(c) Form of Investment Subadvisory Agreement for Janus
Adviser -- U.S. Value Fund.
Exhibit 6(d) Form of Investment Subadvisory Agreement for Janus
Adviser -- International Equity Fund.
Exhibit 11 Form of Opinion of Goodwin Procter LLP with respect to
shares of Janus Adviser -- U.S. Value Fund and Janus Adviser
-- International Equity Fund.
Exhibit 14(a) Consent of Tait, Weller & Baker, independent accountants.
Exhibit 14(b) Consent of PricewaterhouseCoopers LLP, independent auditors.
Exhibit 16 Powers of Attorney
</Table>